TRENTON, N.J. (AP) — Lawyers for Johnson & Johnson shareholders suing management for not fixing serious problems for years— from shoddy manufacturing to paying kickbacks to boost sales — have reached a tentative settlement meant to restore high standards at the health care giant.
The deal calls for big changes to protect both investors and patients using J&J products, including establishing a new committee of independent board members that will get reports about legal and quality problems directly from key executives so they can be addressed quickly and fully.
The plaintiffs, institutional and individual investors, state Johnson & Johnson's decentralized management was a "recipe for disaster" that gave top executives and board members "plausible deniability" to claim they were unaware of a range of severe problems that dragged on, some since the late 1990s, and tarnished the company's once-stellar reputation.
Those included kickbacks paid to doctors and pharmacists to boost product sales, marketing of drugs for unapproved uses and dozens of recalls due to manufacturing deficiencies, including wrong levels of active ingredients in medicines, glass and metal shards in liquid medicines and nauseating packaging odors.
In a statement Thursday, Johnson & Johnson said it "continues to deny the claims in the plaintiffs' lawsuit."
The company, based in New Brunswick, N.J., added that it is "entering into the settlement to undertake the changes in corporate governance to benefit J&J and its shareholders, and to eliminate the burden, distraction, and expense of further litigation."
The plaintiffs are suing 10 members who were on J&J's board when the case started in 2010, as well as several current or former executives. Those include the current CEO, Alex Gorsky, and predecessor Bill Weldon, who stepped down in April after a decade in the post but remains board chairman.
The proposed settlement requires the full board to adopt new quality and compliance goals that the company follow laws and regulations in its operations and deliver high-quality products. All of J&J's 120,000 employees worldwide, up to senior management, are to be evaluated and have their compensation decided according to how well they adhere to the goals.
The planned Regulatory, Compliance and Government Affairs Committee is to receive regular reports from key Johnson & Johnson executives, including the chief quality officer, chief compliance officer and vice president for corporate internal audit. And the committee must report to shareholders each year on all significant compliance and quality matters reported to the board.
The settlement's provisions are to remain in effect for at least five years. The plaintiffs seek compensation of up to $10 million for attorneys' fees, plus $450,000 for expenses such as gathering expert testimony in the case, which began in the spring of 2010 as more recalls occurred and serious legal problems came to light.
Earlier that year, the Justice Department joined a whistleblower lawsuit alleging that a Johnson & Johnson subsidiary paid tens of millions of dollars in illegal kickbacks to a company that provided prescription drugs to nursing home patients, to boost patients' use of a powerful antipsychotic drug called Risperdal linked to increased risk of death for elderly people with dementia. The company is negotiating a settlement of that case with the government and is expected to pay penalties in the range of $2 billion.
The settlement notes that J&J subsidiaries in 2010 paid about $82 million in penalties to resolve criminal and civil charges over marketing an epilepsy drug, Topamax, for unapproved use in children. Later that year, the Food and Drug Administration ordered another J&J subsidiary, DePuy Orthopedics, to stop selling a hip replacement system it was marketing illegally.
Meanwhile, manufacturing deficiencies have led to about three dozen product recalls since September 2009, keeping about 70 percent of Johnson & Johnson's nonprescription medicines for infants and children, plus many for adults, off the market for more than two years. The lost sales have been costing the company hundreds of millions of dollars a year, on top of the expense of gutting and completely rebuilding a huge consumer health products factory in suburban Philadelphia.
The tentative settlement is being reviewed by U.S. District Judge Freda Wolfson in Trenton, N.J. She is expected to grant preliminary approval on Aug. 6, at which point the settlement details would be sent to Johnson & Johnson shareholders, a large number of whom are pension funds and other institutional investors. After a period for comment by shareholders, final approval could be granted in the fall.
