In the lesson-rich history of compliance failures, one of the most important cases of all time is the prosecution in 2001 of a 50/50 joint venture (JV) between two pharmaceutical companies for violations of federal fraud and abuse laws (the “TAP case”).
Evidently neither of the two companies paid much attention to the compliance and ethics program of the JV. And, although neither bore legal liability for the JV’s wrongdoing, the cost to each this inattention – presumably half of the total penalties of about $875 million – was higher than almost any other prosecution’s total cost up until that time.
In 2012 joint ventures seem to be more common than at any time before. This is due in part to many companies expanding operations into countries where as a matter of local law (or for other reasons) they need a local partner, and in part on “asset light” strategies being pursued by some corporations.
When a company’s ownership of the JV is greater than 50%, it typically extends its C&E program to the JV’s operations. But this is far less common in 50/50 situations or those involving minority ownership. Still, as the TAP case shows, even where an organization has no potential legal liability for the transgression of a JV in which it has invested, it can still face dire economic consequences.
Indeed, if costly enough, a corporate compliance failure in a JV could create the rare situation where individual directors could be liable for such a failure even though their company is not – since Caremark claims are predicated on economic harm to shareholders, not legal liability per se.
For these (and other) reasons, many companies should take a more hands-on approach to the C&E programs of their JVs, particularly those operating in emerging markets. Among the measures that should be considered here are:
Finally, I should stress that this article is not offered as a comprehensive discussion of JV compliance issues. (Among other things, there are many substantive compliance risk areas – such as IP protection, compliance with local laws and various supply chain issues – that may require particular focus in the JV context.) But hopefully it can help organizations coming to the challenging area of joint venture compliance for the first time know where to begin.
About the Author
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Jeffrey Kaplan, a partner in the Princeton, New Jersey office of Kaplan & Walker LLP, has practiced law in the compliance and ethics field since the early 1990’s.
Mr. Kaplan is also former adjunct professor of business ethics at NYU’s Stern School of Business, co-editor (with Joseph Murphy) of Compliance Programs and the Corporate Sentencing Guidelines (West Thomson), former counsel to the Ethics and Compliance Officer Association and co-author of a study by the Conference Board on the use of compliance and ethics program criteria in government enforcement decisions.