Category Archives: Enforcement Policy

The Rule of Law and the Responsible Corporate Officer Doctrine after Quality Egg

by Jason Driscoll
This post is the second part of a two-part post by the author.

Introduction

In my previous post (DeCoster v. United States: Testing the Limits of the Responsible Corporate Officer Doctrine), I discussed how the Food and Drug Administration (“FDA”) and the Department of Justice (“DOJ”) have revived the Responsible Corporate Officer (“RCO”) doctrine in an attempt to increase compliance with the Federal Food, Drug, and Cosmetic Act (“FDCA”). In light of the incarcerative sentences in the Quality Egg case, I addressed the DOJ’s new strategy of seeking enhanced sanctions in RCO cases. In United States v. Quality Egg, LLC,[1] the government brought FDCA Section 333(a)(1) misdemeanor food adulteration cases against two corporate officers—Jack and Peter DeCoster—ultimately securing three-month prison sentences premised largely on the RCO doctrine.[2] On appeal, the DeCosters argued that the incarcerative sentences violated due process absent evidence of mens rea or actus reus.[3] The Eighth Circuit affirmed the sentences, however, holding that a three-month strict liability prison sentence was “relatively light” doing “no grave damage” to an offender’s reputation.[4] A petition for a writ of certiorari followed, inviting the Supreme Court to review the doctrine for the first time since 1975, but was denied. Continue reading

DOJ Memorandum Addressing Agency Guidance

by Matthew L. Biben, Courtney M. Dankworth, Mark P. Goodman, Maura Kathleen Monaghan, Jacob W. Stahl and Eric Silverberg

On January 25, the Department of Justice (the “DOJ”) released a memorandum by former Associate Attorney General Rachel Brand (the “Brand Memo”) prohibiting the DOJ from relying on noncompliance with other agencies’ guidance documents as evidence of a defendant’s violation of applicable law. While the Brand Memo is arguably only a restatement of the established principle that agency guidance is nonbinding, it may nevertheless have important implications for cases brought by the DOJ under the False Claims Act (the “FCA”) and other enforcement actions.

BRAND MEMO OVERVIEW

The Brand Memo prohibits the DOJ from using “its enforcement authority to effectively convert agency guidance documents into binding rules” by using a party’s noncompliance with other agencies’ “guidance documents as a basis for proving violations of applicable law” in affirmative civil enforcement (“ACE”) cases. It also applies to both “future ACE actions brought by the Department, as well as (wherever practicable) to those matters pending as of the date of this memorandum.”

The Brand Memo follows a directive from Attorney General Sessions, dated November 16, 2017, prohibiting all DOJ sections from issuing “guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.”[1] This directive required the DOJ to refrain from using its own guidance documents to “coerc[e]” persons to take or avoid taking actions beyond what is required by statutes or regulations. These memos highlight the DOJ’s increased skepticism of “rulemaking by guidance.”

It should be noted that the Brand Memo permits the DOJ to rely upon agency guidance to paraphrase or explain statutes and regulations, and to prove that a party had knowledge of a particular statute or regulation. It does not elaborate on these scenarios. The breadth of the carve-outs poses a risk that the exceptions will swallow the rule. However, in light of the Trump administration’s disapproval of the use of guidance documents, it is unlikely that these exceptions will be widely invoked.

IMPLICATIONS OF THE BRAND MEMO

Implications for FCA Actions Brought by the DOJ

The Brand Memo is likely to reduce, if not eliminate, the circumstances in which the DOJ brings FCA actions predicated on failures to comply with agency guidance documents. Instead, the DOJ will be confined to proving violations based on the text of the applicable statutes or regulations. This development will be particularly relevant in certain industries

  • In the life sciences sector, where DOJ attorneys often rely on guidance issued by the Department of Health and Human Services’ Office of the Inspector General and Food and Drug Administration.
  • In the healthcare sector, where DOJ attorneys often rely on the Centers for Medicare & Medicaid Services’ Medicare Benefit Policy Manual.
  • In the mortgage sector, where DOJ attorneys often rely on provisions of the HUD Handbook or on Mortgagee Letters issued by the Department of Housing and Urban Development.

In light of the Brand Memo, the DOJ may no longer be able to argue that defendants’ reimbursement submissions were false because the defendants were not in compliance with the applicable standards set forth in agency guidance.

Many FCA cases also turn on whether or not any alleged false statements were material. In Universal Health Services v. United States ex rel. Escobar,[2] the Supreme Court held that FCA plaintiffs must satisfy a “rigorous” materiality standard, i.e., that the government would not have provided reimbursement had it known about the alleged false statement. In light of the Brand Memo, the DOJ may no longer be able to rely on agency guidance to establish the importance to an agency decision of a defendant’s misrepresentation. It therefore may be more difficult in some circumstances for the DOJ to satisfy Escobar’s heightened materiality requirement.

A few examples highlight the circumstances in which the DOJ relied on agency guidance in the past but might not be able to do so in the future in light of the Brand Memo:

  • In 2012, the DOJ brought an FCA action against Life Care Centers of America, a large skilled nursing home operator. The DOJ alleged that the defendant engaged in a scheme to increase revenue by placing as many patients as possible in the highest reimbursement category for skilled rehabilitation therapy even though such therapy was often not medically reasonable and necessary. The complaint relied on the Medicare Benefit Policy Manual, which is an agency guidance document, to explain what types of skilled rehabilitation therapy are appropriate. This matter ultimately settled in 2016 for $145 million.[3]
  • Last year, the DOJ announced the settlement of an FCA action against Residential Home Funding Corporation, an entity that originates residential mortgages. The DOJ alleged that the defendant made false statements in order to participate in a government program under which it had the authority to endorse mortgages for Federal Housing Administration insurance (meaning that the federal government would cover losses on loans that defaulted). The DOJ’s allegations were premised in part on the defendant’s failure to follow requirements set forth in the Department of Housing and Urban Development Handbooks, which are agency guidance documents. This matter was settled for $1.67 million.[4]

The Brand Memo also casts doubt on the DOJ’s ability to rely on the Auer deference, a well-known but often-challenged doctrine providing that courts should defer to an agency’s interpretation of its own regulations, as set forth in that agency’s own guidance documents, unless the agency’s interpretation is clearly erroneous.[5]

Implications for FCA Actions Brought by Relators

FCA actions can be brought by relators, private individuals who allege misconduct related to false claims for government reimbursement or other government benefits. If the DOJ declines to intervene in an action brought by a relator, the relator can elect to proceed alone. While the Brand Memo technically applies only to actions led by the DOJ, it has potentially significant implications for actions prosecuted by relators as well.

The Brand Memo was issued shortly after a leaked internal memorandum by Michael Granston, the Director of the DOJ Civil Division’s Fraud Section, which outlined the circumstances in which DOJ attorneys should seek early dismissal of FCA actions (the “Granston Memo”).[6] The Granston Memo described the substantial increase in actions led by relators alone and argued that the DOJ should consider invoking its statutory authority to seek early dismissal of such cases when they impose significant burdens on the DOJ. For example, each of these cases still must be actively monitored by the DOJ, and the rulings issued in such cases may create precedents that negatively impact the DOJ’s ability to litigate its own FCA cases. To the extent that a case brought by a relator acting alone relies on agency guidance, FCA defendants can now use the Brand Memo to argue to the DOJ that the case should be dismissed because the reliance on guidance documents is improper. Even if the DOJ does not elect to try and dismiss a case, the Brand Memo gives FCA defendants ammunition to argue that relators who stand in the shoes of the DOJ should not be permitted to rely on agency guidance.

Implications for Use by Defendants to Establish Compliance

The Brand Memo does not preclude defendants from using agency guidance documents to establish that they complied with applicable standards set forth in agency documents. At the very least, proof of compliance with standards described in agency guidance should negate allegations that the defendant was acting with knowledge of wrongdoing.[7]

Implications for Criminal Cases and Administrative Enforcement Actions

Even though the Brand Memo applies only to ACE actions brought by the DOJ Civil Division, its logic extends to other contexts as well. The underlying principle that “guidance documents cannot create binding requirements that do not already exist by statute or regulation” should apply equally to actions brought by the DOJ Criminal Division and to enforcement actions brought by other agencies. Whether that happens remains to be seen.

CONCLUSION

Companies should not use the Brand Memo as a justification for disregarding agency guidance. That said, the Brand Memo may be helpful to companies that are currently facing FCA actions predicated on agency guidance. In such cases, the Brand Memo may provide FCA defendants with leverage to secure a relatively favorable resolution. In future cases, defendants should be able to invoke the Brand Memo to dissuade the DOJ and private relators from bringing actions arising from noncompliance with standards set forth in agency guidance.

[1] “Memorandum for All Components: Prohibition of Improper Guidance Documents,” from Attorney General Jefferson B. Sessions III, November 16, 2017, available at https://www.justice.gov/opa/press-release/file/1012271/download.

[2] 136 S. Ct. 1989 (2016).

[3] “Life Care Centers of America, Inc. Agrees to Pay $145 Million to Resolve False Claims Act Allegations Relating to the Provision of Medically Unnecessary Rehabilitation Care,” October 24, 2016, available at https://www.justice.gov/usao-edtn/pr/life-care-centers-america-inc-agrees-pay-145-million-resolve-false-claims-act.

[4] “Acting Manhattan U.S. Attorney Settles Civil Mortgage Fraud Lawsuit Against Residential Home Funding Corp.,” September 28, 2017, available at https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-settles-civil-mortgage-fraud-lawsuit-against-residential.

[5] Auer v. Robbins, 519 U.S. 452, 461 (1997).

[6] “Factors for Evaluating the Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A),” from Director of Commercial Litigation Branch, Fraud Section Michael D. Granston, January 10, 2018, available at https://drive.google.com/file/d/1PjNaQyopCs_KDWy8RL0QPAEIPTnv31ph/view. For additional information, please consult our recent client update, titled “DOJ Creates Potential Openings for Early Dismissal of False Claims Act Suits,” available at https://www.debevoise.com/insights/publications/2018/01/doj-creates-potential-opening-for-early-dismissal.

[7] See, e.g., United States ex rel. Walker v. R&F Prop. of Lake Cnty, Inc., 433 F.3d 1349, 1356–58 (11th Cir. 2005).

Matthew L. Biben, Courtney M. Dankworth, Mark P. Goodman and Maura Kathleen Monaghan are partners; Jacob W. Stahl is a counsel; and Eric Silverberg is an associate at Debevoise & Plimpton LLP.

Disclaimer
The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law.  PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.

DOJ Applies Principles of FCPA Corporate Enforcement Policy in Other White-Collar Investigations, Increasing Opportunity for Corporate Declinations

by John F. Savarese, Ralph M. Levene, Wayne M. Carlin, David B. Anders, Marshall L. Miller, and Jonathan Siegel

Late last week, the Department of Justice’s Criminal Division announced at an ABA white-collar conference that it has begun using the FCPA Corporate Enforcement Policy as “nonbinding guidance” in other areas of white-collar enforcement beyond the FCPA.  As a result, absent aggravating factors, DOJ may more frequently decline to prosecute companies that promptly self-disclose misconduct, fully cooperate with DOJ’s investigation, remediate in a complete and timely fashion, and disgorge any ill-gotten gains.  As a first example of this approach, the officials pointed to DOJ’s recent decision to decline charges against Barclays PLC, after the bank agreed to pay back $12.9 million in wrongful profits, following individual charges arising out of a foreign exchange front-running scheme. Continue reading

Section 7 of the United Kingdom Bribery Act 2010 and the “Fair Warning Principle”

by Jonathan J. Rusch

As governments around the world watch the rising tide of public sentiment and law enforcement actions against corruption,[1] some are looking to the United Kingdom Bribery Act 2010 (the “Act”) as a model for crafting their own criminal sanctions, including with regard to corporate criminal liability.[2]  Section 7 of the Act, which is captioned, “Failure of commercial organization to prevent bribery,” defines the offense in just 45 words:

A relevant commercial organisation (“C”) is guilty of an offence under this section if a person (“A”) associated with C bribes another person intending—

(a) to obtain or retain business for C, or

(b) to obtain or retain an advantage in the conduct of business for C.[3]

Unless the company, as an affirmative defense, can “prove that [it] had in place adequate procedures designed to prevent persons associated with [it] from undertaking such conduct,”[4] it faces a criminal fine without statutory limit.[5] Continue reading

The New DOJ FCPA Corporate Enforcement Policy Highlights the Continued Importance of Anti-Corruption Compliance

by Lisa Vicens, Jonathan Kolodner, and Eric Boettcher

In a significant development for companies relating to the Foreign Corrupt Practices Act (FCPA), in late November the U.S. Department of Justice (DOJ) announced a new FCPA Corporate Enforcement Policy (the Enforcement Policy).

The Enforcement Policy[1] is designed to encourage companies to voluntarily disclose misconduct by providing greater transparency concerning the amount of credit the DOJ will give to companies that self-report, fully cooperate and appropriately remediate misconduct. Notably, in announcing the Enforcement Policy, the DOJ highlighted the continued critical role that anti-corruption compliance programs play in its evaluation of eligibility under the Enforcement Policy. Continue reading

White Collar and Regulatory Enforcement: What to Expect in 2018

by John F. Savarese, Ralph M. Levene, Wayne M. Carlin, David B. Anders, Jonathan M. Moses, Marshall L. Miller, Louis J. Barash, and Carol Miller

Introduction

In our memo last year, we acknowledged that it was close to impossible to predict the likely impact that the newly elected Trump administration would have on white-collar and regulatory enforcement.  (White Collar and Regulatory Enforcement: What to Expect in 2017)  Instead, we set out a list of initiatives we urged the new administration to consider, including clarifying standards for when cooperation credit would be given, reducing the use of monitors, and giving greater weight to a company’s pre-existing compliance program when exercising prosecutorial discretion, among other suggestions.  While the DOJ under Attorney General Jeff Sessions has, for example, taken some steps toward clarifying the applicable standards for cooperation and increasing incentives to disclose misconduct in the FCPA area, few other policy choices or shifts in approach have been articulated or implemented.  Continue reading

Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry

by Matthew C. Solomon, Alexander Janghorbani, and Richard R. Cipolla

On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130,[1] a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs).  The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.”  The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017.  Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide.

At this point, both the petitioner and the Solicitor General (SG) actually agree that ALJs are officers.  In its response to the cert petition raising this issue in Lucia, the SG, in an about-face, had abandoned the SEC’s long-held defense of the manner in which it appoints its ALJs.  Up until now, in an attempt to fend off an asserted constitutional defect in their AJL’s method of appointment, the SEC has argued (with SG approval) that ALJs are “mere employees” of the SEC, and not “officers.”  The day after the SG dropped this position—and with no warning in its briefing—the Commission took the step to appoint the current ALJs.[2]   Continue reading

Global Anti-Bribery Year-in-Review: 2017 Developments and Predictions for 2018

by Kimberly A. Parker, Jay Holtmeier, Erin G.H. Sloane, Lillian Howard Potter, Tetyana V. Gaponenko, Victoria J. Lee, and Roger M. Witten

This past year marked the 40th anniversary of the U.S. Foreign Corrupt Practices Act (“FCPA”).  Since its enactment in 1977, the U.S. Department of Justice (the “DOJ”) has brought approximately 300 FCPA enforcement actions, while the U.S. Securities and Exchange Commission (the “SEC”) has brought approximately 200 cases.[1]  This anniversary year, the first year of the Trump administration, demonstrated that the FCPA continues to be a powerful tool in combating corruption abroad and encouraging compliance at global companies.

Below are six key take-aways regarding FCPA enforcement in 2017: Continue reading

Securities Fraud Class Action Suits following Cyber Breaches: The Trickle Before the Wave

by Michael S. Flynn, Avi Gesser, Joseph A. Hall, Edmund Polubinski III, Neal A. Potischman, Brian S. Weinstein, Peter Starr and Jessica L. Turner

Overview

Large-scale data breaches can give rise to a host of legal problems for the breached entity, ranging from consumer class action litigation to congressional inquiries and state attorneys general investigations.  Increasingly, issuers are also facing the specter of federal securities fraud litigation.[1]

The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising.  Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer.  Until recently, significant declines in stock price following disclosures of cyber breaches were rare.  But that is changing.  The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach.  Similar cases can be expected whenever stock price declines follow cyber breach disclosures.  Continue reading

The Enforcement Outcomes of the Australian Securities and Investments Commission

By Ian Ramsay and Miranda Webster

The following post provides an overview of the key findings from our research on the enforcement outcomes of the Australian Securities and Investments Commission (ASIC) for the five-year period from 1 July 2011 to 30 June 2016. The full journal article can be accessed here.

ASIC is Australia’s corporate, markets, financial services and consumer credit regulator. This government organization regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC dedicates a significant amount of resources (around 70%) to surveillance and enforcement activity, reflecting its view that enforcement is an important part of its regulatory role. Continue reading