The agreement is the third-largest settlement with a drugmaker in U.S. history, and the latest in a string of actions against drug companies allegedly putting profits ahead of patients.
Justice Department officials alleged that J&J used illegal marketing tactics and kickbacks to persuade physicians and pharmacists to prescribe Risperdal and Invega, both antipsychotic drugs, and Natrecor, which is used to treat heart failure.
"J&J's promotion of Risperdal for unapproved uses threatened the most vulnerable populations of our society — children, the elderly and those with developmental disabilities," said Zane Memeger, U.S. Attorney for the Eastern District of Pennsylvania.
The settlement amount includes $1.72 billion in civil payments to federal and state governments as well as $485 million in criminal fines and forfeited profits.
Monday's action is the latest example of regulators cracking down on aggressive pharmaceutical marketing tactics, namely trying to increase sales by pushing medicines for unapproved, or "off-label," uses. While doctors are allowed to prescribe medicines for any use, drugmakers cannot promote them in any way that is not approved by FDA.
"Every time pharmaceutical companies engage in this type of conduct, they corrupt medical decisions by health care providers, jeopardize the public health, and take money out of taxpayers' pockets," said Attorney General Eric Holder.
J&J said in a statement, "This resolution allows us to move forward."
The FDA first approved Risperdal tablets for schizophrenia in 1993, but prosecutors say J&J began promoting the drug for unrelated uses by the end of the decade. Risperdal then grew to become J&J's top product by 2005, with sales over $3.5 billion.
In its plea agreement, J&J subsidiary Janssen Pharmaceuticals admitted to promoting Risperdal as a way to control erratic behaviour in seniors with dementia. Today that use is explicitly barred in the drug's warning label because it can increase the risk of stroke and death in elderly patients.
Janssen agreed to plead guilty to violating drug marketing laws and will pay $400 million in fines and forfeited sales.
In a separate civil complaint, the government alleged that J&J and Janssen promoted Risperdal and a similar drug, Invega, to control numerous behavioural problems in seniors, children and the mentally disabled between 1999 and 2005.
Documents filed in the case show the government raised objections about the company's marketing approach for years. In a 1999 letter, the FDA warned Janssen that "disseminating materials that state or imply that Risperdal has been determined to be safe and effective for the elderly population" would be "misleading."
Despite such warnings, the company's marketing plan targeted nursing homes and doctors who treated the elderly. Marketing materials distributed by an "ElderCare sales force" emphasized Risperdal as a treatment for seniors suffering from everything from agitation to depression to hostility. The company also downplayed the drug's risks, including diabetes and weight gain.
At the same time the drugmaker was allegedly paying kickbacks to the nation's largest nursing home pharmacy, Omnicare. J&J paid millions in bogus grants and education payments to persuade the company's hundreds of pharmacists to recommend Risperdal to nursing homes. The government said the payments amounted to kickbacks.
The company also set business goals to increase drug sales to children and adolescents. Janssen instructed its sales representatives to call on child psychiatrists and to market Risperdal as a treatment for common childhood disorders, such as attention deficit disorder and autism.
Prosecutors said Monday the off-label prescribing contributed to millions of dollars of wasteful federal and state spending by health programs like Medicare, Medicaid and the Department of Veterans' Affairs.
"Through these alleged actions, these companies lined their pockets at the expense of American taxpayers, patients and the private insurance industry," Holder said.
In a separate civil complaint, the government alleged that J&J and its subsidiary Scios promoted its heart failure drug Natrecor as a weekly treatment for patients, despite no scientific evidence to support this approach.
J&J and Scios agreed to pay $184 million to settle civil allegations surrounding the drug.
Both state and federal governments are spending more than ever on prescription drugs, as Medicare and Medicaid swell with aging baby boomers. That increased spending has attracted scrutiny from prosecutors looking to recover taxpayer dollars.
Last year British drugmaker GlaxoSmithKline paid a record $3 billion in fines to settle criminal and civil violations involving 10 of its drugs. Prior to that, the record settlement involved Pfizer Inc., which paid $2.3 billion in criminal and civil fines.
In its most recent quarterly filing, New Brunswick, N.J.-based J&J reported $17.3 billion in cash on hand.
In a letter to employees distributed Monday, the company's general counsel Michael Ullmann said the settlement was "in the best interests of the company." But he added that "we do not agree with all of the government's allegations and strongly believe some of them are not supported by the facts."
Johnson & Johnson shares fell 34 cents to close at $93.03.