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VOL. 129 | NO. 140 | Monday, July 21, 2014

FedEx Could Face $1.6 Billion Fine for Drug Shipments

By Amos Maki

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Starting around 1998, Internet pharmacies – some of which did not require a doctor’s visit or prescription – began proliferating online, turning a corner of the Web into a black market bazaar for prescription pills.

The worldwide explosion of these online pharmacies became big business for shippers like Memphis-based FedEx Corp. and rival United Parcel Service, which shipped the prescriptions from the pharmacies or their fulfillment centers to customers.

When federal authorities shut down two of the most widely used Internet pharmacies, sales officials at Memphis-based FedEx worried the shutdowns would impact their financial compensation and placed the online pharmacies under a different designation that would not impact their pay, according a federal indictment against the company handed down last week.

A federal indictment against FedEx was handed down last week.

(FedEx/Steve Cook)

Details from the 15-count, 26-page federal grand jury indictment accusing FedEx of knowingly facilitating the distribution of illegal prescription drugs offer a detailed look at how much FedEx valued the online pharmacy business, that FedEx knew the pharmacies were legally suspect and steps the company took to continue delivering shipments of the medications while protecting its profits, despite a decade of warnings from lawmakers and law enforcement that the illegal Internet pharmacies were using FedEx to deliver the prescription drugs.

The indictment says FedEx knew for a decade that illegal Web-based pharmacies used their services and that the parcel delivery giant took steps to protect its business by setting up special credit policies for Internet pharmacies to minimize financial losses if law enforcement shut the sites down.

Online pharmacies were a growing part of the company’s business, according to the indictment. As of July 2004, FedEx employees had identified more than 200 accounts associated with online pharmacies, an amount that swelled to more than 600 by September 2010, according to the indictment.

The online pharmacies were also of increasing importance to federal authorities, which shut down two large operations that were utilizing FedEx. As authorities shuttered the online pharmacies, FedEx field sales employees became alarmed because if customers were lost – in this case, online pharmacies closed by authorities – the employees were expected to replace them with a new company bringing in an equal amount of revenue so the salesperson could meet his or her yearly goal.

Beginning in 2004, sales employees began suffering revenue losses due to the closure of the online pharmacies and began exploring alternate ways to classify the businesses – which opened accounts quickly and shipped large amounts of packages before being shut down – that wouldn’t impact executive compensation.

“I can assure you that these types of accounts will always result in a loss at some point,” a managing director of sales stated to the vice president of sales for the Eastern Region, according to the indictment. “They have a very short lifespan and will eventually be shut down by the DEA.”

On July 6, 2006, an enhanced credit policy – designed to minimize FedEx losses if the pharmacies were shut down by law enforcement – was circulated to FedEx’s managing directors of sales.

“Many of these companies operate outside federal and state regulations over the sale of controlled drugs. ... Drugs purchased from these sites may be diluted or counterfeit,” the policy stated. “Several sites have been shut down by the government without warning or simply disappeared, leaving large balances owing to FedEx.”

In 2007, FedEx sales officials adopted a new classification for online pharmacies that protected yearly sales goals and compensation in case a pharmacy was shut down by the government. The policy protected pay while allowing the shipment of suspected illegal drugs to continue. The stated reason for the policy was because of the “volatile in nature (i.e., here one day and gone the next). There are often numerous large volume shifts associated with internet pharmacies as they move the shipping location often to avoid detection of the DEA.”

FedEx, which has been summoned to appear in federal court in San Francisco on July 29, denies any wrongdoing, saying it has a long history of cooperating with law enforcement.

“FedEx is innocent of the charges brought today by the Department of Justice,” the company said in a statement. “We will plead not guilty. We will defend against this attack on the integrity and good name of FedEx and its employees. FedEx has a 42-year history of close cooperation with law enforcement agencies.”

FedEx, the Memphis area’s largest private employer, said the government was unfairly assigning law enforcement responsibilities to a company that delivers more than 10 million packages a day.

“We want to be clear what’s at stake here: the government is suggesting that FedEx assumes criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day,” the company statement said. “We are a transportation company – we are not law enforcement.”

The stakes are high for FedEx. The company could face a fine of up to $1.6 billion, double the amount prosecutors allege the company earned from shipping the medications.

The charges come after a years-long investigation by the Drug Enforcement Administration and federal prosecutors in Northern California into the role shipping companies play in the illicit prescription-drug trade.

Last year, UPS reached an agreement with the U.S. Justice Department to forfeit $40 million in sales for serving online pharmacies. UPS, which admitted to knowing it was working for illegal pharmacies, also agreed to set up a new compliance program.

David Kustoff, the former U.S. Attorney for the Western District of Tennessee, said he could a scenario where FedEx could agree to a deal similar to the one UPS reached with the government.

“It looks similar to the UPS case – and essentially UPS, I don’t know if you would call it an admission, they issued a statement where they essentially agreed to the facts and paid $40 million,” said Kustoff. “I think you could see a situation where FedEx says it could enter an agreement not confirming or denying guilt and pay a fine.”

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