All posts by Flavio Monfrini

Electronic Medical Record: Italian Data Protection Authority Issues New Guidelines

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On June 4, 2015, the Italian Data Protection Authority issued new guidelines governing the collection and processing of personal and sensitive data through the Electronic Medical Record.

  • What is an Electronic Medical Record?

A record, kept by a hospital or a healthcare center, containing patients’ clinical history at that specific hospital or healthcare center.

  • Patients’ rights

The guidelines set forth several rights to which patients treated at any hospital or healthcare center are entitled:

  1. Patients are entitled to decide whether the hospital or the healthcare center may store their data through an Electronic Medical Record. If a patient denies his/her consent, physicians will be able to rely only on information gathered during examination and treatment, as well as on information previously conveyed by the patient, if any. Denial of consent will not affect the possibility of being treated at the hospital/healthcare center.
  2. Specific consent is needed for the collection of certain categories of sensitive date, such as HIV infections, abortions, data relating to sexual assault. With respect to such data, patients will have the right to limit access to specific individuals/professionals.
  3. In addition to all rights granted by the Data Protection Code (such as the right to receive confirmation on the existence of personal/sensitive data, to know the origin of the data, the purpose and means of processing, as well as the logic applied to the processing) patients will also be entitled to receive information on each access to their Electronic Medical Record.
  • Hospitals and healthcare centers’ obligations

Hospitals and healthcare centers are required to provide patients with a thorough privacy notice concerning the processing of data through the Electronic Medical Record. Upon patients’ request, hospitals and healthcare centers shall also provide information concerning stored data and access logs to the Electronic Medical Record (including the professional accessing the data, date and time of access) within 15 days of the request. Patients will also be entitled to redact data or healthcare documentation that they do not wish to be included in their Electronic Medical Record.

The Data Protection Authority’s guidelines also address important technical aspects and provide that patients’ healthcare information contained in the Electronic Medical Record shall be segregated from other administrative data. Sensitive data will need to be encrypted. Furthermore, access to the record will be granted only to medical staff involved in the patient’s treatment and any access and processing will be recorded on log files to be kept by the hospital or healthcare center for at least 24 months.

Lastly, the guidelines set forth strict data breach requirements for hospitals and healthcare center, by providing that any data breach or unauthorized access shall be reported to the Data Protection Authority within 48 hours of knowledge of the breach. Failure to report will lead to the application of penalties.

See the Data Protection Authority’s presentation of the new guidelines

A New e-Health National Plan

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A new Agreement on Digital Health (“Patto sanità digitale”) prepared by the Ministry of Health has been submitted to the State and Region Conference in June 2015. The proposed agreement between regions and national government aims at setting forth a precise timetable for the implementation of e-health in Italy and envisages a steering committee in charge of monitoring the status of implementation of the plan.

Among the priorities of the new proposal, the Ministry of Health has indicated the adoption of effective solutions for patient workflow management and patient relationship management, to be achieved through the widespread use of electronic clinical records, telemedicine services and mobile health. According to the plan presented by the government, e-health solutions are key to a deeper overhaul of the national healthcare service in order to increase care outside of hospitals and find more efficient ways of bringing healthcare to patients.

Telemedicine solutions, including remote monitoring and diagnosis, would allow the national health service to bring services to patients in a more efficient way. While a specific piece of legislation addressed to telemedicine services has not yet been enacted, on February 20, 2014 the Italian Ministry of Health issued a set of official national guidelines on telemedicine, which set forth a useful regulatory and technical framework for healthcare authorities and private operators active in the provision of telemedicine services.

Unlike previous guidelines, however, the latest digital health plan also aims at restructuring the use of financial resources devoted to the development of telemedicine solutions, in order to convey funds only to more effective projects capable of fostering the widespread adoption of e-health instruments by other healthcare providers. The government also plans to increase the involvement of private actors in these development projects, through project financing and performance based service contracts.

While it is expected that patients will ultimately benefit from a more efficient model for the supply of healthcare, the government also hopes to rein in spending through a more efficient use of resources and a closer monitoring of test prescriptions and drug consumption, which the new e-health solutions will enable.

Courts Limit Administration’s Discretion in Public Contracts

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Recent rulings by two administrative courts in Italy have restricted the discretion of public entities in the award of public contracts without open procurement procedures, in particular in the healthcare sector. The two decisions reaffirm the Courts’ policy of restricting recourse to in-house contracts and extensions of expired contracts.

The first decision, issued on May 7, 2015 by the Supreme Administrative Court in Rome, invalidated the award of a service contract to a company established and owned by the regional government of Puglia for the provision of in-house services to healthcare facilities in the region. The contract was awarded without a public procurement procedure, on the basis of the fact that it was an in-house service contract. The Court, deciding upon an appeal brought by a competitor who was not granted the possibility to submit its offer, held that a procurement procedure open to competitors must always occur, even if a governmental entity has established a specific vehicle for the purpose of providing in-house services. The Court left a limited room for in-house services, i.e., services provided by an entity fully controlled and managed by the same administration awarding the contract, as if it was one of its internal departments.

On a different occasion, the regional administrative Court of Turin had the chance to reiterate that the extension of expired public contracts is prohibited by public procurement legislation, as it prevents competitors from participating in new public procurement procedures. In addition to stating again this general principle, the Court in its decision of April 3, 2015 no. 573 also held that governmental entities should proceed with calls for tenders whenever the goods or services they intend to procure are not covered by a national or regional framework agreement. In an effort to curb public spending, the Italian government has implemented in several sectors a centralized negotiation process, whereby a central governmental agency (“Consip”) enters into framework agreements for the supply of goods and services to local administrations. Local administrations are generally bound to adhere to such framework agreements and, if they do so, no call for tender needs to be issued. Public hospitals, on the other hand, must adhere to healthcare-specific regional framework agreements and to Consip agreements; only if no such agreements exist they may proceed with the issuance of a call for tenders.

In the case the before the Court, a local healthcare office postponed the validity of an expired supply contract, after assessing that the framework agreement entered into by Consip would have only partially covered the needs of the local administration and – most importantly – would have entailed a higher cost than the expired agreement. Regardless of the potential savings that the extension of the existing contract would have granted the public administration, the Court held that no exceptions can be envisaged to the issuance of a public procurement procedure. Clearly, more than by savings, the Court must have been guided by the desire to sanction a widespread practice of extending expired contracts, which in most cases stifles competition and does not guarantee lower prices.

It is expected that this policy, increasingly adopted by many administrative Courts, will be one of the highlights of the new public procurement legislation that is currently being examined by Italian lawmakers. The new public procurement code is, in fact, expected to provide new instruments for a more effective fight against corruption and inefficiencies within the public administration.

EMA Issues New Guidelines to Prevent Medication Errors

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On April 14, 2015 the European Medicines Agency (“EMA”) released two drafts of good practice guides aimed at improving the reporting, evaluation and prevention of medication errors. The new guides are addressed to regulatory authorities, as well as the pharmaceutical industry.

Medication errors generally refer to unintended mistakes in the processes of prescribing, dispensing or administering of medicinal products in clinical practice and according to EMA they account for an estimated 18.7 – 56% of all adverse drug events among hospitalized patients.

The first guide released by EMA provides an overview of the main sources and types of medication errors, as well as measures to minimize the risks that such errors are made. The second guide, on the other hand, focuses on suspected adverse reactions caused by medication errors, providing guidance and recommendations on how to record, code, report and assess such errors.

The guidelines from EMA recommend a number of actions to marketing authorization holders, including the periodical reporting of information concerning medication errors. Recommendations to the industry include periodical safety update reports and risk management plans to be adopted for each marketed pharmaceutical product. The overall scope of these reporting obligations is to implement a real-life continuous evaluation of the risks and benefits of all medicines placed on the European market.

The two draft guidelines are now open to comments from all relevant stakeholders: the public consultation procedure will expire on June 14, 2015. The final version of the guidelines is expected to be finally adopted later in 2015.

More information and the new draft guides can be found here: http://www.ema.europa.eu/ema/index.jsp?curl=pages/news_and_events/news/2015/04/news_detail_002307.jsp&mid=WC0b01ac058004d5c1.

New Transparency List For Generics And A Victory In Court

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On February 16, 2015 the Italian Medicines Agency (“AIFA”) has published the 2015 update to the so called “transparency list” (lista di trasparenza), i.e., a list of generic drugs authorized in Italy, along with their market price.

Following a number of changes in the legislation governing generics in the past few years, the National Health Service currently only reimburses the cost of the less expensive generic on the market. In fact, Section 7 of Law Decree 347/2001 sets forth the medicines having the same active ingredients composition, pharmaceutical form, way of administration, release modalities, number of tablets and dosage, are reimbursed by the National Health Service up to the price of the less expensive product on the market. The transparency list serves as a tool for reimbursement purposes: if the patient chooses to buy a branded product or a more expensive generic, the patient will need to cover the difference in price.

The publication of the transparency list comes shortly after a recent decision of the highest Italian administrative court, which stroke down past practices of AIFA on the reimbursement of new generics. In this case, the generic drug company EG S.p.A. claimed that AIFA issued a marketing authorization for gabapentin (a generic drug approved in a different EU member state) but unduly refused to recognize any reimbursement. The per-tablet dosage of the generic drug was in fact different from the branded product and other generics already included in the transparency list: therefore, according to AIFA, reimbursement was not warranted by Section 7 of Law Decree 347/2001. AIFA also argued that the new dosage, higher than other reimbursed products, entailed risks for the patients’ safety, as they would have to apportion the right dosage themselves (e.g., to split the drug tablets in half). The administrative court stated that such risk was ungrounded and had no impact on the reimbursement of the drug: if at all, it should have prevented AIFA from issuing a marketing authorization in the first place. Furthermore, the court stated that the National Health Service may reimburse a generic even if not included in the transparency list, striking down AIFA’s argument that dosages already reimbursed by the National Health Service sufficiently covered the needs of the patients, as such criterion was not set forth in applicable legislation.

The court decision comes as the latest victory for generics on the Italian market, adding to several regulatory and legislative changes prompted by budged restraints in the past few years, causing generics to continue gaining strength. In the meantime, proposed new legislation on the sale of generics outside of authorized pharmacies is stirring public debate.

Tax Relief on Exploitation of Intellectual Property Rights and Know-How

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INTRODUCTION OF THE SO CALLED “IP BOX”. Law no. 190 of December 23, 2014 (“Law”), provides for a new regulatory framework concerning taxation of revenue arising from exploitation of intellectual property rights and know-how eligible for legal protection.

Starting from 2015, repatriation of intangible assets owned by Italian and foreign companies abroad will be favored. Exportation or re-exportation of intangible assets to countries having more favorable taxation of revenue arising from exploitation of intellectual property rights will likely decrease, whereas investments in R&D activities in Italy should increase.

SCOPE OF THE LAW. The Law expressly covers works of intellect, patents, trademarks, design, models, processes, formulas, as well as industrial, commercial, and scientific know-how eligible for legal protection[1]. Revenue arising from both direct and indirect exploitation will receive a more favorable taxation as profits from licensing of eligible assets as well as their direct use (e.g. use of patented machineries in manufacturing processes) will be partially excluded from companies’ taxable income. The Law provides for a progressive implementation of the tax relief system. In 2015, only 30% of the profits will be excluded, whereas such percentage will increase to 40% in 2016, and to 50% in 2017[2].

Capital gains arising from sale of eligible intangible assets will be entirely tax-exempt, upon condition that at least 90% of sales revenue are invested, within two years from the relevant sale, in maintenance or development of any of such assets.

It must be noted that the tax relief will not automatically apply to all eligible entities. Instead, companies must expressly opt for the regime, and their choice will be binding and irrevocable for the following five fiscal years.

WHO CAN BENEFIT. Entities carrying out business activity in Italy, regardless of their type or size, can benefit from the new taxation regime. Foreign companies and other incorporated or non-incorporated entities, including trusts, carrying out business activity in Italy through a permanent establishment, can also benefit from the newly introduced regulatory framework provided that their country of residency is a party to a double tax treaty and undertakes to exchange relevant information with Italy.

CONDITIONS. The exclusion of profits from corporate income will apply only to those entities that carry out R&D activities by way of contracts entered into with either universities or equivalent research entities, or with companies other than those belonging to the same group[3].

In case of direct exploitation of eligible intangible assets, companies must conclude an advanced pricing agreement (APA) with the Agenzia delle Entrate (the Italian tax agency) to determine the ratio between the production value of the assets and the corporate income[4]. Such an agreement is optional for revenue arising from exploitation of eligible assets within the same group[5], whereas it is mandatory in case of capital gains deriving from sale of the assets.

EXEMPTED INCOME. Not all of corporate income benefits from the tax relief. The benefitting quota is instead calculated on the basis of the ratio between R&D costs incurred for maintenance and development[6] of eligible intangible assets and overall costs borne to produce such assets.

[1] The Law originally provided for works of intellect, patents, trademarks that are functionally equivalent to patents, processes, formulas and know-how eligible for legal protection. The meaning of “trademarks functionally equivalent to patents” has been debated ever since, with experts stating that such trademarks could be indentified in those trademarks used to market patented inventions. The recent Law Decree no. 3 of January 24th, 2015 (currently still to be converted into law) expanded the scope of the Law to all kind of trademarks, therefore also to purely commercial trademarks, as well as to design and models.

It must be noted that the scope of the Law is wider than what provided in other European countries by similar tax regimes, where tax relief is usually limited to exploitation of patents. Such systems are therefore commonly defined as “Patent Box”.

[2] The exemption is relevant to calculation of both IRES (corporate income tax) and IRAP (regional tax on production). It is estimated that, starting from 2017, revenue arising from exploitation of eligible assets will be taxed at a rate of 13.75%.

[3] The provision is aligned with the “nexus approach” adopted by OECD, aiming at limiting harmful tax competition amongst OECD countries. According to such an approach, tax relief is to be granted only when R&D costs are incurred, therefore hindering companies from exporting intangible assets to countries with more favorable tax rates without carrying out any R&D activity in such countries. (For further information on this issue visit http://www.oecd.org/ctp/beps-2014-deliverables.htm)

[4] The agreement is reached upon an international ruling procedure that is usually applied with regards to transfer pricing and dividends within the context of multinational companies.

[5] The Law originally provided for a mandatory agreement also in case of exploitation within the same group. Law Decree no. 3 of January 24, 2015, made such an agreement optional. Please note that the agreement may remain mandatory if the law decree is not converted into law or if it is modified by the law of conversion.

[6] Law Decree no. 3 of January 24, 2015, provides that such costs are increased by those incurred for the purchase of the asset or for research contracts entered into with companies belonging to the same group up to 30% of maintenance and development costs.

Health Innovation Academy: a new event coming up!

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The next event of Health Innovation Academy will take place on February 19, 2015 in Milan.

We will discuss how technological innovation reaches patients, with a focus on medical devices within the Lombardy healthcare system.

For more information on the event: http://healthinnovationacademy.weebly.com/come-giunge-linnovazione-tecnologica-al-paziente.html

Italian Competition Authority Targets Big Pharma, Triggers Expansion Of Off-Label Prescription

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I. ITALIAN COMPETITION AUTHORITY FINES ROCHE, NOVARTIS

On February 27, 2014, the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato, hereinafter “AGCM”), in an unprecedented decision concerning the pharmaceutical industry in Italy, issued fines in an amount of more than 180 million euro in the aggregate against F.Hoffman-La Roche Ltd. and Novartis AG, as well as their Italian affiliates. The two companies have been found to have restricted competition in connection with the commercialization of two drugs known by their brand name of Aventis and Lucentis.

The fines issued by AGCM, however, did not only affect Roche and Novartis. The AGCM decision triggered in fact, within a very few months, new legislation and case-law on off-label use of medicinal products, making it effectively easier for physicians to prescribe such products so long as their prices are lower than authorized alternatives.

Furthermore, the AGCM decision made painfully clear to the industry that mere compliance with the specific regulations applicable to pharmaceutical products will no longer shield companies from antitrust scrutiny.

II. PHARMACEUTICAL PRODUCTS, RELEVANT MARKET AND MARKETING AUTHORIZATIONS

Aventis and Lucentis have been employed in the treatment of several eye diseases, including in particular age related macular degeneration (“AMD”) and neovascular glaucoma. Both drugs have been approved by the European Medicines Agency (“EMA”) pursuant to the centralized authorization procedure. According to applicable legislation, medicines derived from biotechnology processes are subject to a single marketing authorization issued by EMA, which is valid in the entire territory of the European Union.

Avastin, a drug developed by Genentech (a fully owned subsidiary of Roche), has been approved by FDA and EMA, in 2004 and 2005 respectively, for the treatment of colon cancer. The marketing authorization has not been sought for the treatment of eye diseases. However, Avastin has been consistently employed off-label by ophthalmologists in the treatment of AMD. While Genentech has retained the rights to market Avastin in the US, it has assigned to Roche distribution rights in the rest of the world in exchange for royalties. Neither Genentech nor Roche have ever submitted a request for a marketing authorization for ophthalmological indications.

Lucentis has also been developed by Genentech and has been approved by FDA and EMA, in 2006 and 2007, for the treatment of AMD. Genentech has assigned the distribution of Lucentis (except in the US) to Novartis and sells to Novartis the active principle (ranibizumab).

III. OFF-LABEL PRESCRIPTION IN ITALY

In assessing the alleged restrictions on competition arising out of the marketing and commercialization of Avastin and Lucentis, AGCM extensively took into account the regulation of off-label prescription in Italy, which deeply affected the use of the concerned drugs by Italian healthcare professionals.

In the absence of any international regulation on off-label prescription of drugs, Italian legislation has developed through the adoption of a series of subsequent regulatory guidelines and ad hoc decisions. Law 648/1996 is the main legal instrument governing off-label prescription of drugs in Italy. Such law provides that, in the absence of a valid therapeutic alternative, the national health service may reimburse (i) innovative drugs that have been approved in other states but not in Italy; (ii) drugs that have not yet been authorized but are undergoing clinical trials; and (iii) drugs to be used for a therapeutic indication other than the approved one. The Italian pharmaceutical agency (Agenzia Italiana del Farmaco, hereinafter “AIFA”) holds, and periodically updates, a list of all the above drugs that may be reimbursed by the national health service, the so called “List 648”. Pursuant to such legislation, healthcare professionals may prescribe drugs included in the List 648 for off-label use and obtain reimbursement from the national health service. This legislation is peculiar to the Italian system, as in other countries off-label use is allowed but not reimbursed.

In 1998, the scope of the above provisions has been restricted, by providing that drugs may be prescribed for off-label use only if the healthcare professional is convinced, on the basis of documentable evidence, that the patient cannot be treated with approved drugs and such off-label use is in line with scientific works published on recognized international journals (Law 94/1998).

According to a brief submitted by EMA in the AGCM proceedings, the permissive legislation governing off-label use of drugs and their reimbursement has been beneficial to pharmaceutical companies, as it has allowed to sell products outside of the approved indications, while gathering at the same time scientific data to support future marketing authorizations at the expense of the national health service. The price of such products in most cases is also not established through negotiations with AIFA, as normally required for approved drugs used in accordance with their indications, thus generally yielding higher prices for reimbursement of off-label drugs. The unintended consequences of the above regulations led to a further crackdown on off-label prescriptions in 2006, when it was established that medicinal products cannot be prescribed and reimbursed unless they are at an advanced stage of clinical trials (at least in second phase) and scientific data from such trials are available (Law 296/2006).
In 2012 a change in the legislation concerning medical malpractice had the effect of further discouraging off-label prescription. Law Decree 158/2012, in fact, established that healthcare professionals are exempted from liability due to ordinary negligence if they comply with guidelines and good practices recognized by the scientific community. This has disincentivized healthcare professionals from prescribing drugs off-label, unless such practice is generally endorsed by the medical community.

IV. THE ANTICOMPETITIVE ARRANGEMENTS CONCERNING THE MARKETING OF AVASTIN AND LUCENTIS

Understanding off-label legislation and the possibility to obtain reimbursement from the national health service is essential to understanding how the Aventis-Lucentis case unfolded. The price of Lucentis is in fact significantly higher than the price of Avastin: as of November 2012 the price reimbursed by the national health service per injection was equal to €902. Avastin, on the other hand, had a price per treatment ranging from €15 to €81 and had been included in the List 648 for the treatment of AMD.

In line with then applicable legislation, the placement on the market of Lucentis triggered the cancellation of Avastin from List 648 for most of its off-label uses, since a valid alternative treatment, duly authorized for the same indication, was available on the market. AIFA definitely cancelled Avastin from the List 648 in October 2012 following a change in the summary of the product characteristics previously filed by Roche with EMA in order to account for certain adverse events in the ophthalmic use of Avastin as compared to Lucentis.

AGCM in its decision points to a concerted allocation of the market between Roche and Novartis, with this latter focusing on the ophthalmic sector and the first focusing on antitumoral drugs. In line with this shared marketing strategy, AGCM held that the two companies artificially restricted the use of Avastin, also by undertaking a variety of regulatory actions aimed at limiting its off-label use. Roche, on the other hand, claims that any such actions were in line with its pharmacovigilance duties, as they related to adverse events in connection with the use of Avastin in ophthalmic settings.

It is quite interesting to note that the actions undertaken by Roche regarding Avastin were on their face completely in line with the current regulatory framework. Roche, in fact, was under no obligation to seek a marketing authorization for the treatment of AMD and was actively (maybe too actively!) reporting any adverse events occurred in connection with the off-label use of Avastin. According to AGCM, however, all such actions in the aggregate had the specific goal of restricting competition and were instrumental to a restrictive agreement between competitors, even if they were formally in line with pharmaceutical regulations. The allegations of AGCM have been supported by the economic and contractual ties between Roche and Novartis and their common interest in the commercialization of the two products.

AGCM, in assessing whether the above practices had an impact on the market, also examined the higher costs borne by the national health service in connection with the prescription of Lucentis instead of Avastin and estimated such higher costs in the amount of €540 million in 2013 and €615 million in 2014. While such higher costs have not been taken into account by AGCM in defining applicable sanctions, but rather to show that the practice of Roche and Novartis had actual effects on competition, they quickly became the basis for a claim by the Italian Ministry of Health, who – soon after the AGCM decision – stated that it is willing to seek reimbursement for damages suffered as a consequence of the alleged anticompetitive arrangements.

V. NEW LEGISLATION AND CASE-LAW ON OFF-LABEL PRESCRIPTION

Following the decision of AGCM and the interest generated in the public opinion by the Avastin-Lucentis case, the Italian Government enacted a law decree (36/2014) significantly extending the possibilities for off-label prescription of drugs. The new legislation, in particular, provides that off-label prescription is allowed and reimbursement is warranted even if a valid alternative drug duly authorized for the concerned indication exists. The possibility to obtain reimbursement for such drugs is subject to their inclusion in the List 648, upon an assessment by AIFA that their use is appropriate and cost-effective. In addition, off-label use must be recognized by the scientific community and must be in line with Italian and international researches. Lastly, AIFA may also take appropriate monitoring measures to ensure patients’ safety, and is thus authorized to act independently in the event that the concerned pharmaceutical company fails to take action.

This new legislation appears to lessen the restrictions on off-label prescription previously introduced, and allows AIFA broad authority to expand the list of reimbursable off-label drugs. Contrary to past legislation, however, for the first time off-label regulations explicitly factor in the cost-effectiveness of off-label prescriptions in order to determine their reimbursement.

Only a few months after the AGCM decision and the enactment of new legislation, the Constitutional Court also decided a dispute regarding the prescription of Avastin. In fact, following the 2012 cancellation of Avastin from List 648, many Italian regions continued to recommend the use of Avastin in the treatment of AMD, giving rise to a dispute with Novartis. One of these disputes reached the Italian Constitutional Court, which on May 19, 2014 held that AIFA always had the power to conduct an independent assessment of valid alternative treatments, based not only on authorized indications but also on economic efficiency for the national health service, de facto authorizing AIFA to include products in the List 648 for off-label use and reimbursement, even if an alternative treatment is approved and marketed, but comes at a higher price.

VI. CONCLUSIONS

The AGCM decision already had the effect of triggering an independent investigation into this matter in France and, although still subject to judicial review, is likely to generate further litigation in the next months with the Italian Ministry of Health and other authorities abroad. In addition, the regulations enacted in the aftermath of the AGCM decision can be expected to trigger new actions from AIFA aimed at extending off-label use of drugs, to the extent that such use may serve the purpose of complying with budget restrictions.

Aside from the details of the Avastin-Lucentis case, however, the key takeaway for the pharmaceutical industry is that compliance with the regulatory framework no longer shields pharmaceutical companies from antitrust investigations. AGCM made it very clear that it will independently assess commercialization and marketing strategies of pharmaceutical companies, regardless of their formal compliance with regulatory requirements. Moreover, AGCM expressly stated that the marketing authorization is an entry barrier and cannot be used to determine the relevant market. If other authorities across the world are willing to follow this path, it might well be time for the industry to reassess their marketing strategies.

Which Organizational Model Will Shield An Entity From Corporate Criminal Liability Under Italian Law?

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THE ENACTMENT OF LEGISLATIVE DECREE 231.  At the time of its enactment in 2001, Legislative Decree no. 231 had a revolutionary impact on the Italian legal system as it subverted a basic tenet of Italian criminal law according to which corporations bore no criminal liability. The assumption that only individuals could be directly subject to criminal sanctions was erased and a system aimed at punishing corporations for crimes committed by individuals to their advantage or in their interest was created. A specific set of sanctions able to punish the corporation and its shareholders was devised: monetary sanctions and blacklisting sanctions (inclusive of the prohibition to carry on the business activity and the appointment of receivers), which may also be ordered on an interim basis, apply instead of arrest and imprisonment of individuals[1].

THE PRINCIPLE OF LEGALITY.  Along with the horrific prospect of monetary fines up to 1.5 million Euros and disqualification from contracting with the Italian public administration (which is the source of vital revenues for many companies, especially in the life sciences field) came a couple of good news.  First of all, criminal liability of the corporation is subject to the principle of legality, i.e., it arises only if certain specific crimes listed in Legislative Decree no. 231 are committed.  A corporation, therefore, does not have to face the Italian criminal code in its entirety and may focus on a subset of crimes. The list of crimes has however been increased time and again by the Italian legislator and crimes giving rise to corporate liability now span from terrorism to money-laundering (and with each new addition that initial sense of relief gradually fades…).

AN EXEMPTION FROM LIABILITY.  In addition, Legislative Decree no. 231 expressly provides for an exemption from criminal corporate liability when the following circumstances are proven:

  • prior to the commission of the fact, the management body has adopted and effectively implemented organizational and management models adequate to prevent crimes similar to those of the type that occurred;
  • an internal corporate body (organismo di vigilanza) having autonomous powers of initiative and control has been entrusted with the task to oversee the application and compliance with such model, has ensured that the model is updated, and its vigilance has not been omitted or insufficient.

The key to shielding a company from criminal corporate liability is apparently easy as there are only two main ingredients required for this recipe: an “organizational model”, and an effective vigilance body.  Once both are proven by the defendant, then the burden of proof shifts to the prosecutor. As often highlighted by case law, criminal corporate liability is not strict liability (responsabilità oggettiva), but applies only as a consequence of “organizational negligence” (colpa di organizzazione)[2].  But what is exactly an organizational model and which are its essential features in order for it to be an effective ground of exemption from liability?

WHAT IS AN ORGANIZATIONAL MODEL?  In the course of the last decade or so, many corporations have tried to understand what an organizational model is, and how to set up one.  The industry associations CONFINDUSTRIA[3], representing industrial companies, and ASSOBIOMEDICA, in the name of medical device manufacturers, have gone as far as drafting guidelines in order to shed light on this exemption from liability.  In particular, ASSOBIOMEDICA has just released interesting Guidelines on this subject in November 2013[4].

Such guidance is very welcome as, in fact, Legislative Decree 231 deals with the issue only in a few sentences and the interpreters have been left with the difficult task of… making sense of them[5].  A useful hint comes from the legislator’s requirement that a model meets the following conditions (which also serves as step-by-step method on setting up a model):

“a) identifies the activities which may give rise to the commission of crimes;

b) provides for specific protocols aimed at programming training and executing the decisions of the corporation in relation to the crimes that must be prevented;

c) identifies ways to manage financial resources adequate to prevent the commission of crimes;

d) foresees obligations to inform the vigilance body required to oversee the functioning and compliance of models;

e) introduces an adequate disciplinary system aimed at sanctioning any lack of compliance of measures set forth in the model”. (Section 6, paragraph 2)

The first step explains what I like to describe as the “soul searching” activity that the corporation must carry out in order to answer the following question: which business activities can lead to the commission of crimes? This also illustrates why a “cut & paste” organizational model will never work, since the law deems that the corporation has adequately prevented the commission of the 231 crimes only after understanding where and how likely they are committed. An organizational model must, at any given time, be extremely customized to its business, market, organizational structure and to the actual activities of the corporation[6].

Once risks are in focus, measures can be set up in order to prevent corporate crimes. The company is free to determine which measures to adopt, but preventive measures need to be sufficiently effective so that an individual must have fraudulently eluded them in order to commit the crime.

Only the corporation itself can determine which measures are appropriate and effective: measures, in fact, can range from a code of conduct to organizational measures, from policies, procedures and protocols mapping and regulating business activities to controls and monitoring systems adequate to verify if the prescriptions by the corporation are actually followed by employees. Specific attention is given to financial resources, which Legislative Decree no. 231/2001 believes should be managed with sufficient protocols, separation of functions and controls as to prevent any crimes from being committed with corporate funds. Last but not least, an organizational model needs some “teeth”: if employees do not abide by the rules, they need to be adequately sanctioned.

So, back to our original question: what is an organizational model? It is a system of structural and prescriptive measures that organizes a business in the most effective way to prevent the commission 231 crimes. In other words, the organizational model is not just a document, but reflects and memorializes the efforts undertaken by a company in order to prevent the commission of crimes foreseen by Legislative Decree 231/2001.

THE ORGANIZATIONAL MODEL’S WATCHDOG.  The system is only regarded as effective if it is supervised by a specific body of the corporation (organismo di vigilanza, or ODV) having “autonomous powers of initiative and control” (Section 6 Paragraph 1). Much debate has been sparked by these few words of Legislative Decree 231/2001[7].  If such words need to be interpreted as requiring autonomy, independence, continuity of action and competence, then the corporation is faced with a difficult task: finding one or more people who will be independent yet knowledgeable about the corporation’s activities, free and autonomous to make decisions yet informed about what is going on within the company. The near impossible balance is often achieved by appointing a mix of internal and external individuals who can bring professional skills, but also perspective, to the job. ASSOBIOMEDICA’s guidelines point out that the above requirements must be referred to the body in its entirety, and not to the single members of the organismo di vigilanza[8], and add that the body’s activity must be full-time, a feature rarely found in practice. The model must also set forth adequate information flows that sufficiently inform the ODV on activities within the areas at risk.

SO WHICH ORGANIZATIONAL MODEL DOES PROVIDE AN EXEMPTION FROM CRIMINAL CORPORATE LIABILITY? On the basis of the opinion of scholars, guidelines and case law on this issue, the answer is fairly simple: an effective one. What does this mean? Unapplied codes of conduct, policies and protocols are not going to help. A beautifully crafted model without a documented history of controls, monitoring and suggested sanctions by the ODV will not get very far. A passive ODV will show that the company is aiming at a pretense of compliance, rather than targeting actual compliance.

Interesting tips can be drawn from the assessment carried out by court appointed experts on the organizational models of pharmaceutical companies accused of criminal liability in connection with a fraud investigated by the office of prosecution in Bari, which ended with plea bargain. The experts concluded that the models were insufficiently preventing the concerned crimes. Although the protocols were “appreciably implemented”, the ODV was deemed to be too marginal within the life of the corporation, audits on the use of financial resources did not occur, while very high incentives to sales staff were granted[9].

In conclusion, the organizational model must become a living system, known to employees, strictly applied after adequate audits, and giving rise to sanctions in case of lack of compliance. A court must be able to see that the organizational model has truly become the DNA of a company, who has tried its very best to prevent that its business activities can lead to criminal conducts.

[1] The exercise of understanding how sanctions originally envisaged for natural persons apply to corporations is still ongoing. For example, a recent court decision (Supreme Court no. 44824 of September 26, 2012) has stated that bankruptcy of the corporation is not equal to death of the offender and thus does not extinguish the crime, thus contradicting prior judgments of lower courts (e.g., Court of Milan October 20, 2011).

[2] The concept of “colpa di organizzazione”, which appeared in case law as early as in the decision of the Court of Palermo of July 1, 2005, was well clarified by the Supreme Court in its decision no. 27735 of July 16, 2010. A useful discussion of the same principle can also be found in the decision by the Court of Milan of March 8, 2012, which argues that negligence in organization is constituted by planning negligence, management negligence and vigilance negligence.

[3] The latest guidelines by CONFINDUSTRIA have been updated on March 31, 2008.

[4] http://www.assobiomedica.it/static/upload/lin/linee-guida-231-01-parte-generale-rev.-2009.pdf

[5] The Court of Milan (Ufficio Indagini Preliminari, November 3, 2010) has however excluded that the indeterminateness of Legislative Decree no. 231/2001 can give rise to a breach of the Constitution.

[6] Additionally, certain scholars argue that the legislator could not possibly suggest any preventive measures due to the constitutional principle of freedom of economic enterprise.

[7] The latest amendments to Legislative Decree no. 231 of 2001 allowing the board of statutory auditors (collegio sindacale), the supervisory committee (consiglio di sorverglianza) and the committee for management control (comitato per il controllo della gestione) to serve as organismo di vigilanza have given rise to further critiques as many scholars disagree on the ability of such bodies to have sufficient independence and adequate professional competence. See, e.g., the white paper of March 27, 2012 by Associazione dei Componenti degli Organismi di Vigilanza ex D.Lgs. 231/2001.

[8] Note that others disagree on this point (e.g.,  Carlo Piergallini “Paradigmatica dell’autocontrollo penale (dalla funzione alla struttura del “modello organizzativo” ex d.lg. n. 231/2001”, on Cassazione Penale, fasc. 1, 2013, pag. 0376B.)

[9] See the thorough analysis of Matteo Vizzardi “Prevenzione del rischio-reato e standard di adeguatezza delle cautele: i modelli di organizzazione e di gestione di società farmaceutiche al banco di prova di un’indagine peritale” published in Cassazione Penale, March 2010, no. 3.