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Contingencies | 12 Months Ended
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Dec. 31, 2012
Commitments And Contingencies Disclosure [Abstract] |
Contingencies |
17. | Contingencies
We are party to outstanding legal proceedings, investigations and claims as described below. We believe that it is unlikely that the outcome of each of these matters, including the matters discussed below, will have a material adverse effect on our Company and its subsidiaries as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings (if any) in any particular quarter. However, we cannot predict with any certainty the final outcome of any legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims made against us as described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on our consolidated financial position, results of operations, or cash flows. We record accruals for certain outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, we do not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If we cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed. The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that we consider in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, our experience in similar matters and the experience of other companies, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the proceeding, investigation or claim. Our assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where we are not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, we believe that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any. In addition to the matters described in the paragraphs below, in the normal course of our business, we are involved in various lawsuits from time to time and may be subject to certain other contingencies. To the extent losses related to these contingencies are both probable and reasonably estimable, we accrue appropriate amounts in the accompanying financial statements and provide disclosures as to the possible range of loss in excess of the amount accrued, if such range is reasonably estimable. We believe losses are individually and collectively immaterial as to a possible loss and range of loss. Matters Related to the Audit Committee’s Review, the Restatement of Certain of the Company’s Consolidated Financial Statements, the State of the Company’s Internal Control Over Financial Reporting and the Company’s Failure to Timely File Periodic Reports with the SEC Audit Committee Review In July 2013, the Company’s Audit Committee began conducting an independent review, with the assistance of outside professionals, of certain accounting matters. This review resulted in the decision to restate certain of the Company’s previously filed consolidated financial statements. As a result of this review and the restatement of certain of the Company’s consolidated financial statements, the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2013 and September 30, 2013 were not timely filed. The Company is filing its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013 on the date hereof, and expects to file its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013 on the date following the date hereof. The Company also currently expects to file its Annual Report on Form 10-K for the year ended December 31, 2013 (which is otherwise due under SEC rules on March 17, 2014) by March 31, 2014. SEC Enforcement Staff Review In connection with the initiation of the audit committee review, the Company initiated contact with the staff of the Division of Enforcement of the Securities and Exchange Commission (the “SEC Enforcement Staff”) in July 2013 to advise them of these matters. The Audit Committee, through its counsel, has been in direct communication with the SEC Enforcement Staff regarding these matters, and both the Company and the Audit Committee are cooperating fully with the SEC Enforcement Staff’s review of these matters. The Company has received requests from the SEC Enforcement Staff for documents and other information concerning various accounting, internal controls and business practices. Such requests cover the years ended December 31, 2011 and 2012, and in some instances, prior periods. It is anticipated that the Company may receive additional requests from the SEC Enforcement Staff in the future. The Company has further provided notice concerning these matters to the Office of Inspector General of the U.S. Department of Health and Human Services (“HHS-OIG”) pursuant to the Company’s Corporate Integrity Agreement (“CIA”) with HHS-OIG (which CIA is described below). The Company cannot predict if, when or how this matter will be resolved or what, if any, actions the Company may be required to take as part of any resolution of these matters. Any action by the SEC, HHS-OIG or other governmental agency could result in civil or criminal sanctions against the Company and/or certain of its current and former officers, directors and employees. The matter is at an early stage and, at this time, the Company cannot reasonably estimate the possible loss, or range of loss, in connection with it. Securities Class Action Complaint On August 14, 2013, a securities class action complaint against the Company, currently styled Tejinder Singh v. Orthofix International N.V., et al. (No.:1:13-cv-05696-JGK), was filed in the United States District Court for the Southern District of New York arising out of the then-anticipated restatement of the Company’s prior financial statements and the matters described above. In addition to the Company, Alan W. Milinazzo, the Company’s former President and Chief Executive Officer, Robert S. Vaters, the Company’s former President and Chief Executive Officer, Brian McCollum, the Company’s former Chief Financial Officer, Bradley R. Mason, the Company’s current President and Chief Executive Officer, and Emily Buxton, the Company’s current Chief Financial Officer, are named as defendants. The operative complaint has not yet been filed in the action following the appointment by the court of a lead plaintiff. Accordingly, the allegations that the lead plaintiff ultimately intend to make in this action are unknown. The matter is at an early stage and, at this time, the Company cannot reasonably estimate the possible loss, or range of loss, in connection with it. Review of Potential Improper Payments Involving Brazil Subsidiary In August 2013, the Company’s internal legal department was notified of certain allegations involving potential improper payments with respect to the Company’s Brazilian subsidiary, Orthofix do Brasil. The Company engaged outside counsel to assist in the review of these matters, focusing on compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act (the “FCPA”). This review remains ongoing. The FCPA and related provisions of law provide for potential criminal and civil sanctions in connection with anti-bribery violations, including criminal fines, civil penalties, disgorgement of past profits and other kinds of remedies. The Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with this review. In 2012, the Company entered into a 3-year deferred prosecution agreement (the “DPA”) with the U.S. Department of Justice (“DOJ”), and a consent to final judgment (the “Consent”) with the U.S. Securities and Exchange Commission (the “SEC”), in connection with the Company’s self-initiated and self-reported review of FCPA-related matters involving the Company’s Mexican subsidiary, Promeca S.A. de C.V. Consistent with certain provisions of the DPA and the Consent, the Company voluntarily self-reported the Brazil-related allegations to the DOJ and the SEC, and the Company and its counsel remain in contact with both agencies regarding the status of the review. The DPA and the Consent collectively require, among other things, that with respect to anti-bribery compliance matters the Company (i) cooperate fully with the government in matters related to corrupt payments, false books and records or inadequate internal controls, (ii) continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws, and (iii) provide certain periodic reporting to the government. In the event that the DOJ and the SEC find that the matters related to the Brazilian subsidiary described above could give rise to a review of the Company’s obligations under the terms of the DPA and/or Consent, the Company currently cannot reasonably estimate a possible loss, or range of loss, in connection with that review, including any effects it may have with respect to the DPA and Consent. Litigation Matters Related To Blackstone Medical, Inc. and Related Escrow Claims In 2007, the Company’s subsidiary, Blackstone Medical, Inc. (“Blackstone”) received a subpoena issued by HHS-OIG, under the authority of the federal healthcare anti-kickback and false claims statutes. The subpoena sought certain documents for the period January 1, 2000 through July 31, 2006, which covered a period prior to Blackstone’s acquisition by the Company on September 22, 2006. In 2008 and 2009, respectively, the Company received a federal grand jury subpoena from the U.S. Attorney’s Office for the District of Massachusetts (“Boston USAO”) and a HIPAA subpoena issued by the U.S. Department of Justice (“DOJ”). These subpoena sought certain documents from us for the period January 1, 2000 through July 15, 2007. Each of the subpoenas concerned the compensation of physician consultants and related matters. In 2008, the Company obtained a copy of a qui tam complaint filed against the Company and Blackstone in the U.S. District Court for the District of Massachusetts. The complaint related to the matters described above involving HHS-OIG, the Boston USAO, and DOJ. The U.S. Department of Justice subsequently filed a notice of non-intervention in the case. In January 2012, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle to pay $32 million to resolve these matters. On October 29, 2012, the Company, through Blackstone, entered into a definitive settlement agreement with the U.S. government and the qui tam relator, which settlement agreement memorialized this agreement. All of the $32 million the Company paid pursuant to the settlement was funded by proceeds it received from an escrow fund established in connection with the Company’s acquisition of Blackstone in 2006. We also recorded a charge of $0.3 million in 2012 which represented imputed interest on the settlement accrued through the payment date in October of 2012. Matters Related to Regenerative Stimulation Business In 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”) issued by the Boston USAO. The subpoena sought documents concerning, among other things, the Company’s promotion and marketing of its regenerative stimulator devices (which the Company has also described in the past as its “bone growth stimulator devices”). The Boston USAO issued several subsequent document and testimony subpoenas. The Company cooperated with these requests. The Company subsequently obtained a copy of a qui tam complaint filed in the U.S. District Court for the District of Massachusetts against the Company, Orthofix Inc. and other companies that have allegedly manufactured regenerative stimulation devices, including Orthologic Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. The complaint, as subsequently amended in 2010, alleged various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of regenerative stimulation devices. The complaint also included claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-Kickback Act by providing free products to physicians, waiving patients’ insurance co-payments and providing inducements to independent sales agents to generate business. On April 28, 2011, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle proposed by the Boston USAO to resolve the criminal and civil matters described in the immediately preceding two paragraphs. On June 6, 2012, the Company entered into a definitive settlement agreement with the United States of America, acting through DOJ and on behalf of HHS-OIG, the TRICARE Management Activity, through its General Counsel, the Office of Personnel Management, in its capacity as administrator of the Federal Employees Health Benefits Program, the United States Department of Veteran Affairs and the qui tam relator. The Company agreed to pay $34.2 million (plus interest at a rate of 3% from May 5, 2011 through the day before payment was made) under the terms of the settlement agreement. In addition, the Company agreed in July 2012 to pay the qui tam relator’s counsel $1.0 million in fees. These amounts were paid during the fourth quarter of 2012. In connection with the settlement agreement, the Company’s wholly-owned subsidiary, Orthofix Inc., entered into a plea agreement with the Boston USAO and DOJ on June 7, 2012 under which Orthofix Inc. agreed to plead guilty to one felony count of obstruction of a June 2008 federal audit (§18 U.S.C. 1516). The plea agreement was amended on December 14, 2012, though all terms remained materially consistent with the earlier plea agreement the Company had executed. The plea was accepted and entered by the U.S. District Court for the District of Massachusetts on December 14, 2012. Consistent with the terms recommended in the plea agreement, the court imposed a criminal fine of $7.8 million and a mandatory special assessment of $400, which the Company subsequently paid during the fourth quarter of 2012. In addition, the court has imposed a five year term of probation, with special conditions which mandate certain non-disparagement obligations and order Orthofix Inc. to continue complying with the terms of the Company’s previously-disclosed 5-year corporate integrity agreement (which is described below) through the expiration of its term. The Company previously recorded a charge of $43 million during the first quarter of 2011 in anticipation of the settlement. The Company also recorded a charge of $1.7 million in 2012 which represented imputed interest on the settlement accrued through the payment date in December 2012. Corporate Integrity Agreement with HHS-OIG On June 6, 2012, in connection with the Company’s settlement of the matters described above related to its regenerative stimulation business, and in anticipation of a final settlement of the government investigation and related qui tam complaint described above related to Blackstone Medical, Inc., the Company also entered into a five-year corporate integrity agreement with HHS-OIG (the “CIA”). The CIA acknowledges the existence of the Company’s current compliance program, and requires that the Company continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and Food and Drug Administration (“FDA”) requirements. The Company is also required to maintain several elements of its previously existing program during the term of the CIA, including maintaining a Chief Compliance Officer, a Compliance Committee, and a Code of Conduct. The CIA requires that the Company conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations. Pursuant to the CIA, the Company is required to notify the HHS-OIG in writing, among other things, of: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by federal healthcare programs. The Company is also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates. The CIA provides that in the event of an uncured material breach of the CIA, the Company could be excluded from participation in federal healthcare programs and/or subject to monetary penalties. Matters Related to Promeca On July 10, 2012, the Company entered into definitive agreements with DOJ and the Securities and Exchange Commission (the “SEC”) agreeing to settle its self-initiated and self-reported internal investigation of its Mexican subsidiary, Promeca S.A. de C.V. (“Promeca”), regarding non-compliance by Promeca with the Foreign Corrupt Practices Act (“the FCPA”). Under the terms of these agreements, the Company voluntarily disgorged profits to the United States government in an amount of $5.2 million, inclusive of pre-judgment interest, and agreed to pay a fine of $2.2 million. The Company paid $2.2 million in July 2012 and $5.2 million in September 2012. As part of the settlement, the Company entered into a 3-year deferred prosecution agreement (“DPA”) with DOJ. DOJ has agreed not to pursue any criminal charges against the Company in connection with this matter if the Company complies with the terms of the DPA. The DPA takes note of the Company’s self-reporting of this matter to DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by the Company. The DPA provides that the Company shall continue to cooperate fully with DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls. In that regard, the Company has represented that it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws. The Company will periodically report to DOJ during the term of the DPA regarding such remediation and implementation of compliance measures. As part of the settlement, the Company also agreed to certain reporting obligations to the SEC regarding the status of its remediation and implementation of compliance measures. In the event that the Company fails to comply with these obligations, it could be subject to criminal prosecution by DOJ for the FCPA-related matters it self-reported. Matters Related to the Company’s Former Breg Subsidiary and Possible Indemnification Obligations On May 24, 2012, the Company sold Breg, Inc. (“Breg”) to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”) pursuant to a stock purchase agreement (the “Breg SPA”). Under the terms of the Breg SPA, upon closing of the sale, the Company and its subsidiary, Orthofix Holdings, Inc., agreed to indemnify Water Street and Breg with respect to certain specified matters, including (i) the government investigation and product liability matters regarding the previously owned infusion pump product line described below, and (ii) pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units. The Company has established an accrual of $4.2 million for its indemnification obligations in connection with the July 2012 verdict described in the fourth paragraph below, however, actual liability in this case could be higher or lower than the amount accrued. The Company has not established any accrual in connection with its other indemnification obligations under the Breg SPA, and currently cannot reasonably estimate the possible loss, or range of loss, in connection with such obligations (including with respect to the matters described in the three paragraphs below). Breg was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” The Company believes that meritorious defenses exist to these claims and Breg is vigorously defending these cases. One of the Company’s insurance carriers previously asserted to the Company that certain potential losses related to this matter are not covered by its insurance coverage. The Company subsequently went into arbitration with this carrier, and on January 22, 2013, the Company obtained a binding arbitration award providing that such carrier is obligated to reimburse the Company for defense expenses, settlements, and judgments under certain policies. As of December 31, 2012, the Company estimated that it was entitled to reimbursement of approximately $13 million for past losses incurred, as well as up to $15 million in potential future coverage for pending products liability matters. The approximately $13 million is recorded in income (loss) from discontinued operations in 2012 and other current assets as of December 31, 2012, and was received in 2013. The Company has also accrued $6.1 million (all of which was accrued during the second fiscal quarter of 2013) for judgments and settlements in connection with these matters that were not covered by insurance. On or about August 2, 2010, Breg received a HIPAA subpoena issued by the DOJ. The subpoena seeks documents from the Company and its subsidiaries for the period of January 1, 2000 through the date of the subpoena. The Company believes that document production in response to the subpoena is completed as of July 2012. The Company believes that this subpoena relates to an investigation by the DOJ into whether Breg’s sale, marketing and labeling of local infusion pumps for pain management, prior to Breg’s divestiture of this product line in 2008, complied with FDA regulations and federal law. The Company is currently cooperating with the U.S. Government in connection with this matter. On January 27, 2012, the Company was orally notified by a U.S. Government official that a civil investigation of Breg was pending in connection with this matter. On January 18, 2013, the Company was served with a qui tam complaint filed in the United States District Court for the Western District of Missouri against the Company (as the former owner of Breg), Stryker Corporation, I-Flow Corporation and DJO Incorporated, which contains allegations relating to the marketing and promotion of Breg’s former infusion pump products. In June 2013, the qui tam complaint filed in the United States District Court for the Western District of Missouri against the Company was dismissed by the court. At the time of its divestiture by the Company, Breg was currently and had been engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court, alleging that the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units. The majority of these cases are at an early stage and no conclusion can be drawn at the present time regarding their potential outcome. However, the Company believes that meritorious defenses exist to these claims. In July 2012, a jury in one case related to a motorized cold therapy unit previously sold by Breg returned a verdict providing for approximately $2.1 million in compensatory damages to the plaintiff against Breg and $7 million in exemplary damages. The case remains subject to appeal. The Company believes that the damages are without merit however, the ultimate outcome is uncertain. The Company previously established an accrual and related charge to discontinued operations of $4.2 million for both compensatory damages and exemplary damages for its indemnification obligations in connection with this July 2012 verdict; however, actual liability in this case could be higher or lower than the amount accrued.

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