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| Theranos' Palo Alto, CA, headquarters--Courtesy of Theranos |
Theranos has been in a world of trouble lately, facing growing pushback for its proprietary testing technology. The company hired hot-shot litigator David Boies to see it through the eye of the storm, but Boies will not only be proffering legal advice. He is also acting as a Theranos director, which could present a conflict further down the road as the company struggles for redemption.
Boies' decision to act as both legal counsel and director "has the potential to blow up," University of California, Berkeley, law professor Steven Davidoff Solomon said in an editorial published by The New York Times. As Solomon points out, Boies, who has represented clients such as Al Gore and former American International Group CEO Maurice Greenberg, may be put in a position where he has to choose between protecting Theranos as its lawyer or its shareholders as a director.
Things could get tricky for Boies given Theranos' structure. The company "is a corporate governance disaster," Solomon said, with CEO Elizabeth Holmes holding the reins. Even though Holmes has pledged more transparency in light of the recent fallout, "she may not be quick to admit" flaws in the company's technology "to the benefit of the remaining shareholders," Solomon said. And the "board could do little more than throw up its collective hands" if Holmes resists potential changes to the company, including her ouster, he said.
While the American Bar Association allows lawyers to take on a dual role of director and counsel, that doesn't mean the arrangement will not lead to problems, Solomon said. Taking on the two jobs "is a difficult line to walk," University of California, Berkeley, business professor Jo-Ellen Pozner said, as quoted by the NYT, even when the stakes are lower.
"I have a hard time believing that an experienced litigator can adequately represent investors--one of the primary responsibilities of a director--while being attentive to potential legal strategies, which might cause him to privilege the interests of management," Pozner said.
Boies will have his hands full as he sorts through current and potential land mines. Back in October, articles pointed to flaws in Theranos' technology, saying that the company stopped collecting finger-prick blood samples for all but one of its more than 200 tests after regulators found that "nanotainers" made by Theranos to collect samples were unapproved medical devices. Another story showed that one of the company's lab tools only handled a small fraction of tests sold to consumers.
Last week, the Centers for Medicare & Medicaid Services (CMS) sent Theranos a letter regarding "deficient practices" at its Newark, CA-based lab that "pose immediate jeopardy to patient health and safety." The CMS described one infraction as "likely to cause, at any time, serious injury or harm, or death, to individuals served by the laboratory or to the health and safety of the general public."
The news triggered immediate backlash from some of Theranos' partners. Walgreens Boots Alliance ($WBA), one of the company's key partners, said that it would stop sending patient blood samples to the Newark lab until issues raised by the CMS were cleared up. And the drugstore giant also said that it would temporarily shutter its Palo Alto, CA-based Theranos Wellness Center until the problems are resolved.
- read the NYT article (sub. req.)