The Powerful Lesson of the GSK–Whistleblower Case

The stunning announcement of a few weeks ago that GlaxoSmithKline (GSK) agreed to pay $750 million to settle civil and criminal charges that it knowingly sold adulterated drugs manufactured at one of its facilities is a much-needed wake-up call for the pharmaceutical industry. It serves as a critical reminder for executives to review their organizations' ethics and compliance programs—especially the communications efforts about their whistleblower programs and the protections those programs afford to employees.

James W. Matthews

The former executive who blew the whistle on GSK will receive an award of about $95 million, which may be the first of many such awards. Such a situation is a result of a confluence of legal, legislative, and regulatory developments that expand a company's liability risk, while simultaneously providing powerful incentives for whistleblowers who go directly to government investigators, rather than reporting their concerns through their company's internal compliance channels.

The GSK settlement marks the first time that a whistleblower suit, filed under the powerful False Claims Act (FCA), has been successfully used to hold a drugmaker accountable for violations of government manufacturing standards. Similar cases are likely to be brought in the future because the FCA was beefed up by certain provisions contained in the Patient Protection and Affordable Care Act of 2010 (PPACA), and the government is currently devoting substantial resources to investigations of alleged fraud in the healthcare industry.

A major concern in the industry about the PPACA is the enhancement of criminal statutes to make prosecutions easier, penalties larger, and the scope of potential plaintiffs wider, given relaxation of former restrictions on who may bring legal actions on behalf of the federal government under the Act. Accordingly, liability exposure for industry participants has greatly expanded, prosecutions are increasing, and whistleblowers can be rewarded.

Concurrently, whistleblower provisions contained in the Dodd–Frank Wall Street Reform and Consumer Protection Act are receiving an enormous amount of attention among publicly traded companies. Under Dodd–Frank, a bounty program now under development by the US Securities and Exchange Commission (SEC) would reward individuals who provide "original information'' to the SEC with up to 30% of any enforcement action recovery that exceeds $1 million. In early November, the SEC set aside $452 million to reward tipsters under the whistleblower program authorized by the Dodd–Frank law.

The whistleblower provisions under Dodd–Frank have provoked serious concerns among business-advocacy groups, such as the US Chamber of Commerce, which recently issued a statement warning that the SEC program "threatens to undermine existing corporate compliance programs that the federal government has long advocated as an important component of responsible and effective corporate governance.''

It is important to note that the GSK whistleblower initially followed the company's internal control mechanisms and reported up the chain of command about numerous quality-control issues at a manufacturing facility. She and her reports were dismissed. In the end, the legal, monetary, and reputational consequences were enormous.

The solution to the conundrum presented by this confluence of events, laws, and regulation is both simple and complex. At its core, the challenge deals with culture and communication. If an organization is a reflection of its leadership, then those at the top must walk the walk of uncompromising commitment to compliance—and they must relentlessly communicate this commitment at all levels of the organization. These leaders must turn an unblinking eye toward their internal controls and compliance program and make an honest assessment of its rigor and effectiveness.

James W. Matthews is a partner and Jason L. Drori is an associate, both in the litigation department of Sherin and Lodgen LLP, Boston, MA, 617.646.2220, JWMatthews@sherin.com.