AGA Medical Corporation: Hospital Orders and Patents Through the Same Distributor

The AGA Medical Corporation FCPA case concerned alleged payments through a Chinese distributor to influence hospital purchases and patent approvals. The Justice Department accused the medical-device manufacturer of arranging payments to doctors who steered government-owned hospitals toward its products, and to officials handling its patent applications. If you worked inside sales, distribution or product approvals, the important connection may be familiar: what the company wanted from an official, and what it asked an intermediary to do.

AGA manufactured products for the minimally invasive treatment of congenital heart defects. In its June 3, 2008 announcement, the Justice Department described the privately held company as incorporated and headquartered in Minnesota. The department announced a deferred prosecution agreement and criminal charges against AGA under the Foreign Corrupt Practices Act. The FBI’s Minneapolis field office investigated the case. The Justice Department also credited AGA with voluntary disclosure, a thorough review of the improper payments, cooperation and enhanced compliance policies and procedures.

Chinese Hospital Orders and the Doctors Who Directed Them

According to the Justice Department’s account of the criminal information, AGA, a high-ranking company officer and other employees agreed to make corrupt payments to doctors employed by government-owned hospitals in China between 1997 and 2005. They allegedly caused those payments to pass through AGA’s local Chinese distributor. In return, the doctors directed their hospitals to purchase AGA products instead of competing products.

That allegation puts the doctor’s purchasing influence at the center of the sale. The hospital bought the device, while the doctor allegedly received the payment that helped determine whose device it bought. We see the competitive injury plainly: the rival manufacturer was competing for an order while AGA allegedly paid someone who could direct it.

Public healthcare purchasing gives medical-device insiders a particular view of foreign bribery in their industry. A doctor’s role can reach beyond using a product to influencing what the institution buys. In remarks published by the Securities and Exchange Commission in 2015, its enforcement director described public-hospital doctors, pharmacists and administrators who decide which products hospitals purchase. The remarks also described payments tied to prescribing medical devices as well as medicines.

For someone handling hospital accounts, the distinction is concrete. Knowledge of who requested a payment and who influenced the purchase can connect the distributor’s activity to the customer’s decision. The hospital’s ownership, the doctor’s actual authority and the communications about the order give that connection substance.

Patent Approvals Reached Beyond the Hospital

The criminal information also alleged payments intended to influence patent approvals. According to the Justice Department’s announcement, AGA sought patents on several products from China’s State Intellectual Property Office from 2000 through 2002. AGA and a high-ranking officer allegedly agreed to pay officials employed by that office through the company’s local Chinese distributor to have the patents approved.

The patent allegation changes where an insider might see the conduct. A hospital account concerns a customer’s purchase. A patent application concerns a government decision about the company’s product rights. The alleged intermediary was the same, but the official, the requested decision and the business purpose were different.

That makes product-approval correspondence relevant alongside sales records. An employee who handled applications or communications with the distributor may be able to explain why a payment request arrived when it did, what approval was being sought and who inside the company authorized the request. We connect those details to the particular official decision the payment was intended to influence.

The Distributor Connected the Company to the Officials

AGA’s alleged payment route ran through an established commercial relationship: its local distributor. The criminal information, as described by the Justice Department, placed a high-ranking AGA officer inside both arrangements and other employees inside the hospital-payment arrangement. The accusation reached the people directing the payments as well as the intermediary passing them on.

A distributor sits between a manufacturer’s selling price and the customer’s purchase price. The difference, and the manufacturer’s explanation for any discount or payment, can matter as much as a separate expense invoice. The field’s distributor-payment cases show why the manufacturer’s accounts and the distributor’s accounts need to be understood together.

In those industry remarks, the enforcement director describes one recurring mechanism: a distributor uses its margin to fund payments to officials, while the added payment layer helps conceal the expense. It gives a sales or finance employee a useful question to bring to us: what commercial work explains the money the intermediary kept or received?

An approval may identify the distributor as the payee while correspondence explains which doctor or official the payment is meant to reach. An insider who understands both sides can help connect a routine-looking company transaction to the public decision behind it.

In the separate Fresenius Medical Care action, the Securities and Exchange Commission’s administrative order described an intermediary absorbing doctor-payment costs to conceal bribes by lowering the manufacturer’s recorded expenses. In another separate case, Olympus Latin America admitted under its deferred prosecution agreement that Mexico agent payments were recorded as administrative or advisory services for public bids even though the services were neither performed nor required.

What Medical-Device Insiders Can Explain

Useful evidence of foreign bribery connects a business decision, a payment and the people who understood its purpose. In a distributor relationship, sales staff may understand the customer’s order, finance staff may understand the payment approval, and product staff may understand the pending government application. We work with you to connect the part you know to the transaction as a whole.

We assess the relevant foreign bribery whistleblower program with you and whistleblower lawyers who understand health care purchasing and medical-device distribution. Your knowledge of the transaction gives that assessment its starting point. A separate whistleblower case under the False Claims Act, involving false claims against U.S. government money, can pay 15% to 30% of what the government recovers.

You Know Why the Distributor Was Paid

If you can connect a distributor’s payment to a hospital order or an official approval, speak to one of our Whistleblower Experts about why the distributor was paid. We bring in foreign bribery whistleblower lawyers who know medical-device sales and stay beside you through the decisions ahead to build your strongest foreign bribery whistleblower case.