BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In recent years, both the pharmaceutical and medical device industries have been hit by many high-profile product recalls, the effect of which has been to undermine the nation's confidence in nearly every segment of the healthcare sector.

In particular, product recalls by cardiovascular product manufacturer Guidant Corp., now part of Boston Scientific Corp. (Natick, MA), have garnered significant attention both in the media and in courtrooms. During 2005 and 2006, the company recalled hundreds of thousands of its implantable cardioverter-defibrillators (ICDs) and pacemakers due to the possibility for malfunction.

Although recalls are not unusual among medtech manufacturers, the debate surrounding Guidant intensified after The New York Times reported that the company failed to properly inform physicians and patients about a potentially fatal flaw in its devices. Company executives defended the decision to limit notification by asserting that the devices met engineering standards and that the risk involved in surgery to remove the devices was greater than the risk associated with leaving the device implanted.

As Guidant's acquirer, Boston Scientific currently faces numerous class-action and individual lawsuits nationwide. The claims and damages sought vary among the lawsuits, but most hinge on issues of negligence related to the company's failure to properly warn physicians and patients of the dangers associated with the devices.

"Guidant's alleged failure to adequately disclose the risks associated with its ICDs and pacemakers also highlights the reach of the Sarbanes-Oxley Act of 2002 (SOX)," says J. Mark Ray, a partner with Alston & Bird LLP (Atlanta). "SOX mandates so-called 'disclosure controls' and sets strict standards for corporate governance and financial reporting. So, Guidant's failure to disclose could have also violated SOX and exposed it to enforcement action from the Securities and Exchange Commission. Perhaps most important to the former executives and directors of Guidant, some theories of corporate liability under SOX and state corporate laws could give raise to personal liability."

Of greater importance to medical device manufacturers outside of Boston Scientific-Guidant is the attention and reaction that company's woes have drawn, not only from the public and media outlets, but also from industry leaders and regulatory agencies. The pending lawsuits against Guidant raise serious legal, regulatory, ethical, and financial questions, and how each element plays out for the company could have implications for all medical device manufacturers.

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