Decided August 18, 2022
Serova v. Sony Music Entertainment, S260736
The California Supreme Court held yesterday that a seller’s promotional statements about an artistic work of interest to the public amounted to commercial speech, regardless of whether the seller knew of the statements’ falsity.
Background: The plaintiff sued Sony under the Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) on the theory that promotional materials for a posthumous Michael Jackson album misrepresented that Jackson was the lead singer. Sony filed a motion to strike under California’s anti-SLAPP statute, arguing that the plaintiff’s UCL and CLRA claims were unlikely to succeed because those statutes target only commercial speech, not noncommercial speech about art protected by the First Amendment.
The Court of Appeal held that the motion should be granted because the plaintiff’s claims targeted protected speech that was immune from suit under the UCL and CLRA. It reasoned that the promotional statements about the album related to a public issue—the controversy over whether Jackson was the lead singer on the album—and were more than just commercial speech because they were connected to music. The plaintiff’s allegation that the statements were false did not strip them of First Amendment protection, according to the Court of Appeal, because Sony didn’t know the statements were false.
Issues: Were Sony’s representations that Michael Jackson was the lead singer on Michael noncommercial speech subject to First Amendment protection (in which case California’s anti-SLAPP statute would apply) or commercial speech (in which case the plaintiff could pursue UCL and CLRA claims against Sony)?
Court’s Holding:
Sony’s representations about the album constituted commercial speech, which can be prohibited entirely if the speech is false or misleading. And those representations did not lose their commercial nature simply because Sony made them without knowledge of their falsity or about matters that are difficult to verify.
“[C]ommercial speech does not lose its commercial nature simply because a seller makes a statement without knowledge or that is hard to verify.”
Justice Jenkins, writing for the Court
What It Means:
-
- Although artistic works often enjoy robust First Amendment protections, the marketing of such works can constitute commercial speech that is regulated by consumer-protection laws.
- It makes no difference whether a seller knew or didn’t know its statements are false, or whether the seller could or couldn’t find out whether its statements are false. If the seller’s speech is commercial, it will not receive full First Amendment protection in California.
- In deciding motions to strike under the anti-SLAPP statute, courts have discretion to skip over the question whether a claim arises from the exercise of free-speech rights and first analyze whether the movant has shown a probability of success.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice leaders:
Litigation Practice
Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected] |
Theane Evangelis +1 213.229.7726 [email protected] |
Appellate and Constitutional Law Practice
Thomas H. Dupree Jr. +1 202.955.8547 [email protected] |
Allyson N. Ho +1 214.698.3233 [email protected] |
Julian W. Poon +1 213.229.7758 [email protected] |
Blaine H. Evanson +1 949.451.3805 [email protected] |
Bradley J. Hamburger +1 213.229.7658 [email protected] |
Michael J. Holecek +1 213.229.7018 [email protected] |
Related Practice: Media, Entertainment & Technology
Scott A. Edelman +1 310-557-8061 [email protected] |
Kevin Masuda +1 213-229-7872 [email protected] |
Benyamin S. Ross +1 213-229-7048 [email protected] |
Katherine V.A. Smith +1 213.229.7107 [email protected] |
Carbon capture, utilization, and sequestration (“CCUS”) projects around the United States received a significant boost from the Inflation Reduction Act of 2022 (the “IRA”).[1] The IRA, which President Biden recently signed into law, includes approximately $369 billion in incentives for clean energy and climate-related program spending, including CCUS projects.[2]
Notably, the IRA (1) substantially increases the availability of the federal income tax credits available for domestic CCUS projects (often referred to as “45Q credits”),[3] (2) makes it easier for CCUS projects to qualify for 45Q credits, and (3) provides significant new avenues for monetizing 45Q credits.[4] The IRA also extends the deadline to begin construction on 45Q credit-eligible projects from 2026 to 2033.
Taken together, these changes are anticipated to significantly increase the number of CCUS projects that will enter service over the coming years.
Substantial Increases in Availability of 45Q Credits
The IRA substantially increases the availability of 45Q credits. Under current law, qualified CCUS facilities that captured qualified carbon oxides (“QCO”) and either used the QCO in enhanced oil and gas recovery (“EOR”) or utilized the QCO in certain industrial applications would have been entitled to receive 45Q credits of up to $35/metric ton (“MT”), and facilities that otherwise disposed of QCO in secure geological storage would have been entitled to receive 45Q credits of up to $50/MT (both rates computed before inflation adjustments).
The IRA effectively increases the above rates to $60/MT and $85/MT (before inflation adjustments) respectively; however the IRA conditions the availability of these credit amounts on satisfying new prevailing wage and apprenticeship requirements (otherwise, the new rates are reduced by 80 percent). At a high level, the prevailing wage and apprenticeship requirements are focused on making sure that projects provide well-paying jobs and training opportunities. The new requirements will apply only to projects the construction of which begins within 60 days on or after the date on which Treasury issues regulatory guidance regarding the new requirements.
The IRA makes similar changes to 45Q credits for QCO captured by direct air capture (“DAC”) facilities, but the availability of 45Q credits for DAC facilities is even larger. Under current law, DAC facilities were eligible for 45Q credits at the same rates as industrial facilities. Under the IRA, DAC facilities are eligible for up to $130/MT for captured QCO used in EOR or utilized in certain industrial applications and $180/MT for other geologically sequestered QCO (subject to the same 80 percent haircut as other projects noted above if the DAC facility fails new prevailing wage and apprenticeship requirements).
The table below illustrates the extent to which the IRA is increasing the value of 45Q credits:
|
2018 BBA 45Q Credit |
2022 IRA 45Q Credit[5] |
QCO Captured by Industrial Facility |
$50/MT |
$85/MT |
QCO Captured by Industrial Facility |
$35/MT |
$60/MT |
QCO Captured by DAC |
$50/MT |
$180/MT |
QCO Captured by DAC |
$35/MT |
$130/MT |
Expansion of Qualified Facilities
The IRA relaxes the annual thresholds that CCUS facilities must satisfy to be eligible for 45Q credits. For electric generating facilities, the IRA lowers the annual threshold from 500,000MT of captured QCO to 18,750MTs of captured QCO.[6] For DAC projects, the IRA lowers the annual threshold from 100,000MTs to just 1,000MTs. The IRA reduces the capture quantity requirements for all other industrial facilities to 12,500MTs. The high thresholds under prior law (combined with the cliff effect of failing to meet those thresholds) were major impediments to the financing of CCUS projects, so these reduced thresholds are a particularly welcome development for the industry.
Additional Options for Easier Monetization of 45Q Credits
The IRA also includes changes that could potentially result in significant adjustments to the manner in which 45Q credits are monetized, potentially diminishing the need for complicated tax equity structures to harvest the benefits of 45Q credits, which could expand the investor marketplace for CCUS projects. Most importantly, the IRA allows an owner of a qualified CCUS project to monetize 45Q Credits by selling any portion of its 45Q credits to third parties for cash or (in certain years) seeking direct payment for 45Q credits from the Treasury. In the case of a transfer, the cash payment received by the transferor will not be treated as taxable income, and the third party transferee may not deduct the cash payment. Once a 45Q credit is transferred to a third party under this rule, the third party may not transfer it again. Although expanded transferability of tax credits opens new potential monetization avenues, many practical questions (such as whether a purchaser that buys credits at a discount to face value would be required to recognize taxable income) remain unanswered and will likely require regulatory guidance. Moreover, the credit transfer regime contemplated by the IRA does not allow for depreciation deductions to be transferred, meaning that sponsors of projects who rely solely on the ability to transfer the 45Q credits will leave tax benefits on the table.
In addition to the new third-party transfer regime, direct payments from the Treasury in lieu of 45Q credits are available; however, with respect to claimants that are taxable entities, such direct payments are only available for the first five years of the twelve-year credit period, limiting the practical utility of the direct payment scheme.
It is important to note that additions to tax may apply to any “excessive credit transfer” (in the case of a credit transfer) or “excessive payments” (in the case of direct payments) in which the credit transferee or taxpayer, respectively, claims in excess of what the credit transferor or taxpayer could validly claim. The addition to tax is 120 percent of the excessive credit transfer or excessive payment. However, the 20 percent penalty component will not apply if the credit transferee or taxpayer can demonstrate reasonable cause for claiming the excessive credit transfer or excessive payment, respectively. Regulatory guidance will be needed to flesh out the details of this reasonable cause exception and other details of how the excessive credit transfer and excessive payment rules will operate in practice.
Conclusion
The IRA potentially fundamentally alters the CCUS landscape in the U.S. The substantially expanded availability of the 45Q credit, broadened scope of qualifying CCUS facilities, and simplified monetization of 45Q credits has the potential to incentivize current CCUS investors to increase the size of their investments, likely will encourage new investors to participate in CCUS projects, and should ensure that CCUS projects will be a significant feature of decarbonization efforts in the U.S.
________________________________
[1] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name and so the so-called Inflation Reduction Act is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”
[2] https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
[3] 45Q credits are authorized by section 45Q of the Internal Revenue Code of 1986 (the “Code”).
[4] Inflation Reduction Act of 2022 (H.R. 5376), §§13104, 13801.
[5] These credit amounts are reduced by 80% unless new prevailing wage and apprenticeship requirements are satisfied (assuming those requirements apply to a project based on when it started construction).
[6] In addition to meeting this minimum requirement, the capture design capacity of the carbon capture equipment at the applicable electric generating unit at the CCUS project must be at least 75% of the baseline carbon oxide production of that unit.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Oil and Gas or Tax practice groups, or the following authors:
Oil and Gas Group:
Michael P. Darden – Co-Chair, Houston (+1 346-718-6789, [email protected])
Graham Valenta – Houston (+1 346-718-6646, [email protected])
Zain Hassan– Houston (+1 346-718-6640, [email protected])
Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Josiah Bethards – Dallas (+1 214-698-3354, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Court of Final Appeal (the “CFA”) has recently confirmed that a director is not liable to penalty, by way of additional tax, arising from an incorrect tax return filed by the company which he/she has signed and declared to be correct, on the basis that he/she should not be regarded having made the company’s incorrect tax return.[1]
The CFA’s judgment provides clarity on the meaning and effect of s 82A(1)(a) of the Inland Revenue Ordinance (Cap. 112) (the “IRO”), which empowers the Commissioner of Inland Revenue (the “Commissioner”) to impose additional tax, commonly referred to as penalty tax, on any person who without reasonable excuse “makes” an incorrect tax return.
It should, however, be noted that the relevant provision has also recently been amended to cover a person who “causes or allows to be made on the person’s behalf, an incorrect return”, and it remains to be seen how this amendment will affect a director’s liability in relation to any company’s incorrect returns signed and declared to be correct by him/her.
1. Background and Procedural History
The CFA judgment was on the appeal by the Commissioner against a decision of the Court of Appeal (“CA”) in October 2019, in which the CA dismissed the Commissioner’s appeal against a decision of the Court of First Instance (the “CFI”) made in November 2018. The CFI ruled in favour of Mr Koo Ming Kown (“Mr Koo”) and Mr Murakami Tadao (“Mr Murakami”), who appealed against two earlier decisions of the Board of Review (the “Board”) upholding certain penalty tax assessed against them.[2]
Mr Koo and Mr Murakami were directors of Nam Tai Electronic & Electrical Products Limited (the “Company”) at the material times when the Company’s returns for the years 1996/97, 1997/98 and 1999/2000 were filed. Mr Koo and Mr Murakami respectively signed and declared to be correct the first and third, and the second, of these returns. Mr Murakami and Mr Koo ceased to be directors of the Company in 2002 and 2006 respectively.
Following a tax audit in 2002, the Inland Revenue Department (the “IRD”) disallowed claims for deductions made in the returns, and assessed the Company to undercharged tax under s 60 of the IRO, which the Company challenged unsuccessfully. The Company did not pay the amounts assessed and was eventually wound up in June 2012 by the court on the petition of the Commissioner.
In 2013, Mr Koo and Mr Murakami were assessed to additional tax under s 82A(1)(a) of the IRO in the amount of HK$12,600,000 and HK$5,400,000 respectively, on the basis that the Company’s returns were incorrect. They appealed to the Board, which found against them. The Board found the returns to have been incorrect and increased the overall amounts payable by Mr Koo and Mr Murakami.
Mr Koo and Mr Murakami appealed to the CFI, which accepted their primary argument that they did not fall within s 82A(1)(a) of the IRO. The CFI ordered the annulment of the additional tax assessments against Mr Koo and Mr Murakami. The Commissioner appealed to the CA, which upheld the CFI’s decision that Mr Koo and Mr Murakami were not required by the IRO to make the returns on behalf of the Company, and therefore could not be made liable to additional tax under s 82A(1)(a).
The Commissioner appealed to the CFA but Mr Koo and Mr Murakami informed the CFA that they did not intend to oppose the Commissioner’s appeal and would not attend the hearing in person or instruct lawyers to do so. The CFA appointed Mr Eugene Fung SC and Mr John Leung as amici curiae, who filed submissions addressing the questions before the CFA that supported the CA and CFI decisions.
2. The CFA’s Decision
Whether Mr Koo and Mr Murakami should be liable for the Company’s incorrect returns signed by them depends on whether they fall within the description, in the s 82A(1)(a) prevailing at the material times, of a “person who without reasonable excuse – (a) makes an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…”[3]
The Commissioner contended that the individuals specified under s 57(1),[4] which included Mr Koo and Mr Murakami as directors of the Company, were “answerable” for doing all such acts as were required to be done by the Company under the IRO, and accordingly they were required to make the Company’s returns; and further that, by physically signing and declaring to be correct the relevant Company’s returns, they did make the Company’s return on behalf of the Company as a corporate taxpayer. On the case for the Commissioner, the individuals identified under s 57(1) to be “answerable” (for doing all such acts as required to be done by a corporate taxpayer) are required (secondarily) to do such acts which the corporate taxpayer is (primarily) required to do under the IRO.
Upon examining the legislative history and context, the CFA disagreed with the Commissioner’s construction of the relevant provisions in the IRO. The CFA confirmed the decisions of the CFI and the CA and concluded that the Company (being the entity to which the notice for making a return was issued under s 51(1)), rather than the individual who signed the return, was the “person” legally required to make, and did make, the return. There is a distinction between answerability under s 57(1), which means that the individuals specified under s 57(1) are responsible for seeing or ensuring the corporate taxpayer does the act in question, and an obligation or requirement to do such act on behalf of the company.
Accordingly, the CFA dismissed the Commissioner’s appeal.
3. Conclusion
The CFA judgment helpfully clarifies that a director of a company (or any other relevant individual specified under s 57(1)) is not required to “make” the tax return of the company, and does not make such tax return by reason that he/she has signed, and declared his/her belief in the correctness of the information in, the returns filed by the company. Therefore, such director or individual specified under s 57(1) does not incur liability under s 82A(1)(a) of the IRO.
However, as from 11 June 2021, s 82A(1)(a) has been amended to provide that “[a]ny person who without reasonable excuse—(a) makes, or causes or allows to be made on the person’s behalf, an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…” (emphasis added to show the amendments).[5]
It remains to be seen whether, notwithstanding that a company’s director signing (or approving the filing of) the company’s tax return is not one who “makes” the tax return, he/she might be caught by the current s 82A(1)(a) as a person who has “caused” or “allowed” the tax return to be made on the company’s behalf, and hence may be exposed to liability should the company’s tax return be found to be incorrect.
_____________________________
[1] Koo Ming Kown & Murakami Tadao v Commissioner of Inland Revenue [2022] HKCFA 18. A copy of the judgment of the Court of Final Appeal is available here. The judgment in the Court of Appeal ([2021] HKCA 1037) is available here. The judgment in the Court of First Instance ([2018] HKCFI 2593) is available here.
[2] Board of Review, Cases D32/16 (available here) and D33/16 (available here).
[3] The current s 82A(1)(a) provides that “[a]ny person who without reasonable excuse—(a) makes, or causes or allows to be made on the person’s behalf, an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…” (emphasis added to show the amendments).
[4] The then-prevailing s 57(1) provided that “[t]he secretary, manager, any director or the liquidator of a corporation and the principal officer of a body of persons shall be answerable for doing all such acts, matters or things as are required to be done under the provisions of this Ordinance by such corporation or body of persons”; whilst the current s 57(1) provides that “[t]he following person is answerable for doing all the acts, matters or things that are required to be done under the provisions of this Ordinance by a corporation or body of persons—(b) for any other corporation [that is not an open-ended fund company], the secretary, manager, any director or the provisional liquidator or liquidator of the corporation…”
[5] See the Inland Revenue (Amendment) (Miscellaneous Provisions) Ordinance 2021, Ord. No. 18 of 2021, Gazette published on 11 June 2021, No. 23 Vol. 25 – Legal Supplement No. 1, available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:
Brian Gilchrist (+852 2214 3820, [email protected])
Elaine Chen (+852 2214 3821, [email protected])
Alex Wong (+852 2214 3822, [email protected])
Celine Leung (+852 2214 3823, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 25, 2022, the U.S. Department of Justice (“DOJ”) entered into an $84.8 million settlement agreement[1] with several poultry processing companies over allegations that the poultry processors conspired with one another to share wage and benefits information through third-party data aggregation firms.[2] The companies entered the settlement without admitting any wrongdoing or liability. In addition to the $84.8 million restitution payment, the settlement agreement also imposed a court-appointed compliance monitor for ten years to ensure compliance with the proposed settlement decree.[3] Government enforcement actions based on information-sharing are rare,[4] and this settlement agreement includes important lessons for all companies that provide internal wage or benefits data to third parties, including consulting firms or trade groups that engage in other information sharing with competitors.
The DOJ’s settlement is the latest in a series of aggressive enforcement of the antitrust laws to protect labor markets. Since the DOJ and the Federal Trade Commission’s (“FTC’s”) 2016 Antitrust Guidance for Human Resource Professionals, the DOJ has been outspoken about intending to prosecute criminally stand-alone wage-fixing and no-hire, no-poach, and non-solicit agreements. Over the past two years, the DOJ has given these threats teeth, bringing criminal indictments against several companies and individuals for alleged wage-fixing, no-poach, and no-solicit agreements.
Here, the DOJ alleged that three poultry processors engaged in a long-running conspiracy to exchange information about wages and benefits for poultry processing plant workers and collaborated with their competitors to deprive “a generation of poultry processing plant workers of fair pay set in a free and competitive labor market.”[5] In addition, the government alleged that the processors coordinated the conspiracy by sharing information with third-party data consulting firms[6] and, importantly, that the information exchanged was “current or future, disaggregated, or identifiable in nature, which allowed the poultry processors to discuss the wages and benefits they paid their poultry processing plant workers.”[7] The data consulting firms also hosted in-person meetings where, the government further alleged, the poultry processors “shared additional compensation information and collaborated on compensation decisions.”[8]
Key to the government’s case, the complaint alleges that the poultry processors failed to abide by the safe-harbor requirements for sharing information outlined in the 2016 Guidance.[9] Under this Guidance, information sharing is unlikely to have anticompetitive effects when “[1] a neutral third party manages the exchange, [2] the exchange involves information that is relatively old, [3] the information is aggregated to protect the identity of the underlying sources, and [4] enough sources are aggregated to prevent competitors from linking particular data to an individual source.”[10] The DOJ alleged that the poultry processors did not qualify for the safe harbor because their information was current or future, disaggregated, and identifiable.[11]
Looking ahead, the safe harbor—which the DOJ and FTC have long used in contexts beyond labor markets—may be revised as a result of President Biden’s July 2021 Executive Order On Promoting Competition in the American Economy. Section 5(f) of the Order directs “the Attorney General and the Chair of the FTC . . . to consider whether to revise the Antitrust Guidance for Human Resource Professionals of October 2016” in order to “better protect workers from wage collusion.”[12] The Fact Sheet on the Executive Order suggests that those revisions may be aimed at information sharing: “the President . . . [e]ncourages the FTC and DOJ to strengthen antitrust guidance to prevent employers from collaborating to suppress wages or reduce benefits by sharing wage and benefit information with one another.”[13] To date, the guidance on information sharing has not been modified.
One other noteworthy aspect of the settlement agreement is the imposition of a ten-year monitorship. Monitorships for antitrust violations are uncommon and typically last only three years—even in the context of hard-core criminal cartels.[14] The groundbreaking agreement to a ten-year monitorship may be an indication that the new regime of antitrust enforcers will seek out monitorships, including lengthy ones, as part of future settlement agreements.
Take-aways
- Carefully assess benchmarking practices. Consider how sensitive information—including wages and benefits, as well as pricing and production data—is shared with others in the industry to ensure that it qualifies for the current safe harbor—that is, the exchange is managed by a third party, such as a trade group, and includes information that is historical, aggregated, and anonymized.[15]
- Monitor developments in DOJ and FTC guidance regarding information sharing, as the safe-harbor provision for human resources could change as a result of the Executive Order On Promoting Competition in the American Economy which directs DOJ and FTC leadership to “revise” the guidance to “better protect workers from wage collusion.”
- Recognize that antitrust enforcers will use the antitrust laws to protect labor markets. They are particularly interested in guarding low-wage workers from antitrust violations, but employers in other areas should not be complacent, as enforcement has included conduct involving specialized labor and highly compensated professionals.
________________________
[1] See Proposed Final Judgment, U.S. v. Cargill Meat Solutions Corp., et al., (July 25, 2022), here, [hereinafter Proposed Settlement]. The data analysis firms and their executives entered into a separate settlement agreement. See Proposed Final Judgment, U.S. v. Webber, Meng, Sahl and Company (July 25, 2022), here.
[2] See Complaint, U.S. v. Webber, Meng, Sahl and Company (July 25, 2022), at ¶ 5 [hereinafter Complaint].
[3] Proposed Settlement at 12-17.
[4] This is the first DOJ antitrust case involving information sharing since 2016. See Complaint, U.S. v. DirectTV Group Holdings, LLC and AT&T, Inc. (Nov. 2, 2016), here.
[10] See Department of Justice, Antitrust Division & Federal Trade Commission, Antitrust Guidance for Human Resources Professionals (October 2016), here.
[12] Executive Order on Promoting Competition in the American Economy (July 9, 2021), here.
[13] FACT SHEET: Executive Order on Promoting Competition in the American Economy, (July 9, 2021), here.
[14] See Judgment, U.S. v. AU Optronics Corporation (Oct. 2, 2012) (imposing a three-year monitorship).
[15] See Department of Justice, Antitrust Division & Federal Trade Commission, Statements of Antirust Enforcement Policy in health Care (August 1996), here (providing that the collection of information qualifies for a “safety zone” when (1) the collection is managed by a third party, (2) the data is more than three months old, and (3) and the data is sufficiently aggregated such that recipients could not identify the data of any individual participant).
The following Gibson Dunn lawyers prepared this client alert: Kristen Limarzi, Rachel Brass, Matt Butler, and Nick Marquiss.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Antitrust and Competition or Labor and Employment practice groups:
Antitrust and Competition Group:
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, [email protected])
Jeremy Robison – Washington, D.C. (+1 202-955-8518, [email protected])
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, [email protected])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])
Labor and Employment Group:
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 27, 2022, Senator Joe Manchin (D-West Virginia) and Senator Majority Leader Chuck Schumer (D-New York) announced an agreement on a reconciliation package entitled the Inflation Reduction Act of 2022 (the “Act”) to address climate change, taxes, health care, and inflation. The Act would, among other things, (1) establish a 15 percent corporate minimum tax, (2) expand the carried interest rules under section 1061 that apply ordinary income tax rates to investment gains earned by asset managers,[1] (3) establish multi-year IRS funding with a dramatic increase in funding for tax enforcement, and (4) extend and expand available clean energy tax incentives.
Legislative Outlook
As a reconciliation bill, Democrats can avoid a Republican filibuster in the Senate and pass the Act with a simple majority of only 51 votes, rather than the usual 60 votes. With the Senate split 50-50, Democrats will need their entire caucus to remain unified, with Vice President Kamala Harris casting the deciding vote. No Republican is expected to vote for the Act.
The Act could pass both chambers of Congress as soon as August. The next step is for the nonpartisan Senate Parliamentarian to review the bill to ensure that everything within it relates directly to the budget, a robust floor debate featuring a “vote-a-rama,” with votes on amendments that could extend far beyond the energy, health care, and tax issues that make up the core of the Act, and then the Senate and House will vote on the bill.
Passage of the Act in an equally divided Senate could be blocked if Democrats lose even a single member of their Caucus. Because Senator Kyrsten Sinema (D-Arizona) has blocked progress on similar issues in the past, her vote will be critical, and she has not yet announced her position. The complicating factor in the House of Representatives—where Democrats hold a narrow majority—will be whether the Progressive Caucus signs off on the Act. But Democrats understand the political reality that if either or both chambers flip in November to Republican control, the Act could be the last opportunity during the Biden Administration for Democrats to pass major legislation. So, though passage of the Act is far more likely than ever before, its passage is not guaranteed.
Corporate Minimum Tax
The Act would subject corporations with book income in excess of $1 billion to a 15 percent alternative minimum tax (“AMT”). The AMT is substantially similar to the revised version of the Build Back Better Act advanced by the Senate Finance Committee in late 2021. Critics of the AMT have noted that imposing a tax on book income instead of taxable income undermines certain tax benefits, such as bonus depreciation, timing benefits, and other differences between financial and tax accounting standards, and could create other unintended mismatches.
The AMT would be imposed on any corporation with average applicable financial statement income (“AFSI”) in excess of $1 billion over any consecutive three-year period preceding the tax year at issue (the “Income Test”). For a corporation (including predecessors) that has been in existence fewer than three years, the Income Test would be applied on an annualized basis. AFSI would be determined by reference to the income (or loss) set forth on the corporation’s audited GAAP financial statements, subject to certain adjustments, including for income from controlled foreign corporations, partnerships, and disregarded entities, corporations filing consolidated returns, and certain taxes paid. If a corporation is treated as a single employer with any other companies (corporate or non-corporate) pursuant to section 52, the AFSI of those other companies is taken into account for purposes of the Income Test. This may cause a corporation that would not otherwise satisfy the Income Test to be subject to the AMT (by reason of its relationship with other entities through disparate ownership structures, such as portfolio companies of private equity funds).
A corporation subject to the AMT generally would be eligible to claim net operating losses and tax credits against its AMT liability, with the new and extended clean energy credits discussed below (and other business credits) generally limited to 75 percent of a corporation’s AMT.
The AMT would not apply to S corporations, regulated investment companies, and real estate investment trusts. Other entities that would be excluded from the AMT include (1) corporations that experience an ownership change and (2) corporations that have not met the Income Test in a to-be-specified number of consecutive taxable years. The contours of these exclusions, however, are to be determined by Treasury regulations, including what constitutes an “ownership change.” A U.S. corporate subsidiary of a foreign-parented group would be subject to the AMT if that group meets the Income Test and that subsidiary has AFSI in excess of $100 million.
By incorporating financial accounting further into the tax law, the proposal would add substantial complexity to the Code. The Act leaves critical details to be provided for by guidance from the Treasury Department and IRS. That guidance will have significant tax consequences for taxpayers and will be subject to review in an era of heightened judicial scrutiny of agency rulemaking. In addition, because the creation and modification of financial statement rules is not subject to Congressional approval or the notice-and-comment requirements of the Administrative Procedures Act, the proposal would result in the calculation of tax liability being determined by decisions made by a relatively small group of unelected, unregulated decision-makers.
These proposals, if enacted, would apply to tax years beginning after December 31, 2022.
Expansion of the Carried Interest Rules Under Section 1061
The Act proposes to modify the current rules relating to the taxation of certain carried interests[2] in the same manner as the House-passed version of the Build Back Better Act (H.R. 5376), most notably:
- denying long-term capital gain rates to holders of carried interests, unless the applicable holder meets the “holding period exception,” which generally would require a five year period of economic exposure to the relevant assets (three years in the case of real estate businesses or a taxpayer with adjusted gross income of less than $400,000);
- changing the manner in which the relevant holding period is determined;
- eliminating the exception from the carried interest rules for gains taxed at long-term gains rates under section 1231 and section 1256; and
- requiring full gain recognition on any transfer of an applicable carried interest, even if nonrecognition rules would otherwise apply.
The holding period exception has drawn attention for its departure from longstanding tax principles regarding holding period determinations. Specifically, the holding period exception would look to the following dates – (i) the date on which the holder of a carried interest acquired “substantially all” of its carried interest, (ii) the date on which the partnership that issued the carried interest acquired “substantially all” of its assets, and (iii) in a tiered partnership, dates determined by applying (i) and (ii) to each partnership – and then would measure the applicable five-year period from the latest of those dates.[3] The Act does not specify how the “substantially all” requirement is intended to be measured, and, because many investment funds (e.g., hedge funds and private equity funds) acquire assets at different times and have overlapping holding periods, it would be extraordinarily difficult for taxpayers to determine when these requirements have been satisfied.
The purpose of the proposed holding period exception is to ensure that ordinary income tax rates apply to any gain realized in respect of a carried interest if the gain is attributable to an asset to which the taxpayer has not been exposed economically for at least five years. As currently drafted, the proposed holding period exception could be both under- and over-inclusive, permitting gain attributable to certain assets that have been held for fewer than five years to benefit from long-term capital gains rates and subjecting long-held assets to ordinary income tax rates. Further, the proposed gain recognition rule would create a substantial trap for the unwary, particularly for indirect transfers of carried interests, including for estate planning purposes and ordinary course restructurings.
These proposals, if enacted, would apply to tax years beginning after December 31, 2022.
Additional IRS Funding – Enforcement
Consistent with the House-passed version of the Build Back Better Act (H.R. 5376), the Act provides nearly $80 billion of additional IRS funding for taxpayer services, enforcement, operations support, and modernization—with more than $45 billion earmarked for IRS tax enforcement over the next nine years. Not only is the multi-year nature of the funding unique for the IRS, but the average-annual $5 billion increase to IRS enforcement also would double the IRS’s enforcement budget over prior years. The art or science of estimating the revenue effects of tax legislation has led to significant disagreement recently, but per Congressional Budget Office analysis, the Senate estimates that IRS tax enforcement will generate $124 billion for the Federal fisc. Furthermore, effective tax enforcement will be critical to the realization of the revenue estimates attributable to the Act’s AMT and modified taxation of carried interest provisions.
Clean Energy Tax Incentives
The Act includes numerous expansions and extensions of tax incentives for investments in clean energy by businesses and individuals. If enacted, the Act would represent a significant commitment to the development of clean energy in the United States.
Certain portions of the Act were introduced in 2021 during discussions of the Green Act, the Clean Energy for America Act, and, ultimately, the Build Back Better Act, but the Act includes additions, subtractions, and refinements that depart from the Build Back Better Act and that could have significant positive impacts on the future of clean energy project development and finance.
Notably, the Act would permit the one-time sale of credits between certain taxpayers. Under current law, clean energy tax credits generally are not transferable, subject to a narrow exception for the investment tax credit (which is transferrable to a lessee if certain requirements are met), but the Act would expand transferability beyond passthrough leases to other structures and credit classes (including production tax credits, carbon capture and sequestration credits, and several newly proposed credits). Federal tax credit transferability could have a significant impact on the tax equity market, expanding the base of potential investors and potentially simplifying structures, although the continued non-transferability of other tax attributes (such as depreciation and amortization) means that legacy tax equity financing structures likely will continue to be relevant. As drafted, however, the Act’s transferability regime raises numerous questions that likely would need to be addressed before enactment or through regulatory guidance.
In addition, the Act includes a number of significant macro-level changes to the clean energy credit system, some of which were first seen in the lead up to the Build Back Better Act, including:
- Wage and workforce eligibility requirements (applicable across clean energy credit classes) to qualify for credits at historic rates;
- Sweeteners for projects that satisfy domestic content or low-income community requirements;
- A limited direct-pay mechanism (conditioned for certain credits on phased-in domestic content requirements for projects one megawatt or greater);
- A three-year credit carryback; and
- Future transition to a technology-neutral credit regime.
In addition to these structural shifts, the Act includes the expansion of existing credits, the re-proposal of credits introduced in the discussions around the Build Back Better Act, and new credits, including:
- A new standalone investment tax credit and homeowner credit for battery storage facilities;
- Extension of the investment tax credit (and re-introduction of the production tax credit) and homeowner credit for solar projects;
- Extension of the production tax credit for on-shore and off-shore wind projects;
- A richer and broader credit regime for carbon capture and sequestration projects; and
- Extensions of legacy clean energy credits and the introduction of numerous new credits, including for clean hydrogen projects, zero-emission nuclear projects, and advanced manufacturing projects.
_________________________
[1] Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”).
[2] These rules apply generally apply to any partnership interest transferred or held in connection with the performance of services in an “applicable trade or business,” other than certain capital interests, interests purchased by unrelated third parties and interests held by corporations. The Act would clarify that the exception for partnership interests held by corporations would not be available for S corporations.
[3] The Act states that section 1061 “shall be applied without regard to section 83 and any election in effect under section 83(b).” The precise meaning of this portion of the proposed legislation is not entirely clear.
This alert was prepared by Josiah Bethards, Michael D. Bopp, Michael Q. Cannon, Michael J. Desmond, Matthew J. Donnelly, Pamela Lawrence Endreny, Bree Gong*, Brian Hamano, Roscoe Jones Jr., Brian W. Kniesly, Jamie Lassiter*, Eric B. Sloan, C. Terrell Ussing, and Daniel A. Zygielbaum.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Public Policy, Tax, or Global Tax Controversy and Litigation practice groups:
Public Policy Group:
Michael D. Bopp – Co-Chair, Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr. – Co-Chair, Washington, D.C. (+1 202-887-3530, [email protected])
Tax Group:
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Sandy Bhogal – London (+44 (0) 20 7071 4266, [email protected])
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Hanna Chalhoub – Dubai (+971 (0) 4 318 4634, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Pamela Lawrence Endreny – New York (+1 212-351-2474, [email protected])
Benjamin Fryer – London (+44 (0) 20 7071 4232, [email protected])
Brian R. Hamano – San Francisco (+1 415-393-8350 , [email protected])
Kathryn A. Kelly – New York (+1 212-351-3876, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Jennifer Sabin – New York (+1 212-351-5208, [email protected])
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])
John-Paul Vojtisek – New York (+1 212-351-2320, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Global Tax Controversy and Litigation Group:
Michael J. Desmond – Co-Chair, Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Saul Mezei – Washington, D.C. (+1 202-955-8693, [email protected])
Sanford W. Stark – Co-Chair, Washington, D.C. (+1 202-887-3650, [email protected])
C. Terrell Ussing – Washington, D.C. (+1 202-887-3612, [email protected])
* Bree Gong is an associate working in the firm’s Palo Alto office who is admitted only in New York; Jamie Lassiter is an associate working in the firm’s Los Angeles office who is admitted only in New York and Texas.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Is antitrust becoming HR’s biggest headache? The antitrust enforcement agencies and plaintiffs’ attorneys alike continue to prioritize competition enforcement in labor markets. The antitrust agencies have been keenly focused on a variety of labor issues, including wage collusion, non-compete, non-solicit and confidentiality agreements, worker classification, earnings claims, franchising arrangements, and merger deals that impact labor, just to name a few. And class actions continue to be filed pressing these issues. How will this trend play out? This panel provides insights from the trenches with a particular focus on pitfalls to avoid.
PANELISTS:
Rachel S. Brass is a partner in the San Francisco office of Gibson, Dunn & Crutcher and co-chair of the Firm’s Antitrust and Competition Practice Group. She is a member of the firm’s Litigation Department where her practice focuses on investigations and litigation in the antitrust, labor, and employment areas. Ms. Brass also has extensive experience representing international and domestic clients in highstakes appellate litigation in the Supreme Court. She has special expertise in international matters and teaches an upper-level course in International Antitrust Law at Berkeley Law School.
Svetlana S. Gans is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where she helps clients navigate complex consumer protection, privacy, and competition related regulatory proceedings before the U.S. Federal Trade Commission (FTC), U.S. Department of Justice Antitrust Division, State Attorneys General and other enforcement bodies. Ms. Gans also assists on litigation matters and provides strategic counseling and advice related to public policy issues.
Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, labor and employment law, and data privacy—both in the trial court and on appeal. Mr. Holecek has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Mr. Holecek has also authored articles on appellate procedure, civil discovery, corporate appraisal actions, data privacy, and bad-faith insurance litigation.
Julian W. Kleinbrodt is a litigation associate in the San Francisco office of Gibson, Dunn & Crutcher, where his practice focuses on antitrust and other complex civil litigation. Mr. Kleinbrodt has successfully represented clients across several industries through trial and appeal. He has represented clients in federal and state government investigations concerning employment, antitrust, and other competition issues. Mr. Kleinbrodt also regularly counsels companies in these areas.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.
Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
This update provides an overview of key class action-related developments during the second quarter of 2022 (April through June).
Part I discusses noteworthy cases from the Ninth, Sixth, and Third Circuits regarding the requirements for class certification—including important decisions on how to address uninjured putative class members.
Part II covers two decisions from the Eighth and Seventh Circuits analyzing Article III standing in light of the U.S. Supreme Court’s decisions in Spokeo, Inc. v. Robins, 578 U.S. 330 (2016), and TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021).
And Part III analyzes a recent decision from the Third Circuit regarding late removals of class actions to federal court under the Class Action Fairness Act of 2005 (“CAFA”).
I. The Ninth, Sixth, and Third Circuits Discuss Rule 23 Requirements
This past quarter, the Ninth, Sixth, and Third Circuits issued significant decisions applying the Rule 23 class certification requirements.
As reported in our prior client alert, the Ninth Circuit released an important en banc opinion in Olean Wholesale Grocery Cooperative, Inc. v. Bumble Bee Foods LLC, 31 F.4th 651 (9th Cir. 2022). The case involved three classes of tuna purchasers who alleged that tuna suppliers engaged in a price-fixing conspiracy in violation of federal and state antitrust laws. In certifying the classes, the district court relied on the plaintiffs’ expert’s analysis purporting to show that the alleged conspiracy resulted in substantial price impacts that injured purchasers on a class-wide basis.
While the Ninth Circuit ultimately affirmed the granting of class certification in Olean, and rejected a per se ruling against certifying a class that contains more than a de minimis number of uninjured class members (a ruling which conflicts with decisions from the First and D.C. Circuits), the court’s opinion outlines a framework for class certification that creates significant hurdles for plaintiffs seeking to certify expansive classes, especially where proving injury at trial would require individualized adjudications. Olean was covered in greater detail in our prior client alert, and we expect the case to impact all types of class actions in the Ninth Circuit, including consumer and employment cases.
The Sixth Circuit also confronted the issue of identifying injured class members in Tarrify Properties, LLC v. Cuyahoga County, 37 F.4th 1101 (6th Cir. 2022), which affirmed the denial of certification of a putative class of owners of abandoned properties to whom the defendant county failed to reimburse the remaining equity when it foreclosed on their properties. Given the many factors that influence property values, the Sixth Circuit reasoned that determining whether any given property owner was owed money required “proof that is variable in nature and ripe for variation in application,” such that “mini-trials” would be necessary to determine the remaining equity in each foreclosed property. Id. at 1106–07. Moreover, the issue was one of determining injury—rather than damages—because “[t]he key impediment . . . is that the court must ask whether a given property’s fair market value exceeds the taxes owed at the time of the transfer to determine who is in the class.” Id. at 1106. The Sixth Circuit also rejected the plaintiff’s proposal to use tax appraisal values to determine whether each property owner had been harmed, calling that approach a “rough justice method” that failed to sufficiently account for “the vagaries of [determining] fair market value.” Id. at 1106‒08.
Finally, the Third Circuit addressed the numerosity and commonality requirements of Rule 23 in Allen v. Ollie’s Bargain Outlet, Inc., 37 F.4th 890 (3d Cir. 2022), and vacated certification of an Americans with Disabilities Act class action against a retail operator with 400 retail stores across 29 states. The plaintiffs had alleged that the retailer’s stores were inaccessible to disabled people using wheelchairs because the aisles were often blocked with merchandise. To satisfy the numerosity requirement, the plaintiffs introduced census data estimating the number of people with ambulatory disabilities for each zip code with a store, 12 emails from patrons using wheelchairs, and evidence that 16 patrons using wheelchairs visited two stores in Pennsylvania over the course of one week. To satisfy the commonality requirement, the plaintiffs argued that the retailer had nationwide store-layout policies that affected accessibility in its stores. The district court granted certification, finding that the plaintiffs had proved there were at least 30 people in the putative class and that the proposed class members would have suffered the same injury stemming from the retailer’s alleged policies.
The Third Circuit reversed on both grounds. On numerosity, the Third Circuit held that the plaintiffs’ evidence was “far too speculative” because the census data said nothing about the number of disabled people who actually shopped at the stores, the customer complaints were “few,” and there were no documented accessibility issues for those patrons recorded visiting the Pennsylvania stores. Id. at 899–900. In contrast to the plaintiffs’ “speculative” evidence, in order to satisfy numerosity, the plaintiffs would have needed to provide “concrete evidence of class members who have patronized a public accommodation and have suffered or will likely suffer common ADA injuries.” Id. at 897.
On commonality, the Third Circuit held that “stitching together a corporate-wide class requires more” than showing “that [the defendant] has corporate policies and that some or all stores in Pennsylvania pay inadequate attention to aisle accessibility.” Id. at 901. Because the plaintiffs’ evidence of inaccessible aisles was limited to Pennsylvania, there was no way of knowing whether the retailer’s visual standards resulted in discrimination “in some regions” but not others. Id. at 902. It concluded that evidence from one state was not enough to support “[p]roceeding on a corporate-wide basis against a corporation with over four hundred stores in twenty-nine states.” Id.
II. The Eighth and Seventh Circuits Analyze Article III Standing in Light of Spokeo and TransUnion
As reported in prior updates, federal courts continue to assess whether named plaintiffs have adequately alleged Article III standing to bring a variety of claims commonly filed as class actions. This past quarter was no different, with the Eighth Circuit and Seventh Circuit clarifying what constitutes a concrete Article III injury under Spokeo, Inc. v. Robins, 578 U.S. 330 (2016), and TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2200 (2021).
In Schumacher v. SC Data Center, Inc., 33 F.4th 504 (8th Cir. 2022), the Eighth Circuit held that the named plaintiff in a putative class action failed to sufficiently allege Article III standing based on a prospective employer’s purported failure to comply with several technical requirements of the Fair Credit Reporting Act (“FCRA”). Siding with the Ninth Circuit—and disagreeing with the Third and Seventh Circuits—the Eighth Circuit first held that the prospective employer’s failure to provide the plaintiff with a copy of her consumer report before denying her employment did not qualify as an “injury in fact” sufficient to confer Article III standing. Id. at 510–12. Although the employer’s failure to provide the report deprived the plaintiff of an opportunity to explain prior convictions that had led to her denial of employment, the Eighth Circuit held that FCRA did not provide a right to explain an accurate consumer report. Id. at 511‒12. Second, the Eighth Circuit held that even though the employer violated FCRA by providing an improper disclosure form, that was only a “technical violation” of the statute that did not harm the plaintiff. Id. at 512‒13. Third, the Eighth Circuit held that the plaintiff lacked standing to challenge any alleged search of a sex-offender database without her authorization, since the plaintiff pled that it caused a mere “invasion of privacy,” which was not a sufficiently concrete harm. Id. at 514.
The Seventh Circuit also addressed standing issues in Pierre v. Midland Credit Management, Inc., 29 F.4th 934 (7th Cir. 2022), where the court held that efforts to collect on a time-barred debt did not constitute injury for Article III standing. The plaintiff in Pierre had defaulted on a credit card and was sued by the debt purchaser, but the lawsuit was subsequently dismissed. After the statute of limitations had run on the debt collection, the defendant sent the plaintiff a letter seeking payment of the debt at a discount, while acknowledging that the plaintiff could not be sued over the debt because of its age. The plaintiff claimed that the letter violated the Fair Debt Collection Practices Act (“FDCPA”) because it falsely represented the character of the debt.
The Seventh Circuit remanded with instructions to dismiss for lack of subject matter jurisdiction because the plaintiff had not established an Article III injury. The Seventh Circuit held that, “critically,” the plaintiff “didn’t make a payment, promise to do so, or otherwise act to her detriment in response to anything in or omitted from the letter.” Id. at 939. Nor did psychological harm, such as the claimed “confusion” and “worry” arising from the letter, rise to a concrete injury. Id. “[A]t most,” the defendant’s letter created “a risk” of injury—which was “not enough to establish an Article III injury in a suit for money damages.” Id. at 936 (citing TransUnion, 141 S. Ct. at 2210–11).
Judge David F. Hamilton, writing for three other judges dissenting from a subsequent denial of a petition for rehearing in Pierre, argued that intangible injuries, such as those advanced by the plaintiff, “could be concrete for purposes of standing” for violations of the FDCPA. 36 F.4th 728, 730 (7th Cir. 2022) (Hamilton, J., dissenting).
III. The Third Circuit Upholds Late-Stage Removal Under CAFA
The Third Circuit issued a notable decision upholding a late-stage removal of a putative class action to federal court under CAFA, which normally requires defendants to file a notice of removal within 30 days from “receipt” of the “initial pleading setting forth the claim for relief.” 28 U.S.C. § 1446(b)(1). CAFA also provides that “if the case stated by the initial pleading is not removable,” then a defendant’s removal is timely if filed within 30 days “after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.” Id. § 1446(b)(3).
In McLaren v. UPS Store Inc., 32 F.4th 232, 241 (3d Cir. 2022), the Third Circuit held that the 30-day removal deadline under Section 1446(b)(3) is not triggered by the defendant’s possession of information about removability. The litigation involved parallel state class actions alleging that the defendants’ stores charged an amount for notary services that exceeded the $2.50 fee permitted by New Jersey state law. Id. at 234. Neither state complaint alleged that the amount in controversy exceeded $5 million, as required for removal under CAFA. Id. at 235. During the course of the state litigation, one defendant produced a spreadsheet that disclosed the number of transactions at issue, revealing that each case had an amount in controversy exceeding $5 million. Id. Seven months later—and after an adverse appellate decision affirming denial of the defendants’ motion to dismiss—the defendants removed both complaints to federal court, asserting that CAFA’s jurisdictional requirements were met. Id. The district court remanded the cases back to state court, holding that the defendants’ removal was untimely under Section 1446(b). Id.
The Third Circuit vacated the district court’s remand order, holding that the spreadsheet the defendant produced was not “recei[ved] by [d]efendant[s],” and thus did not trigger any 30-day removal clock. Id. at 241. The court reasoned that the removal clocks are triggered based only on what a defendant can ascertain from the four corners of a complaint or other paper the defendant “receives”—and that Section 1446(b) does not impose a duty to search company records to investigate possible removal. Id. at 239. Moreover, the statutory text “focuses only on what a defendant receives,” and “does not contemplate that the thirty-day clock would be triggered by information that the defendant already possesses or knows from its own records.” Id. at 238.
The following Gibson Dunn lawyers contributed to this client update: Katie Henderson, Sean Howell, Timothy Kolesk, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.
Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:
Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, [email protected])
Lauren R. Goldman – New York (+1 212-351-2375, [email protected])
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Lauren M. Blas – Los Angeles (+1 213-229-7503, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Employee Benefits Security Administration of the U.S. Department of Labor has released a proposed rule that would amend prohibited transaction class exemption 84-14 (“PTE 84-14”), a longstanding regulation governing financial institutions acting as qualified professional asset managers (or “QPAMs”) for IRAs or employer-provided retirement plans. The proposed rule is scheduled to be published in the Federal Register on July 27, 2022.
PTE 84-14, which allows QPAMs to cause a plan to engage in transactions in which a party in interest to the plan (e.g., a plan trustee) is participating in some manner, is considered by many financial institutions to be a practical necessity when managing ERISA plan assets. The Labor Department’s proposal, if finalized, would make several substantial changes.
Extension to Non-Prosecution and Deferred Prosecution Agreements
Currently, PTE 84-14 provides that a QPAM is ineligible to use the exemption for a period of 10 years if the QPAM or any of its affiliates (which includes any person or entity that owns 5% or more of the QPAM) is convicted of any of a range of specifically-enumerated crimes. The Department proposes to extend that prohibition to a broader range of events, including “any conduct that forms the basis for a non-prosecution or deferred prosecution agreement that, if successfully prosecuted, would have constituted a crime” that would have resulted in exclusion from PTE 84-14’s coverage. Under the proposed rule, a QPAM is also ineligible if it or an affiliate knew of such criminal conduct and did not “tak[e] active steps to prohibit” it.
This extension to non-prosecution and deferred prosecution agreements could significantly expand the instances in which QPAM status is lost. It could also complicate the negotiation of non-prosecution or deferred prosecution agreements.
Foreign Convictions Would Now Be Expressly Covered
The proposed rule would codify the Labor Department’s current view that disqualifying QPAM convictions include foreign convictions for offenses that are “substantially equivalent” to the disqualifying domestic criminal offenses listed in PTE 84-14. (PTE 84-14 currently does not mention foreign convictions.) The Department states that it will allow QPAMs to ask the Department whether a particular foreign offense would be disqualifying, but does not propose to formalize that process.
Mandatory One-Year Winding Down Period
The Department proposes a mandatory one-year winding-down period after a disqualifying conviction. During that period, and even if they were applying for an individual exemption, QPAMs could rely on PTE 84-14 only for existing clients and a limited range of transactions. This would effectively prevent QPAMs from onboarding new matters that depend on PTE 84-14.
Mandatory Contracts with All Clients
Under the proposed rule, all QPAMs would be required to enter into agreements with clients containing certain mandatory provisions. Among other things, the QPAM would have to “agree[] to indemnify, hold harmless, and promptly restore actual losses to the client Plans for any damages that directly result to them from a violation of applicable laws, a breach of contract, or any claim arising out of the conduct that is the subject of a Criminal Conviction or Written Ineligibility Notice of the QPAM or an Affiliate.”
This provision, which would effectively make any violation of ERISA subject to indemnification, may present issues similar to those in Chamber of Commerce of U.S.A. v. U.S. Dep’t of Labor, 885 F.3d 360, 384–85 (5th Cir. 2018), where the U.S. Court of Appeals for the Fifth Circuit ruled that a written contract requirement in the Department’s 2016 “Fiduciary Rule” impermissibly created a private cause of action.
Public Comment and Potential Litigation
Interested parties will have 60 days to comment from the date of the proposal’s forthcoming publication in the Federal Register. Thorough, robust comments can have a significant impact on the eventual final rule, by drawing attention to problems with the proposal and by suggesting alternatives—and potentially, revisions to the QPAM regime as a whole—that the Department will be obligated to consider under the Administrative Procedure Act. Final QPAM amendments would ultimately be subject to review in court if concerned parties, or their representatives, believe the final rule is unjustifiably burdensome, restrictive, or fails to take proper account of comments received in the rulemaking.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Michael Collins, Martin A. Hewett, Andrew G.I. Kilberg, and Ryan C. Stewart.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Administrative Law and Regulatory, Labor and Employment, White Collar Defense and Investigations, or Executive Compensation and Employee Benefits practice groups:
Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, [email protected])
Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])
White Collar Defense and Investigations Group:
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Martin A. Hewett – Washington, D.C. (+1 202-955-8207, [email protected])
Charles J. Stevens – San Francisco (+1 415-393-8391, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])
Executive Compensation and Employee Benefits Group:
Michael J. Collins – Washington, D.C. (+1 202-887-3551, [email protected])
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+ 214-698-3425, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 21, 2022, the Securities and Exchange Commission (“SEC”) filed an insider trading case alleging for the first time that an employee’s alleged tipping of material nonpublic information for purposes of trading crypto assets constitutes securities fraud.[1] Under this theory, the SEC’s complaint alleges that certain cryptocurrencies were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, because the SEC claims they were investment contracts based on the fact that they were (a) “offered and sold to investors”; (b) “who made an investment of money in a common enterprise,” and (c) “with a reasonable expectation of profits derived from the efforts of others.”[2] In contrast, the United States Attorney’s Office for the Southern District of New York (“SDNY”)—the tip of the spear in the U.S. Department of Justice’s prosecutions for insider trading—brought an indictment arising out of the same conduct alleging only wire fraud charges.[3] Unlike the SEC, the SDNY did not allege that any of the crypto assets at issue were securities, and did not charge securities fraud.
I. Background and Charges
The SEC and SDNY filed parallel civil and criminal actions against Ishan Wahi, a former manager at Coinbase, Inc. (“Coinbase”), Nikhil Wahi (Wahi’s brother), and Sameer Ramani (Wahi’s friend) based on allegations that Wahi tipped his brother and Ramani with material, nonpublic information concerning the timing and content of upcoming Coinbase “listing announcements.”
As alleged, by virtue of his position as a manager, Wahi had access to confidential information regarding upcoming listings of crypto assets on the exchange. The SEC and SDNY allege that Wahi tipped information concerning these listing announcements to his brother Nikhil and friend Ramani allowing them to profit by purchasing the crypto assets in advance of the announcements, and subsequently selling the assets post-listing to the tune of over $1 million in total.
Both the SEC and SDNY actions allege and emphasize that Wahi’s disclosure of listing information to his brother and Ramani violated the exchange’s policies, which defined material nonpublic information to include asset listings, prohibited employees from disclosing such confidential information, and “expressly barred employees from providing a ‘tip’ to any person who might make a trading decision based on the information.”[4]
1. SEC Charges
In a single-count complaint filed in the United States District Court for the Western District of Washington, the SEC contends that defendants’ alleged insider trading scheme amounted to securities fraud in violation of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R.§ 240.10b-5).
The SEC’s complaint alleges that blockchain addresses linked to Nikhil Wahi and Ramani traded in at least 25 crypto assets ahead of more than 10 listing announcements. The SEC claims that 9 of the 25 crypto assets were securities. The SEC complaint does not explain why the remaining 16 crypto assets did not constitute securities. With respect to the nine crypto assets underlying the securities fraud charges, the SEC alleges that they were “investment contracts” under the securities laws because (a) they were “offered and sold to investors”; (b) “who made an investment of money in a common enterprise;” and (c) they created “a reasonable expectation of profits to be derived from the efforts of others.”[5] The SEC further alleges that there were “continuing representations by issuers and their management teams regarding the investment value of the tokens, the managerial efforts that contribute to the tokens’ value, and the availability of secondary markets for trading the tokens” such that “a reasonable investor in the nine crypto asset securities would continue to look to the efforts of the issuer and its promotors, including their future efforts, to increase the value of their investment.”[6] The SEC case is before the Honorable Theresa L. Fricke in the Western District of Washington’s Seattle Division.
2. SDNY Charges
The SDNY filed criminal charges against Wahi, Nikhil Wahi, and Ramani for the same conduct, but notably does not allege securities fraud. The SDNY indictment contains the following four wire fraud counts in violation of Title 18, United States Code, Section 1343: (1) conspiracy to commit wire fraud against Wahi and his brother; (2) a separate conspiracy to commit wire fraud against Wahi and his friend; (3) a substantive count of wire fraud against Wahi and his brother; and (4) a substantive count of wire fraud against Wahi and his friend.
The SDNY indictment alleges that, on the basis of tips from Ishan Wahi of material non-public information concerning anticipated listing announcements, Wahi’s brother and friend separately executed trades concerning at least 25 different crypto assets shortly before at least 14 listing announcements, resulting in $1.5 million in illicit profits.[7]
In order to convict on the substantive wire fraud counts, the government must show: (1) a scheme or artifice to defraud; (2) money or property as the object of the scheme; and (3) the use of wires to further the scheme. To prevail on the conspiracy charges, the government must also show: (1) an agreement between Wahi and any alleged co-conspirator to execute the trading scheme; and (2) an overt act—whether innocent or illegal—committed in furtherance of the conspiracy. The SDNY case is before the Honorable Loretta Preska.
II. Notable Issues Arising from SEC Allegation that Certain Crypto Currencies Are Securities
The SEC’s decision to pursue a securities fraud case against Wahi is noteworthy for a number of reasons.
First, the SEC’s legal theory that certain crypto assets constitute “securities” is far from settled in the federal courts.[8] The SEC is in fact litigating a similar issue in an ongoing case against Ripple Labs concerning whether Ripple’s sales of digital asset XRP constituted unregistered securities offerings.[9]
In this regard, it is notable that there is no securities fraud charge in the parallel criminal indictment. The SDNY only charged wire fraud and conspiracy to commit wire fraud—a highly atypical move in an insider trading case where the government almost always charges securities fraud. In a press release announcing four new insider trading indictments against nine individuals on July 25, 2022—all of which allege securities fraud—U.S. Attorney Damian Williams reinforced the SDNY’s commitment to prosecuting insider trading and referenced the Wahi case in stating that insider trading is a form of “old school fraud” that may be committed using “new school methods.” The lack of a securities fraud charge in the Wahi case potentially reflects the SDNY’s concerns about proving beyond a reasonable doubt that defendants dealt in a “security” subject to the federal securities laws.
Significantly, a current Commissioner of the Commodity Futures Trading Commission—which has brought actions in the crypto space related to crypto assets that are commodities—has also signaled discomfort with the SEC’s action against Wahi. In an unusual rebuke, Commissioner Caroline D. Pham issued a public statement calling the SEC lawsuit a “striking example of regulation by enforcement.”[10]
Second, any resolution indicating that the crypto assets at issue are securities is likely to lead to line drawing questions as to which crypto assets contain alleged hallmarks of traditional securities. The SEC itself publicly stated in 2018 that two digital assets (bitcoin and ether) were not securities.[11] And in 2020, SEC Commissioner Hester Peirce stated that a cryptocurrency may start out as a security digital asset and later become a non-security digital asset.[12]
Third, the SDNY and SEC parallel cases reflect an ongoing dedication of resources by the federal government toward investigating cases relating to crypto assets. Unquestionably, the United States Department of Justice, the SEC, and many other federal and state regulators have and will continue to focus on this area. Investigations which relate to crypto assets continue to draw significant resources for the foreseeable future.
Finally, the SEC’s theory against Wahi merits monitoring by cryptocurrency market participants as they react to this evolving regulatory and enforcement landscape and consider their policies and procedures.
III. When Will the Court Decide in Wahi Whether These Crypto Assets Are Securities?
The timing of any court decision on the issue of whether these crypto assets are securities depends on a variety of important factors. First, it depends on whether Wahi and his co-defendants move to dismiss in the Western District of Washington. Second, it depends heavily on whether the SDNY moves to stay, and the extent of its motion to stay, the SEC’s civil proceeding in the Western District of Washington. There is a history in the SDNY of moving for at least a partial stay in parallel SEC proceedings. Although the US DOJ and the SEC coordinate in terms of timing and share evidence when permissible in taking actions in their respective cases prior to charging, the SEC usually takes no position when the US DOJ seeks to stay any part of its civil proceeding. If the SEC’s civil case is stayed in full pending the SDNY criminal case, there will be a long delay in any court hearing over whether the crypto assets in the SEC’s case constitute securities. A typical criminal securities fraud case takes well over a year, and potentially far longer to reach its conclusion including any appeal. On the other hand, if the SEC’s civil case is stayed in part, allowing the accused to seek to dismiss the charges on a legal basis, there might be a court decision and potential appeal relating to whether the crypto assets constitute securities in the near future.
IV. Conclusion
In sum, the SEC’s complaint against Wahi fans the flames of a longstanding debate over whether crypto assets constitute securities, and the SEC’s proper role in regulating crypto assets. While the SEC’s actions reflect its interest in pressing the theory that such assets are securities under certain circumstances—without any guidelines yet—subject to its regulatory jurisdiction, it appears that federal district courts may provide the first initial guidance about the law.
_________________________
[1] SEC v. Wahi, No. 2:22-cv-01009 (W.D.Wash. Jul. 21, 2022) [hereinafter “SEC Complaint”].
[3] United States v. Wahi, No. 22-cr-392 (S.D.N.Y. Jul. 21, 2022) [hereinafter “SDNY Complaint”].
[4] SDNY Complaint ¶ 7; see also id. ¶ 4.
[5] Id. ¶¶ 89-90; see also id. ¶¶ 103, 106, 114, 115, 125, 128, 138, 140, 149, 153, 163, 165, 172, 173, 186, 189, 200, 202.
[8] See, e.g., In re Tether & Bitfinex Crypto Asset Litig., No. 19-cv-9236 (KPF), 2021 WL 4452181, at *51 (S.D.N.Y. Sept. 28, 2021) (noting the unsettled nature of the security/commodity debate as it relates to crypto assets, and declining to classify a certain crypto asset as a “security, commodity, or some other type of good or asset”); Barron v. Helbiz Inc., No. 20-cv-4703 (LLS), 2021 WL 229609, at *4 (S.D.N.Y. Jan. 22, 2021) (holding that Helbiz Coin, a type of crypto asset, is a security after engaging in a fact-intensive analysis of the product); Sec. & Exch. Comm’n v. Blockvest, LLC, No. 18-cv-2287 (GPB) (BLM), 2018 WL 6181408, at *1 (S.D. Cal. Nov. 27, 2018), on reconsideration, No. 18-cv-2287 (GPB) (BLM), 2019 WL 625163 (S.D. Cal. Feb. 14, 2019) (declining to determine whether the token that defendant had offered to investors was a “security” for the purposes of the federal securities laws before full discovery on the issue)
[9] See SEC v. Ripple Labs Inc., No. 1:20-cv-10832 (S.D.N.Y. Dec. 22, 2020).
[11] William Hinman, Dir., Div. of Corp. Fin., Sec. & Exch. Comm’n, Digital Assets Transactions: When Howey Met Gary (Plastic), (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418.
[12] Hester Peirce, Comm’nr, Sec. & Exch. Comm’n, Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization (Feb. 6, 2020).
The following Gibson Dunn lawyers prepared this client alert: Reed Brodsky, Mark Schonfeld, Tina Samanta, and Sarah Patterson*.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members and leaders of the firm’s Securities Enforcement practice group:
Zainab N. Ahmad – New York (+1 212-351-2609, [email protected])
Reed Brodsky – New York (+1 212-351-5334, [email protected])
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Richard W. Grime – Co-Chair, Washington, D.C. (+1 202-955-8219, [email protected])
Mary Beth Maloney – New York (+1 212-351-2315, [email protected])
Mark K. Schonfeld – Co-Chair, New York (+1 212-351-2433, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Tina Samanta – New York (+1 212-351-2469, [email protected])
* Sarah Patterson is a recent law graduate working in the firm’s New York office who is not yet admitted to practice law.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Given the recent changes in the composition of the SEC Commissioners, we offer a summary of the current composition in our most recent Monitor post, which is available at the following link:
The following Gibson Dunn attorneys assisted in preparing this update: Hillary H. Holmes, Thomas J. Kim, Ronald O. Mueller, and James J. Moloney.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On June 8, 2022, the City of Los Angeles implemented new local political contribution restrictions and reporting requirements for property owners, developers, and their respective principals while entitlement applications are in process, and for twelve (12) months thereafter.[1] Under newly adopted Section 49.7.37 (Developer Contribution Restrictions) to the Los Angeles Municipal Code, contributions from project developers (even if they are not a lobbyist) to the Mayor, the City Attorney, a City Council member, a candidate for any of those offices, or a City committee controlled by any of those individuals are prohibited.[2] Individuals applying for significant planning entitlements are required to electronically file Form 65 (Restricted Developer Registration) with the Los Angeles City Ethics Commission.[3] These new laws come in response to several high-profile investigations of alleged corruption, including allegations that developers have provided monetary and non-monetary bribes to City officials in exchange for securing discretionary development approvals.
How do I know if I have to register?
An individual qualifies – and must register with the Los Angeles City Ethics Commission – as a “restricted developer” when they apply for any of the 17 types of significant planning entitlements listed in Los Angeles Municipal Code Section 49.7.37(A)(5).[4] A “significant planning entitlement” means any of the following planning approvals submitted to the Los Angeles Department of City Planning that are not solely ministerial:[5]
Significant Planning Entitlement | Case Prefix, Suffix, or Reviewing Division | |
1. | Density Bonus, On Menu | DB |
2. | Density Bonus, Off Menu | DB |
3. | Development Agreement | DA |
4. | General Plan Amendment | GPA |
5. | Height District Change | HD |
6. | Major Development Project | Review by Major Projects Division |
7. | Oil Drilling District Establishment | O |
8. | Sign District Establishment | SN |
9. | Site Plan Review | SPR |
10. | Specific Plan Establishment | SP |
11. | Tentative Tract Map | TT |
12. | Transfer of Floor Area Rights | TDR |
13. | Transit Oriented Communities Affordable Housing Incentive | TOC |
14. | Vesting Tentative Tract | VTT |
15. | Vesting Zone Change | VZC |
16. | Zone Change | ZC |
17. | Zone Variance where Area or Citywide Planning Commission is the initial decision maker | (APC and ZV) or (CPC and ZV) |
Who do the restrictions apply to?
Any applicant, property owner, or principal associated with a significant planning entitlement filing in the City of Los Angeles qualifies as a “restricted developer” and is subject to the new restriction.[6] Principals include all of the following for both the applicant and the property owner(s):
- board chair;
- president;
- chief executive officer (CEO);
- chief financial officer (CFO);
- chief operating officer (COO);
- individual who serves in the functional equivalent of one of those positions;
- person who owns 20% or more of the entity and/or property; and
- individual authorized to represent the applicant or property owner before the City Planning Department (ex: in house employee, outside consultant, attorney, lobbyist, permit expediter, or similar consultant).[7]
The contribution ban does not extend to an external board member of a developer or property owner who does not serve in a role that is functionally equivalent to one of the above positions. If your project is not required to be registered with the Los Angeles City Ethics Commission or if you are not required to be listed on a Form 65 (Restricted Developer Registration) (even if you are involved with a project that is required to be registered with the Los Angeles City Ethics Commission), you may make contributions subject to the applicable contribution limits.[8]
How do I comply with this requirement?
- Reporting Requirements – Applicants are required to register significant planning entitlements with the Los Angeles City Ethics Commission by filing Form 65 (Restricted Developer Registration)[9] online through the Restricted Developer Filing System (RDFS).[10] Form 65 is due at the time a significant planning entitlement is submitted to the Los Angeles Department of City Planning.[11] Applicants are required to disclose information about the project, themselves, the property owners, and the principals associated with the significant planning entitlement.[12] If any information in Form 65 changes, an amended registration must be filed within ten (10) business days after the change occurs.[13]
Required information for filing Form 65 through RDFS can be found at https://ethics.lacity.org/wp-content/uploads/RDFS-Registration-Required-Info.pdf.
General data from each application will be displayed on the Restricted Developer Master Portal on the Los Angeles City Ethics Commission website.[14] See https://ethics.lacity.org/restricted-developers/. Registrations, applicants, owners, and principals can be viewed and searched through the Public Data Portal.[15] See https://ethics.lacity.org/data/.
- Political Contribution Restrictions – Once an application is filed, the applicant, the property owner, and their principals (the restricted developers) are prohibited from making political contributions to the Mayor, the City Attorney, a City Council member, a candidate for any of those offices, or a City committee controlled by any of those individuals.[16] The prohibition does not apply to contributions made to LAUSD candidates or committees.[17] Applicants must notify owners and principals that they are subject to this ban.[18]
What are the penalties for non-compliance?
A planning application is not complete until the applicant has filed the information required with the Los Angeles City Ethics Commission.[19] A planning application will be on hold until registration is complete and the applicant has received a confirmation receipt from the Los Angeles City Ethics Commission.[20]
In addition to any other penalties or remedies that may apply under the Los Angeles Municipal Code (potentially monetary fines or misdemeanor charges), a restricted developer who violates or aids or abets a violation of the disclosure requirement or contribution ban may not be an applicant, property owner, or principal on a new planning application for twelve (12) months after the determination of violation by the Los Angeles City Ethics Commission.[21] If the commission, as a body, determines that mitigating circumstances exist concerning the violation, this debarment may not apply.[22]
Is this law retroactive?
Registration is required for any pending project that meets the requirements and that has not yet been approved, conditionally approved, or denied, even if the application was submitted before June 8, 2022.[23] Contributions made prior to June 8, 2022, are not subject to the requirement.[24]
When does this restriction begin and end?
The restriction begins the day the application is submitted to the Los Angeles Department of City Planning.[25] The restriction ends twelve (12) months after the date a letter of determination is issued by the Los Angeles City Ethics Commission or, if no letter is issued, the date the decision on the application is final.[26]
If an application is withdrawn or terminated pursuant to the Zoning Code, the restriction applies until the day after the termination or the filing of the withdrawal.[27]
__________________________
[1] https://ethics.lacity.org/news/developer-contribution-ban-goes-into-effect/
[4] https://ethics.lacity.org/developers/#requirements
[6] https://ethics.lacity.org/wp-content/uploads/RDFS-Flyer.pdf
[9] https://ethics.lacity.org/how-do-i-file/?document_source_number=CEC65
[10] https://ethics.rdfs.lacity.org/
[11] https://ethics.lacity.org/developers/#requirements
[13] https://ethics.lacity.org/developers/#whatdoifile
[14] https://ethics.lacity.org/developers/#requirements
[15] https://ethics.lacity.org/developers/#faq
[16] https://ethics.lacity.org/wp-content/uploads/RDFS-Flyer.pdf
[17] https://ethics.lacity.org/developers/#faq
[18] L.A., CAL., MUNICIPAL CODE § 49.7.37 (2020) (effective June 7, 2022).
https://ethics.lacity.org/wp-content/uploads/Laws-Campaigns-City-CFO.pdf#page=45
[19] https://ethics.lacity.org/developers/#requirements
[21] https://ethics.lacity.org/developers/#debarment
[23] https://ethics.lacity.org/developers/#faq
[25] https://ethics.lacity.org/developers/#limitations
[27] L.A., CAL., MUNICIPAL CODE § 49.7.37 (2020) (effective June 7, 2022).
https://ethics.lacity.org/wp-content/uploads/Laws-Campaigns-City-CFO.pdf#page=45
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Land Use and Development or Real Estate teams in California, or the following authors:
Mary G. Murphy – San Francisco (+1 415-393-8257, [email protected])
Douglas M. Champion – Los Angeles (+1 213-229-7128, dchampion@gib sondunn.com)
Benjamin Saltsman – Los Angeles (+1 213-229-7480, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2023, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).
You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2023 at the link below.
https://www.gibsondunn.com/wp-content/uploads/2022/07/SEC-Filing-Deadline-Calendar-2023.pdf.
The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Peter Wardle, Lori Zyskowski, and Patrick Cowherd.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 15, 2022, the United States Court of Appeals for the Second Circuit issued an important decision addressing the scope of scheme liability after Lorenzo v. SEC, 139 S. Ct. 1094 (2019), in securities actions brought under Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933. In SEC v. Rio Tinto plc (No. 21-2042), the Second Circuit held that Lorenzo did not abrogate existing case law holding that scheme liability requires something beyond misstatements and omissions.
As a result of the Rio Tinto decision, plaintiffs within the Second Circuit will not be permitted to allege a purported “scheme” based on misrepresentations or omissions unless they can point to some additional fraudulent conduct beyond the misstatements or omissions themselves.
Background
The Rio Tinto decision arises out of a securities-fraud suit that the Securities and Exchange Commission (“SEC”) filed in 2017 against mining company Rio Tinto and its former CEO Thomas Albanese and former CFO Guy Elliott. The underlying fraud claims pertain to the timing of Rio Tinto’s decision to impair an undeveloped, exploratory coal-mining asset in Mozambique that Rio Tinto acquired in August 2011 and recorded as impaired in January 2013.
In March 2019, the district court dismissed the SEC’s scheme liability claims as inactionable under Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), because the sole basis for those claims were alleged misrepresentations and omissions—e.g., statements in Rio Tinto’s 2011 Annual Report, statements in bond-offering documents, statements to shareholders, and the alleged omission of information previously learned about the coal asset.
A few days later, the Supreme Court issued its Lorenzo decision, which expanded the scope of scheme liability to include fraudulent dissemination. The SEC moved to reinstate its scheme liability claims, arguing that Lorenzo abrogated Lentell’s holding that scheme liability requires fraudulent conduct beyond any misstatements or omissions. Although the district court denied reconsideration, in 2021 the SEC was granted leave to file an interlocutory appeal with the Second Circuit.
After Lorenzo, Scheme Liability Still Requires Conduct Beyond Misstatements and Omissions
The issue on appeal in Rio Tinto was whether “misstatements and omissions—without more—can support scheme liability” under Rule 10b-5(a) and (c) and related provisions under Section 17. Slip Op. 5.
Long before Lorenzo, the Second Circuit had held that additional conduct was required. In Lentell, the Second Circuit held that, “where the sole basis for [scheme] claims is alleged misrepresentations or omissions, plaintiffs have not made out a . . . claim under Rule 10b-5(a) and (c).” 396 F.3d at 177.
In Lorenzo, the Supreme Court expanded scheme liability to encompass “those who do not ‘make’ statements” within the meaning of Rule 10b-5(b), “but who disseminate false or misleading statements to potential investors with the intent to defraud.” 139 S. Ct. at 1099. The Court noted, however, that “[p]urpose, precedent, and circumstance, could lead to narrowing [the] reach” of the scheme liability provisions “in other contexts.” Id. at 1101.
Rio Tinto now establishes that “Lentell remains sound” after Lorenzo, Slip Op. 2, meaning that scheme liability still “requires something beyond misstatements and omissions,” id. at 4–5. The Second Circuit emphasized that “misstatements or omissions were not the sole basis for scheme liability in Lorenzo. The dissemination of those misstatements was key.” Id. at 16.
The Second Circuit also provided several reasons why it refused to read Lorenzo more expansively:
- If misstatements or omissions alone were sufficient to constitute a scheme, “the scheme subsections would swallow the misstatement subsections” of Rule 10b-5(b) and Section 17(a)(2), Slip Op. 18;
- “Lorenzo signaled that it was not giving the SEC license to characterize every misstatement or omission as a scheme,” Slip Op. 19 (discussing Lorenzo, 139 S. Ct. at 1103); indeed, “Lorenzo emphasized the continued vitality of” Janus’ limitations on primary liability for making misstatements, id. (discussing Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011));
- “An overreading of Lorenzo might allow private litigants to repackage their misstatement claims as scheme liability claims” and thereby evade statutory pleading requirements in misstatement cases, Slip Op. 20 (discussing 15 U.S.C. 78u-4(b)(1)); and
- “[A] widened scope of scheme liability would defeat the congressional limitation on the enforcement of secondary liability” by the SEC alone and would “multiply the number of defendants subject to private securities actions, and render the statutory provision for secondary liability superfluous.” Slip Op. 21–22 (citing 15 U.S.C. 78t(e)).
Conclusion
Rio Tinto is the Second Circuit’s first pronouncement on the scope of scheme liability after Lorenzo—and the most extensively reasoned analysis of the issue by any court yet. The decision forcefully rejects an expansive interpretation of Lorenzo, while upholding meaningful constraints on primary fraud liability for misstatements when the defendant did not actually “make” the statements or omissions at issue. The Second Circuit’s decision thereby reaffirms the vitality of a long line of pre-Lorenzo cases that curbed the ability of the SEC and private plaintiffs to repackage deficient misrepresentations and omissions claims as “scheme” claims. See, e.g., Alpha Capital Anstalt v. Schwell Wimpfheimer & Assocs. LLP, No. 1:17-cv-1235-GHW, 2018 WL 1627266, at *11 (S.D.N.Y. Mar. 30, 2018); SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342, 361 (D.N.J. 2009); In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 475 (S.D.N.Y. 2005).
* * * *
Gibson Dunn represents Rio Tinto plc and Rio Tinto Ltd. Thomas H. Dupree Jr. argued in the United States Court of Appeals for the Second Circuit on behalf of Rio Tinto on May 19, 2022.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Securities Litigation or Appellate and Constitutional Law practice groups, or the authors of this alert:
Mark A. Kirsch – New York (+1 212-351-2662, [email protected])
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Jennifer L. Conn – New York (+1 212-351-4086, [email protected])
Kellam M. Conover – Washington, D.C. (+1 202-887-3755, [email protected])
Please also feel free to contact any of the following practice group leaders:
Securities Litigation Group:
Monica K. Loseman – Denver (+1 303-298-5784, [email protected])
Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Craig Varnen – Los Angeles (+1 213-229-7922, [email protected])
Appellate and Constitutional Law Group:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, [email protected])
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Julian W. Poon – Los Angeles (+ 213-229-7758, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Hundreds of millions of dollars in government recoupments. Supreme Court attention. Potential Congressional legislation. All of this—and more—marked the False Claims Act (FCA) landscape during the first half of 2022, and proved yet again that the FCA is one of the government’s most powerful, and most litigated, enforcement tools.
On the enforcement front, the U.S. Department of Justice (DOJ) announced FCA resolutions totaling more than $500 million during the first half of the year, outpacing last year’s settlements. Among those resolutions were settlements related to fraud under the COVID stimulus programs and novel settlements from DOJ’s nascent “cyber-fraud” initiative, which promises to blur the line between traditional cybersecurity law and traditional FCA claims. DOJ also settled its usual assortment of cases against health care companies and government contractors.
Meanwhile, the Supreme Court agreed to decide yet another FCA case—this time to decide how much control the government retains over FCA litigation pursued by whistleblowers on its behalf—marking the 10th time in the last 15 years that the Supreme Court has decided to clarify aspects of the FCA statutory framework. The Supreme Court’s grant of certiorari adds to a host of important circuit court decisions from the last six months, as well as continued rumblings about potential Congressional action to strengthen the FCA.
With all of these developments, Gibson Dunn is pleased to once again present our mid-year round-up of the critical developments that businesses and practitioners must know about under the FCA.
Below, we summarize recent enforcement activity, then provide an overview of notable legislative and policy developments at the federal and state levels, and finally analyze significant court decisions from the past six months. Gibson Dunn’s recent publications regarding the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies navigate the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.
I. NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2022
During the first half of 2022, DOJ announced FCA resolutions totaling more than $500 million. Enforcement activity thus far in 2022 has outpaced that of the first six months of 2021, although many of the resolutions announced this year have been relatively modest in amount. It remains to be seen whether DOJ will match the recoveries obtained during 2021, which included blockbuster settlements stemming from the opioid crisis.
Some of the most notable settlements of the first six months of 2022 came from the continued fallout from COVID and a new DOJ initiative around cyber-fraud.
Specifically, DOJ continues to focus on enforcement actions related to the Paycheck Protection Program (PPP), including actions under the FCA. For example, as detailed below, in February DOJ reached a settlement with a Virginia-based software development company to resolve allegations that the company fraudulently obtained multiple PPP loans in the year 2020.[1] In April, DOJ announced a settlement with a medical provider network, and several individuals, of claims that the company billed for unnecessary telehealth visits and instructed physicians to order certain medical tests without assessing for medical necessity.[2] In addition, DOJ claimed that the company submitted false statements in connection with a PPP loan application, by representing in its PPP loan application that the company was not engaged in unlawful activity. Notably, all four of the qui tam actions resolved by the settlement pre-dated the creation of the PPP program under the CARES Act. In addition to FCA claims, the settlement resolved a claim under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), ostensibly based entirely on the PPP allegations. The addition of this claim follows the approach taken in DOJ’s very first PPP-related settlement in January 2021, which we have covered previously.
DOJ also continues to focus on employing the FCA to respond to cybersecurity threats. In March, DOJ announced its first settlement under the “Cyber Fraud Initiative” that it announced late last year.[3] The Cyber Fraud Initiative was set up to encourage the federal government to pursue fraud claims related to cybersecurity, including claims related to data security practices by health care providers. In this particular settlement, a Florida-based medical services provider agreed to pay $930,000 to resolve allegations that it failed to disclose to the State Department that it had not consistently stored patients’ medical records in a secure electronic medical record system and that it failed to properly obtain certain controlled substances that were manufactured in accordance with federal quality standards. Given the significance of data security in the health care industry, it is not surprising that DOJ’s first settlement under the Cyber Fraud Initiative was with a medical company—but we expect to see DOJ extending the initiative’s efforts broadly across industries in the coming months. Indeed, on July 8, DOJ announced another first-of-its-kind FCA settlement with a defense and aerospace contractor who allegedly misrepresented its compliance with cybersecurity requirements in certain federal government contracts.
Below, we summarize the other most notable settlements from the first half of the year, organized by industry and focused on key theories of liability at issue in the resolutions. As is often the case, FCA recoveries in the health care and life sciences industries dominated enforcement activity during the first half of the year in terms of the number and value of settlements. DOJ, however, also announced notable resolutions in the government contracting and procurement space, described below.
A. Health Care and Life Science Industries
Settlements to resolve liability under the FCA in the health care and life sciences industries totaled more than $400 million in the first half of 2022.
- On January 11, a California health system agreed to pay $3 million to resolve allegations that it violated the FCA by ordering and submitting referrals for unnecessary genetic testing, leading to the submission of false claims to Medicare for those tests.[4]
- On January 12, a specialized footwear company agreed to pay $5.5 million to settle allegations that the company sold shoe inserts to diabetic patients who received a prescription for the inserts from a physician. According to the government, the company billed Medicare and Medicaid as if the inserts provided to patients were customized, but the inserts actually all came from a generic model. In connection with the settlement, the company entered a three-year corporate integrity agreement, requiring the company to update its policies and hire an independent review organization to monitor the company’s Medicare and Medicaid claims. The settlement also resolved a qui tam suit brought by a former employee; that individual’s share of the recovery was not reported with the settlement announcement.[5]
- On January 31, a health care company agreed to pay more than $13 million to settle allegations that it violated the FCA and AKS by providing initial discounts on the purchase of drugs to physician practices. The government alleged the company used these discounts to persuade the practices to buy federally reimbursable drugs from the company rather than its competitors. According to the government, the company’s upfront discounts ran afoul of the FCA and AKS because they were not tied to any particular sale and were not associated with an earned rebate. The settlement also resolved qui tam suits brought against the health care company, for which the relators received approximately $2.8 million of the settlement.[6]
- On February 9, a hospital agreed to pay $3.8 million to resolve allegations that it violated the FCA and AKS by paying its own cardiologists to cover for, and provide services to, another cardiologist’s patients when that cardiologist was unavailable. The government alleged that the cardiologist, in turn, referred millions of dollars of medical procedures to the hospital. The government asserts the arrangement constituted an unlawful kickback and resulted in the submission of false claims to the government. The settlement also resolved a qui tam suit brought by a former hospital employee; that individual’s share of the recovery was not reported with the settlement announcement.[7]
- On February 15, three Ohio-based health care providers agreed to pay more than $3 million to resolve allegations that the providers submitted bills to Medicare for complex surgeries by an orthopedic surgeon who worked out of each of the providers’ facilities. The government asserted that the surgeon claimed to have performed numerous procedures that he actually did not perform. Even though none of the parties knowingly submitted false claims based on the surgeons’ actions, the government alleged there was sufficient evidence that each provider should have known that the claims were false.[8]
- On March 7, a pharmaceutical company agreed to pay $260 million to resolve allegations that it violated the FCA and AKS by underpaying Medicaid rebates for a particular drug and using a foundation to subsidize patient co-pays. Approximately $234.7 million of the settlement went to resolving the rebate allegations and $26.3 million went toward resolving the kickback claims. In addition to the payment, the pharmaceutical company agreed to a corporate integrity agreement, which includes monitoring provisions focused on Medicaid rebates. The settlement also resolved qui tam suits brought by two whistleblowers, who received almost $30 million of the settlement.[9]
- On March 28, a psychiatrist agreed to pay $3 million to resolve allegations that he violated the FCA by billing the Department of Labor Office of Worker’s Compensation Programs for psychiatric appointments that never took place and double-billing for other sessions. As part of the settlement, the psychiatrist agreed to be excluded from federal health care programs for 25 years.[10]
- On April 6, a health care system and four affiliated entities agreed to pay $20 million to resolve allegations that they violated the FCA by making donations to a local entity which in turn contributed the money to the state’s Medicaid program—the state ultimately paid back the funds to the health care system. The government asserted that, based on this conduct, the government had to make matching Medicaid payments without any actual expenditure by the state. The settlement also resolved a qui tam suit brought by a former hospital reimbursement manager, who received $5 million of the settlement.[11]
- On April 12, a pain management company agreed to pay $24.5 million to resolve allegations that it violated the FCA by submitting claims for unnecessary drug, genetic, and psychological testing. As part of the settlement, the company entered into a corporate integrity agreement with the Office of Inspector General for the Department of Health and Human Services (HHS-OIG) that required the company to maintain a compliance department and submit to ongoing reviews by an independent review organization. The settlement resolved qui tam suits brought by former employees of the company and its affiliates; the relators’ share of the recovery was not reported with the settlement announcement.[12]
- On April 13, a company, its co-founders, and 18 affiliated anesthesia entities agreed to pay $7.2 million to resolve allegations that they violated the FCA and AKS by sharing revenue received from the company’s anesthesia services with the physicians running outpatient surgery centers in order to obtain exclusive anesthesia agreements with the surgery centers. The settlement also resolved a qui tam suit brought by a whistleblower, who received $1.3 million of the settlement.[13]
- On April 29, a hearing aid company agreed to pay $34.4 million to resolve allegations that it violated the FCA by submitting inaccurate claims for reimbursements to the federal government. Some Federal Employees Health Benefits Program plans elect to offer a benefit for hearing aids but require submission of a hearing-loss related diagnosis code supported by a hearing exam by a physician. The government alleged that the company submitted claims for hearing aids containing unsupported diagnosis codes to the Benefits Program.[14]
- On May 9, a home health company agreed to pay $2.1 million to resolve allegations that it violated the FCA by submitting claims for Medicare beneficiaries who were not homebound and did not require certain skilled care. The government also alleged the company submitted claims for services that otherwise did not have a valid or appropriate plan of care and/or did not have requisite in-person encounters to qualify for home health service certification. The settlement resolved allegations brought in a qui tam and a HHS-OIG complaint; the whistleblower’s share of the recovery was not disclosed at the time of the settlement.[15]
- On June 1, a behavioral health care provider agreed to pay $2.1 million to settle claims that it improperly billed claims to Medicaid that were ineligible for reimbursement under the state’s medical clinical coverage policy. The allegations stemmed from a qui tam lawsuit; the whistleblower’s share was not disclosed at the time of the settlement announcement.[16]
- On June 1, a molecular science company agreed to pay over $2.8 million to resolve allegations that it billed Medicare for laboratory tests in violation of Medicare’s 14-Day Rule, which prohibits laboratories from separately billing for certain tests ordered within 14 days of a patient’s discharge from an inpatient or outpatient hospital setting. In addition to submitting purportedly improper claims, the government alleged that the company failed to discourage providers who ordered testing within 14 days after a discharge from canceling the order and placing a new order for testing after the 14-day period had elapsed. The settlement partially resolves one qui tam lawsuit and fully resolves another.[17]
- On June 6, a diagnostics company that provides home sleep testing agreed to pay $3.5 million to resolve FCA and AKS allegations that it billed Medicare and four other federal health care companies for unnecessary home sleep testing. The government alleged that the company’s founder directed employees to submit claims for additional nights of home sleep testing when only one night was necessary to effectively diagnose sleep apnea. The government further alleged that the company improperly multiplied copays received from Medicare beneficiaries and incentivized physicians to refer all home sleep testing services to the company. The settlement agreement requires the company’s founder and vice president to pay $300,000 and $125,000, respectively, and the company and its founder agreed to a corporate integrity agreement. The allegations in the settlement were part of two qui tam [18]
- On June 10, a Los Angeles doctor agreed to pay $9.5 million to resolve FCA allegations that he submitted claims to Medicare for procedures and tests that he never performed and admitted that he intentionally submitted false claims for payment. The settlement amount includes nearly $5.5 million paid as criminal restitution following a guilty plea to health care fraud in a separate criminal matter. The allegations originally stemmed from a qui tam lawsuit filed by a former medical assistant and former IT consultant. The two whistleblowers will receive more than $1.75 million as their share of the recovery.[19]
- On June 21, a managed care health services company and its previously-owned subsidiary agreed to pay $4.6 million to resolve allegations that it billed a joint federal and state Medicaid program for care provided by unlicensed and unsupervised staff. The settlement also resolved allegations that the companies failed to provide and timely document the provision of adequate clinical supervision for clinicians. The settlement resolves a qui tam suit filed by four former employees; the whistleblowers were awarded $810,000 as their share of the recovery.[20]
B. Government Contracting and Procurement
Settlements to resolve liability under the FCA in the government contracting and procurement space totaled more than $90 million in the first half of 2022.
- On February 23, a kitchen and food service equipment company agreed to pay $48.5 million to resolve allegations that it provided inaccurate information to the government regarding contracts awarded to small businesses. The federal government may set aside certain contracts for various categories of small businesses; and, in some instances, only eligible small businesses may bid on and receive contracts. The government alleged that the company caused federal agencies to award contracts to small businesses that claimed to be run by service-disabled veterans when, in reality, the small businesses served as the face of the contracts, and the company actually provided all of the services. The settlement resolved a qui tam suit brought by a competing company, which received $10.9 million of the settlement.[21]
- On March 7, a construction contractor agreed to pay $10 million to resolve allegations it overbilled the government. The government asserted that the contractor—which was performing work for the Department of Energy—presented false invoices for non-existent materials submitted by a subcontractor to the contractor. According to the government, the contractor’s employees received kickbacks from the subcontractor to submit the claims.[22]
- On March 14, two freight carrier companies agreed to pay $6.9 million to resolve allegations they violated the FCA by inflating bills submitted to the Department of Defense. The government alleged the companies each claimed to have hauled greater weights than they actually carried, which served as the basis for payment under the contract. The settlement resolved a qui tam suit brought by a former employee of one of the companies who received $1.3 million of the settlement.[23]
- On March 21, a package delivery company agreed to pay $5.3 million to resolve allegations that it violated the FCA by submitting inaccurate information regarding time and proof of delivery. Under the company’s contract for mail pick-up and delivery at various Department of Defense and State Department locations domestically and abroad, the company received penalties for mail delivered late or to the wrong location. The government alleged that the company submitted scans of proof of mail and package deliveries that did not accurately reflect when the company actually delivered the packages.[24]
- On May 12, a construction company agreed to pay $2.8 million to settle FCA allegations that the company improperly manipulated a subcontract reserved for service-disabled, veteran-owned small businesses (SDVOSBs). The government awarded the company a contract to develop retirement communities and residential facilities for veterans, a condition of which was to provide subcontracting opportunities to SDVOSBs. The company admitted that it negotiated with a non-SDVOSB for the subcontract and then entered into a subcontract with an SDVOSB for the same work, but with an additional 1.5% fee. The company further admitted that it should have known the SDVOSB was a pass-through for the non-SDVOSB, which provided all of the work under the subcontract. The settlement resolves allegations originally brought in a qui tam lawsuit; the whistleblower received approximately $630,000 for its share of the recovery.[25]
- On May 18, seven South Korean companies agreed to pay $3.1 million to settle FCA and other allegations that they conspired to rig the bidding process for contracts for construction and engineering work on United States military bases in South Korea. The government alleged that, as a result of the anticompetitive behavior, the government paid more for services performed under the contracts than it otherwise would have.[26]
- On May 25, a manufacturing company agreed to pay $3 million to settle allegations that it violated the FCA by knowingly selling technical fabrics to the military that failed to meet required specifications. The company allegedly falsified test results and falsely certified that its military-grade fabrics met all requisite performance specifications set by the military. The company also entered into an agreement with the Defense Logistics Agency to ensure that it remains in compliance with testing requirements going forward. The settlement resolves allegations brought under a qui tam lawsuit; the whistleblower’s share was not disclosed at the time of the settlement announcement.[27]
- On June 2, a manufacturing company and two related entities agreed to pay $5.2 million to resolve allegations that the company violated the FCA by improperly obtaining a contract reserved for small businesses that it was ineligible to receive. The manufacturing company allegedly falsely certified that it was a “small business concern” within the meaning of the Small Business Administration’s regulations so as to receive 22 small business set-aside contracts, even though the company ceased to qualify after its acquisition by a larger company. The company also allegedly falsely certified that it was a “women-owned small business concern.” As part of the settlement agreement, the entities received credit for the company’s voluntary disclosure and cooperation with the government during the investigation.[28]
- On June 14, four companies agreed to pay $13.7 million to resolve FCA and AKS allegations that the companies rigged the bidding process for subcontracts to perform logistics support services for the military in Iraq and that employees entered into arrangements with a foreign contractor under which the companies would receive a kickback for every subcontract awarded to the foreign entity. The government alleged that the employees influenced the federal government to award two subcontracts to the foreign contractor at prices higher than necessary to fulfill the military’s contract requirements, and the government alleged that the companies extended the duration of subcontracts at inflated prices and sought reimbursement of these inflated costs from the U.S. military. The settlement resolves allegations originally brought in a qui tam lawsuit; the whistleblower’s share was not disclosed at the time of the settlement announcement.[29]
C. Other
Settlements to resolve other types of FCA cases totaled nearly $25 million in the first half of 2022.
- On January 14, a loan servicer agreed to pay $7.9 million to resolve allegations that it violated the FCA by submitting inaccurate claims to the Department of Education. The government alleged that the loan service failed to make required financial adjustments to borrower accounts and improperly treated some ineligible borrowers as eligible for military deferments.[30]
- On April 4, a telecommunications carrier agreed to pay $13.4 million to resolve allegations that it enrolled 175,000 ineligible customers for free cell phones and service under a federal program. The federal government runs the Lifeline Program, which assists low-income individuals with telecommunications needs. According to the government, the carrier failed to monitor subscriptions obtained by a third-party marketing firm who actually enrolled the ineligible customers. The settlement also resolved a qui tam suit brought by a former employee of the marketing firm, who received roughly $450,000 of the settlement.[31]
- On May 27, a for-profit school and its owner agreed to pay over $1 million to settle allegations that they improperly concealed financial information to influence the school’s student loan default rate, which affects an institution’s ability to participate in Title IV programs. The for-profit school and its owner allegedly mailed 154 direct payments to loan servicers on behalf of 102 students to prevent those students from defaulting on their loans and, therefore, counting towards the school’s student loan default rate. The school and its owner allegedly failed to disclose the actual student loan default rate to the Department of Education. The school and its founder also entered into an administrative agreement with the Department of Education.[32]
II. LEGISLATIVE AND POLICY DEVELOPMENTS
A. Federal Legislative Developments
As we previously reported, last summer, Senator Chuck Grassley (R-IA), along with a bipartisan group of Senators, introduced a bill to amend the FCA which he subsequently amended last November. Senator Grassley’s proposed amendments were targeted at limiting the implications of the Supreme Court’s decision in Escobar and limiting the government’s ability to dismiss claims brought by relators. Since being reported out of the Senate Judiciary Committee, there has been no indication regarding whether the bill will receive a floor vote.
Time will tell whether the Supreme Court’s decision to take up the Polansky case (which relates to the government’s ability to dismiss claims brought by relators, as covered below in this Alert) has the effect of further delaying or killing the bill’s progress. In the meantime, Senator Grassley filed an amicus curiae brief in support of a certiorari petition in the United States ex rel. Schutte v. SuperValue Inc., which deals with the relevance of a defendant’s subjective beliefs for FCA scienter.[33] Consistent with his statements in the past, Sen. Grassley’s brief focuses on what he sees as the importance of a defendant’s contemporaneous subjective intent, in a professed effort to prevent the same defendant’s “post-hoc” (albeit objectively correct) interpretations of the law from hobbling the government’s efforts to establish scienter.
B. State Legislative Developments
The first half of 2022 has witnessed significant developments in state-level FCA legislation. Most notably, Colorado expanded its false claims law beyond the realm of Medicaid fraud. The Colorado False Claims Act (CFCA), which became law on June 7, 2022, largely tracks the federal FCA, but with several significant features not found in the federal statute.
First, the CFCA expressly states that “[a] person who acts merely negligently with respect to information is not deemed to have acted knowingly, unless the person acts with reckless disregard of the truth or falsity of the information.”[34] The federal FCA contains neither an express carve-out for negligence (although courts routinely find that it does not satisfy the Act’s scienter requirement), nor any sort of caveat regarding situations in which negligence could still be actionable.
Second, the CFCA contains a distinct framework for assessing reduced damages and penalties for cooperating defendants. The federal FCA grants courts discretion to impose only double damages when a defendant reports information within 30 days of obtaining it, cooperates fully with the government, and discloses the information prior to the commencement of any action under the FCA and without actual knowledge of any FCA investigation. The CFCA, by contrast, requires the imposition of double damages for any defendant who reports information within 30 days of learning it, does so without actual knowledge of the existence of an FCA investigation, and does so while an FCA action is under seal.[35] In the event that a similarly situated defendant reports the information prior to any action being filed under seal, the court is required to impose one-and-one-half the amount of damages.[36] In this way, the CFCA places a premium on companies enhancing their compliance programs to affirmatively identify fraudulent conduct, but arguably incentivizes qui tam relators to act hastily in filing complaints in an effort to lock even cooperating defendants into at least double damages. On another level, the apparently mandatory nature of the reduced damages provisions in cases where defendants make voluntarily self-disclosures could have the effect of making settlement discussions in such cases more efficient by vesting the government with less discretion to negotiate damages multipliers where the other requirements for cooperation credit are otherwise met.
Third, and notably in light of Polansky and the longer history of disputes at the federal level regarding DOJ’s dismissal authority, the CFCA explicitly requires the Colorado Attorney General to consider certain enumerated factors when determining whether to voluntarily dismiss a CFCA action.[37] Those factors are “the severity of the false claim, program or population impacted by the false claim, duration of the fraud, weight and materiality of the evidence, other means to make the program whole, and other factors that the Attorney General deems relevant.”[38] The statute also expressly provides that “[t]he Attorney General’s decision-making process concerning a motion to dismiss and any records related to the decision‑making process are not discoverable in any action.”[39]
Fourth, unlike the federal FCA, the CFCA expressly prohibits a qui tam relator from disclosing—as part of its mandatory disclosure statement served on the State along with a copy of the complaint—”any evidence or information that the person reasonably believes is protected by the defendant’s attorney-client privilege unless the privilege was waived, inadvertently or otherwise, by the person who holds the privilege; an exception to the privilege applies; or disclosure of the information is permitted by an attorney pursuant to [the SEC’s standards of professional conduct], the applicable Colorado Rules of Professional Conduct, or otherwise.”[40]
Elsewhere, other states have been actively considering steps to expand or revise their false claims laws. In Connecticut and Michigan, bills are pending that would—like Colorado’s new law—expand false claims liability beyond Medicaid, although without nearly as much variation on matters of FCA procedure and practice compared to the federal statute as is reflected in the CFCA.[41] New York’s legislature, for its part, on June 3 passed an amendment to the state’s FCA that would expand liability for tax-related claims to include fraudulent failures to file tax returns. As currently written, the New York FCA covers tax-related actions but limits them to the knowing use of false records and statements material to tax obligations.[42] The new bill is now awaiting the governor’s signature.
HHS-OIG provides incentives for states to enact false claims statutes in keeping with the federal FCA. HHS-OIG approval for a state’s FCA confers an increase of 10 percentage points in that state’s share of any recoveries in cases involving Medicaid.[43] Such approval requires, among other things, that the state FCA in question “contain provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims” as are the federal FCA’s provisions.[44] Approval also requires a 60-day sealing provision and civil penalties that match those available under the federal FCA.[45] Consistent with our reporting in prior alerts, the lists of “approved” and “not approved” state statutes remain at 22 and 7, respectively.[46] Michigan is on the “not approved” list, and could remain there even if its FCA amendment passes: the bill entitles qui tam relators to a maximum of 20% of recoveries in intervened cases, whereas the federal FCA caps that amount at 25%.[47] HHS-OIG could well determine that this discrepancy means the Michigan law (if it passes in its current form) is not “at least as effective” as the federal FCA is in rewarding qui tam relators.
III. CASE LAW DEVELOPMENTS
The big news of the last six months was the Supreme Court’s decision to wade into the FCA waters once more. But the first half of 2022 also saw a number of notable federal appellate court decisions. We cover all of these developments below.
A. Supreme Court and Multiple Courts of Appeal Consider DOJ’s Dismissal Authority
1. Supreme Court Grant of Cert
The Supreme Court granted certiorari in United States ex rel. Polansky v. Executive Health Resources, Inc., 17 F.4th 376, 385 (3d Cir. 2021), cert. granted, 142 S. Ct. 2834 (2022), to decide the question of whether the government can dismiss a qui tam realtor lawsuit after declining to litigate, and if it can, what the government must show in order to persuade the district court to dismiss the case. 21-1052, United States, Ex Rel. Polansky v. Executive Health Resources, Inc., https://www.supremecourt.gov/qp/21-01052qp.pdf (last visited July 14, 2022).
The FCA generally provides that the government may dismiss a qui tam, over the objection of a relator, at any time, subject to certain procedures. 31 U.S.C. § 3730. This provision is an important check on runaway whistleblower suits, United States ex rel. Campos v. Johns Hopkins Health Sys. Corp., 2018 WL 1932680, at *8 (D. Md. April 24, 2018), and is a critical feature that courts have relied upon to uphold the constitutionality of the qui tam provisions against constitutional challenges under the delegation clause, United States ex rel. Stilwell v. Hughes Helicopters, Inc., 714 F.Supp. 1084, 1086–93 (C.D. Cal. 1989).
Currently, however, there is a circuit split as to the standard under which a district court may evaluate the government’s decision to dismiss relators’ cases.[48] Some courts have concluded that the government may dismiss virtually any action brought on behalf of the government, with very little scrutiny. Polansky, 17 F.4th at 384–88. Other courts have decided that if the government does not intervene in a relator’s case, the government must first intervene in the lawsuit before seeking to dismiss it under Federal Rule of Civil Procedure 41(a)’s standard. Id. Still other courts have indicated that the government must have some reasonable basis for the decision to dismiss, and ostensibly apply a degree of scrutiny to dismissal decisions. Id.
In Polansky, appellant Jesse Polansky argues that the Supreme Court must adjudicate the “intractable split” on the issue, urging the Court to hold the government to a heightened standard. Id., Pet. at I. Unsurprisingly, respondent Executive Health Resources—seeking to preserve DOJ’s decision to dismiss—contends that the standards are just “slightly different” and that appellant would lose under all of them. Id., Opp. at 1.
FCA practitioners know that the “split” may be more of an illusion than a reality. In practice, district courts almost always agree to dismiss cases where DOJ seeks dismissal, regardless of what jurisdiction they are in and what standard they apply. Indeed, in every Circuit Court case making up the split, the court upheld the government’s dismissal. It is therefore unclear why the Supreme Court decided to hear the case, given the lack of practical differences in the standards. But we will be watching carefully to see whether the Supreme Court strengthens—or weakens—DOJ’s ability to reign-in qui tam lawsuits.
2. First and Eleventh Circuits Consider the Government’s Dismissal Authority
While the Supreme Court’s grant of cert in Polansky was the big news with regard to the government’s dismissal authority, several circuit courts also issues decisions that bear on DOJ’s control over qui tams.
The FCA provides for a hearing when the Government moves to dismiss a relator’s qui tam action over the relator’s objection. But the statute is silent as to the standards governing that hearing and the courts of appeals have developed different tests for assessing the propriety of such a motion to dismiss. Weighing in on the issue for the first time, the First Circuit held in Borzilleri v. Bayer Healthcare Pharmaceuticals, Inc., 24 F.4th 32 (1st Cir. 2022), that the Government must “always provide its reasons for seeking dismissal” and that the “court’s role is to apply commonly recognized principles for assessing government conduct—the well-established ‘background constraints on executive action.’” Id. at 42. The motion to dismiss should be granted unless the relator can establish that the government’s decision to seek dismissal “transgresses constitutional limitations” or that the government “is perpetrating a fraud on the court.” Id. Further, if the relator seeks discovery to establish the government’s “improprieties” the relator must make a “substantial threshold showing” to support her claims. Id. at 44.
In so holding, the First Circuit, disagreed with the approaches taken by other circuits. For example, the Borzilleri Court held that the Ninth Circuit’s approach, which requires the government to identify a “valid government purpose” for dismissal and to establish a “rational relation between dismissal and accomplishment of the purpose” erred in placing too weighty a burden on the government. Id. at 37, 40 (quoting United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998)). The Borzilleri Court likewise rejected the approach taken by the Seventh and Third Circuits, which look to Federal Rule of Civil Procedure 41 for guidance. The First Circuit concluded that Rule 41 was not an “appropriate guide” for the FCA because its primary aim is to protect the defendant from being prejudiced by a plaintiff’s voluntary dismissal, while § 3730(c)(2)(A) hearings are intended to protect the relator’s “unique” interests as an “objecting co-plaintiff.” Id. at 41.
In United States ex rel. Farmer v. Republic of Honduras, 21 F.4th 1353 (11th Cir. 2021), meanwhile, the Eleventh Circuit took up the issue of whether the Government must formally intervene in a qui tam action to move for dismissal, where it has initially declined to intervene. Id. at 1355. There, when relators filed their initial complaint in the qui tam action, the United States declined to intervene. Id. Later, however, after the relators filed an amended complaint adding defendants, the United States—without first filing a motion to intervene in the case—motioned to dismiss the action. Id. The relators challenged the dismissal motion on the ground that the Government was not a party to the suit because it had not formally intervened “for good cause” under 31 U.S.C. § 3730(c)(3), and thereby lacked standing to motion for dismissal. Section 3730 asserts that Courts may allow the Government to later intervene—in a case for which it initially declined intervention—upon a showing of “good cause.” Id. at § 3730(c)(3). However, the Court held that the Government was not required to show “good cause” for late interventions that strictly seek dismissal, explaining that the good-cause subsection “applies only when the [G]overnment intervenes for the purpose of actually proceeding with the litigation,” rather than intervening “for the purpose of settling and ending the case.” Id. at 1356. “[W]hen the Government moves to dismiss an action after having declined to intervene,” the Court continued, “it need provide the Relator only notice and a hearing.” Id. at 1357. Notably, the Eleventh Circuit subsequently voted to rehear the case en banc, and accordingly vacated the initial panel’s opinion.
B. Public Disclosure Bar and First-to-File
The FCA employs two related rules barring relators from bringing actions in situations where the underlying, alleged wrongdoing has already been disclosed or addressed by someone else. First, the public disclosure bar requires dismissal of FCA cases brought by private litigants where “substantially the same allegations or transactions” underlying the action have already been publicly disclosed, including “in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party,” unless the relator is an “original source of the information.” 31 U.S.C. § 3730(e)(4). Relatedly, the first-to-file rule prevents private litigants from bringing an action that is “based on the facts underlying” any other action that was pending at the time and brought by a separate litigant. Id. at § 3730(b)(5). There were a number of notable decisions under these bars in the first half of the year.
1. Eleventh Circuit Considers Public Disclosure and First-to-File Bars
In Cho on behalf of States v. Surgery Partners, Inc., 30 F.4th 1035 (11th Cir. 2022), the Eleventh Circuit considered questions related to both the first-to-file rule and the public disclosure bar.
First, it considered whether an amended complaint filed after a related action was resolved can overcome the first-to-file rule’s applicability to an earlier compliant that was filed while a related case was still pending. Id. at 1038, 1040. In April 2017, relators filed a qui tam action against a private equity firm and its subsidiary for allegedly leading a fraudulent enterprise to submit false claims for reimbursement under Medicare. Id. at 1037, 1039. However, in August 2016, approximately six months before the relators filed their complaint, a different group of relators had filed a related action against one of the same parties—the subsidiary—but not against the parent, private equity firm. Id. at 1039. After the August 2016 action settled and became public, the relators for the April 2017 action filed an amended complaint, which focused the allegations solely on the private equity firm that had not been a party in the separate, but related, action brought by the different relators in the August 2016 action. Id. However, the district court dismissed the second amended complaint, finding that though the amended complaint was filed after the August 2016 case was resolved, the first-to-file rule rendered the entire action dismissible because the initial, April 2017 complaint was filed when the August 2016 suit was still pending. Id.
Under de novo review, the Eleventh Circuit affirmed the district court’s dismissal under the first-to-file rule on appeal. Focusing on the key words “bring” and “action” within section 3730(b)(5) (establishing that “no person . . . may intervene to bring a related action based on the facts underlying [a] pending action”), the Court asserted that the first-to-file rule “turns on the moment the Relators initiated legal proceedings.” Id. at 1040 (emphasis in original). The Court accordingly concluded that the plain text of the FCA “tethers” the first-to-file analysis on the “moment a qui tam action is filed.” Id. at 1042.
The Eleventh Circuit also considered a nuance to the public disclosure bar: what test it should apply when determining whether a pending action is “related” to a later-filed qui tam action. Id. Adopting the same approach used by its sister circuits and the district court below, the Court decided to use the “same material elements” test to assess relatedness. Id. Under this test, two actions are deemed to be related if they “rely on the same ‘essential facts.’” Id. (quoting United States ex rel. Wood v. Allergan, Inc., 899 F.3d 163, 169 (2d Cir. 2018)). Applying this test to the facts at hand, the Court found that the relators’ April 2017 action was adequately “related” to the separate relators’ August 2016 action for the purposes of dismissal, explaining that though the April 2017 complaint named an additional defendant not included in the August 2016 action, the suits were related because the first-to-file bar does not “require[] a necessarily defendant-specific approach[,] . . . particularly where the new defendant is a corporate relative or affiliate of the earlier-named defendants.” Id. at 1043.
2. Ninth Circuit Considers What Counts as a Public Disclosure
In a pair of cases, the Ninth Circuit considered what public disclosures can trigger the public disclosure bar.
First, the Ninth Circuit addressed whether materials released by a government agency under FOIA can trigger the public disclosure bar in Roe v. Stanford Health Care, No. 20-55874, 2022 WL 796798 (9th Cir. Mar. 15, 2022). In that case, appellant brought a FCA suit alleging that Stanford Health Care engaged in fraudulent Medicare billing. The Ninth Circuit affirmed the district court’s dismissal of appellant’s claims on the basis of the FCA’s public disclosure bar. Appellant’s claims were barred because the “second amended complaint is almost entirely premised on publicly disclosed Medicare data [appellant] obtained through Freedom of Information Act requests,” and because “[t]he other information [appellant] identifies . . . is either irrelevant or already revealed in the data.” Id., at *1. In so holding, the Ninth Circuit joined the vast majority of courts to consider the issue in holding that FOIA disclosures do trigger the public disclosure bar.
Second, in Mark ex rel. United States v. Shamir USA, Inc., No. 20-56280, 2022 WL 327475 (9th Cir. Feb. 3, 2022), the Ninth Circuit considered whether an eyeglass lens manufacturer’s description of its customer rewards program in public promotional materials triggered the FCA’s public disclosure bar. The qui tam relator in this case alleged that Shamir’s customer rewards program violated the AKS and FCA by exploiting the Government’s practice of reimbursing lenses based on the invoice price. Id. at *1. According to the relator, Shamir persuaded eyecare professionals (ECPs) to prescribe Shamir’s lenses by offering discounts and rebates on lenses and subsequently providing the ECPs with invoices purporting to charge full price so that government insurance programs, “rather than Shamir, pa[id] for the ECP discounts.” Id. The district court granted Shamir’s motion to dismiss the relator’s claim, holding that his allegations were precluded by the FCA’s public disclosure bar because they were “substantially similar” to statements Shamir made about its rewards program in promotional materials. Id. For example, in several industry journals, Shamir encouraged ECPs to participate in its rewards program by stating that “they automatically receive rewards back, making it a win-win for everyone,” and offering to develop “personalized YouTube channels” for ECPs to showcase Shamir-manufactured lenses. Id. at *2. According to the district court, these “publicly disclosed facts” announced that the discounts and rebates ECPs received from Shamir “were not deducted from any insurance reimbursement,” thereby foreclosing the relator’s claim. Id. The Ninth Circuit overruled the district court, holding that application of the public disclosure bar was not warranted because the information in the promotional materials “was so innocuous” that no “transaction or allegation of fraud” was publicly disclosed by Shamir in the first place. Id.
C. Sixth Circuit Finds Inflated Fixed-Price Proposals Sufficient to Satisfy FCA’s Pleading Standard
In United States ex rel. USN4U, LLC v. Wolf Creek Federal Services, Inc., 34 F.4th 507 (6th Cir. 2022), the Sixth Circuit issued a detailed and probing decision that addressed pleading standards for FCA suits. In that case, the relator, USN4U, LLC (USN4U) alleged that Wolf Creek Federal Services, Inc. (Wolf Creek), a federal contractor, “falsely inflated project estimates to the National Aeronautics and Space Administration (NASA) for facilities maintenance projects to be performed by Wolf Creek, resulting in the negotiation of fraudulently induced, exorbitant contract prices,” thereby violating the FCA. Id. at 510.
Wolf Creek provided facilities management maintenance services to the National Aeronautics and Space Administration (NASA) under the terms of an indefinite-delivery indefinite-quantity (IDIQ) contract awarded in 2013 (the NASA Contract). Id. at 510–11. Pursuant to the terms of the NASA Contract, NASA would approve specific projects for Wolf Creek to perform on a firm-fixed price basis. Id. at 511. After Wolf Creek received a work order for the subject task, it was required to submit a proposal for schedule of completion and the total cost of labor and materials, which NASA would evaluate for purposes of negotiating a final firm-fixed price amount. Id. As the Court noted, once the firm-fixed price was established, Wolf Creek’s invoices were required to align with the agreed-upon amount. Id.
Wolf Creek filed a motion to dismiss USN4U’s complaint for failure to state a valid claim, taking the position that “the estimates and project proposals [it submitted] were not ‘claims’ for FCA purposes” and generally contesting the sufficiency of USN4U’s fraud claims more generally. Id. at 512. After USN4U amended its complaint, Wolf Creek filed a second motion to dismiss, “repeating their argument that quotes were not ‘claims’ for purposes of the FCA and further arguing that invoices were not ‘false’ if they matched the quoted amount.” Id. The Court noted that USN4U’s amended complaint included further examples supporting the FCA allegations, including providing a list of employees who admitted to reporting more hours worked than actually completed, as well as “a transcript of a recorded conversation in which several Wolf Creek employees allegedly discussed the fraudulent scheme.” Id.
The district court nevertheless granted Wolf Creek’s second motion to dismiss and denied USN4U’s motion to file a second amended complaint. By the district court’s read, notwithstanding that the work order proposals Wolf Creek submitted to NASA contained quoted prices, the proposals did not constitute “claims” under the FCA, serving only as estimates rather than demands or invoices. Id. at 512–13. Additionally, the district court held that USN4U did not satisfy its burden to plead falsity under the FCA as USN4U’s allegations merely compared the labor costs with industry standards to support its claims of false inflation. Id. at 513. Finally, the district court held that USN4U failed to satisfy its burden to plead fraud in the inducement, citing Wolf Creek’s continued performance under the NASA Contract even after the fraud allegations materialized. Id.
The Sixth Circuit reversed, holding USN4U sufficiently alleged a claim of fraudulent inducement, which is a viable legal theory under the FCA, noting that “FCA liability can be based on a fraudulent premise that caused the United States to enter into a contract,” and finding that USN4U adequately pled its fraudulent inducement claim based on its assertions that “Wolf Creek falsely inflated cost estimates in its work order proposals and thus induced NASA to agree to contracts at that price point.” Id. (internal citation omitted).
Turning next to the elements of an FCA claim, the Court first addressed falsity, finding that reliance on industry standards as the basis for a fraud claim is not presumptively insufficient. See id. at 515. The Court also noted that USN4U provided additional support beyond a comparison with industry standards when it offered evidence of a disparity in billing activity between the employees participating in the scheme and those who did not, an incident where a plumber billed to a project where no plumbing work was required, and a recording transcript in which Wolf Creek employees discussed the practice of using false estimates. Id.
Regarding scienter, the Court found USN4U satisfied the pleading standard through, in addition to the examples discussed herein, USN4U’s submission of a “recorded conversation in which Wolf Creek employees allegedly discussed their knowledge of the falsely inflated cost estimates and labor hours,” noting that an employee stated: “[t]he original estimate that they gave me for hours, they told me they needed about 130 hours of overtime. I upped it like I always do to 164 hrs.” Id. at 516. The employee further stated:
I came back and we started chewing up what you guys had. It was going away so I got nervous and had no intentions of working 40 hrs when I came back. So then I got crazy and started pumping out estimates. And now it[‘]s, if I stay at the rate that I am at right now we will never run out. So the key is to just have it flooded. Inundate the customer with the quotes.
Id. With respect to materiality, the Court found that “Wolf Creek’s falsely inflated estimates could have had the tendency to influence NASA’s contracting decisions,” given that NASA relied on Wolf Creek’s contractual estimate rather than conduct its own research into costs. Id. The Court noted that “[w]hile it is possible, as Wolf Creek suggests, that NASA’s faith in Wolf Creek’s estimates came from its own careful research and consideration of Wolf Cree’s proposals, it is also plausible that NASA trusted and relied exclusively upon Wolf Creek’s estimates, and that NASA ultimately paid Wolf Creek based on its induced belief that the quoted prices were reasonably accurate.” Id. Finally, the Court stated that NASA’s decision to allow Wolf Creek to continue with contract performance after the fraud allegations surfaced was not dispositive or indicative of “actual knowledge” of fraud, and noted that various factors could influence the decision to continue performance, including the desire to avoid prematurely ending a contractual relationship prior to an investigation into the alleged fraud. Id. at 517. The court also noted that the government’s decision not to intervene in a particular case is not considered for purposes of assessing materiality. Id.
Lastly, the Court found that USN4U satisfied the pleading requirements for causation, stating that “NASA asked Wolf Creek for estimates and when it awarded Wolf Creek the contracts, NASA always awarded the contracts for the quoted amount, which could indicate that NASA trusted and relied upon the purported accuracy of Wolf Creek’s estimates when it entered into the contracts at the quoted prices.” Id. at 518. The Court also noted that “NASA plausibly would not have agreed to pay Wolf Creek the quoted amount if NASA knew that it was being grossly overcharged.” Id. The Court accordingly reversed the judgment of the district court and remanded for further proceedings.
D. Falsity
1. Ninth Circuit Holds Disagreement in Clinical Judgment Is Insufficient to Establish Falsity
In Holzner v. DaVita Inc., No. 21-55261, 2022 WL 726929 (9th Cir. Mar. 10, 2022), appellant alleged that DaVita Inc. (appellee) provided medically unnecessary products and services and/or unreasonably expensive medications in violation of the FCA.
The Ninth Circuit affirmed the district court’s dismissal of appellant’s claims on the grounds that appellant had not plausibly alleged a false statement in order to establish FCA liability. Id. at *2. The court explained that the complaint “does not contain sufficient facts . . . to state a plausible claim of false or fraudulent billing related to the appellees’ provision of dialysis treatments” and prescription drugs, because the allegations instead “show no more than a disagreement in clinical judgment,” as “[t]he medical literature on which Holzner relies . . . does not establish new guidelines for practitioners or otherwise compel a change of practice among nephrologists.” Id. at *1. As a result, “Holzner has not raised a plausible inference that the nephrologists’ certifications that these interventions are medically necessary—or appellees’ reliance on those certifications—were false or fraudulent.” Id.
In so holding, the Ninth Circuit joins a growing number of appeals courts to consider these issues in recent years. In United States v. AseraCare, Inc., 938 F.3d 1278 (11th Cir. 2019), the Eleventh Circuit similarly held that clinical disagreement is insufficient to establish falsity because the FCA requires the alleged falsehood to be objectively false. Yet the Third Circuit, in United States ex rel. Druding v. Care Alternatives, 952 F.3d 89 (3d Cir. 2020), and the Sixth Circuit, in United States v. Paulus, 894 F.3d 267 (6th Cir. 2018), have rejected the Eleventh and Ninth Circuits’ conclusion that the FCA requires proof of “objective falsity,” and held instead that a difference of medical opinion can be sufficient to show that a statement is false.
2. District Court Holds That Relator Failed to Satisfy Falsity Element of an FCA Claim Based on Alleged Failure to Comply with State Law
In United States ex rel. Jehl v. GGNSC Southaven LLC, 3:19-CV-091-NBB-JMV, 2022 WL 983644 (N.D. Miss. Mar. 30, 2022), the district court held, inter alia, that the relator failed to satisfy the falsity element of an FCA claim based on the Defendants’ alleged false certification of compliance with state licensure laws. In the complaint, the qui tam relator alleged that the Defendants, who operated a nursing facility in Southaven, Mississippi, violated the FCA by billing Medicare and Medicaid for health care services while certifying that the company complied with Mississippi’s licensure laws for nurses even though its Director of Nursing Services (Director) was not licensed to work as a nurse in the state. Id. at *1. Shortly before she began working for the defendants in Mississippi, the Director obtained a valid multistate nursing license from Virginia based in part on a declaration she submitted averring that Virginia was her primary state of residence (PSOR). Id. at *2. The Virginia multistate license permitted the Director to practice nursing in Mississippi, and the day after the Director began her employment at the Southaven facility, an employee for one of the Defendants confirmed that she held an active Virginia nursing license with a multistate privilege. Id. However, according to the relator, the Director’s multistate license was actually invalid because her claiming of Virginia as her PSOR was false; in fact, the relator continued, the Director’s PSOR was actually Tennessee, as evidenced by her Tennessee driver’s license. Id. The relator argued that because the Director lacked a valid license to practice nursing in Mississippi while employed by the Defendants, their “certifications of compliance with applicable licensure laws in their Medicare and Medicaid reimbursement requests were false within the meaning of the FCA.” Id.
The district court granted the Defendants’ motion for summary judgment, holding that the relator did not possess evidence establishing the FCA’s falsity, knowledge, or materiality elements. Id. at *6. The Centers for Medicare & Medicaid Services’ (CMS) regulations for nursing facilities require such facilities to comply “with all applicable Federal, State, and local laws, regulations, and codes.” 42 C.F.R. § 483.70(b). In CMS’s State Operations Manual, which provides interpretive guidance on CMS’s nursing facility regulations, CMS explains that noncompliance “with Federal, State, and local laws, regulations [and] codes” occurs “only when a final adverse action has been taken by the authority having jurisdiction regarding noncompliance with its applicable laws, regulations, codes and/or standards.” Id. at *4. In this case, undisputed facts showed that during the period when the Director worked at the Southaven facility, neither the Virginia Nursing Board nor any other nursing board had “taken any action, let alone a final adverse action, against [the Director’s] professional license, meaning that under CMS’s clear rules, her nursing license was . . . valid during the entire period of her employment.” Id. at *5. Therefore, as a matter of law, the FCA’s falsity element could not be satisfied because the Defendants’ certifications of compliance with CMS regulations were “demonstrably true and accurate, not false.” Id. at *6. Similarly, the district court concluded that the relator could not satisfy the knowledge element of an FCA claim because the Defendants’ certifications were proper. Id. Further, the district court ruled that the relator could not satisfy the FCA’s materiality element because the CMS regulations that the Defendants allegedly breached, 42 C.F.R. Part 483, contained only “broad certification language” that, under established precedent, cannot support an FCA claim, and the evidence available at summary judgment “show[ed] no linkage between nurse licensure” and government payment of submitted claims. Id.
E. Materiality
1. D.C. Circuit Holds That the FCA’s Materiality Inquiry Focuses on the Potential Effect of False Statement When Made
In United States ex rel. Vermont National Telephone Co. v. Northstar Wireless, LLC, et al., 34 F.4th 29, 31 (D.C. Cir. 2022), Vermont National Telephone Company (Vermont Telephone) alleged that several telecommunications companies, including Northstar, SNR, DISH, and affiliated companies (collectively, Defendants), violated the FCA and defrauded the U.S. government of $3.3 billion by manipulating Federal Communications Commission (FCC) rules and falsely certifying their eligibility for discounts on spectrum licenses. The district court dismissed Vermont Telephone’s qui tam suit, relying on the FCA’s “government-action bar” and the FCA’s “demanding materiality standard.” Id. The D.C. Circuit reversed on both grounds.
To apportion licenses allowing companies to use portions of the electromagnetic spectrum to provide television, cell phone, and wireless internet service, the FCC holds auctions that involve a two-step license application process. Id. at 31. The FCC officers allocate “bidding credits” (discounts to cover part of the cost of licenses won at auction) to very small businesses, those with less than $15 million in revenue. Id. at 31, 32. As part of the application process, companies must provide information concerning their eligibility to bid in the auction and certify their eligibility for bidding credits. Id. at 32.
Vermont Telephone alleged that Defendants failed to disclose resale agreements with DISH, which would have increased their attributable revenues beyond the allowable cap for the very small business credits. Id. at 36. Defendants argued that the alleged undisclosed agreements would not have changed the FCC’s ultimate decision to deny bidding credits because the FCC found the Defendants ineligible for the discounts even without disclosure of any resale agreements. Id. at 37.
The D.C. Circuit rejected Defendants’ argument to focus on the “ultimate decision.” Id. Instead, the Court’s materiality analysis focused on the “potential effect of the false statement when it is made,” not on “the false statement’s actual effect after it is discovered.” Id. (internal citation omitted). The Court held that Defendants’ failure to disclose agreements central to their eligibility for discounts was certainly “capable of influencing” the FCC’s eligibility determination and, thus, Vermont Telephone plausibly pleaded materiality. Id. at 36–38. This appears to conflict with language from Escobar that if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated then “that is very strong evidence” of the immateriality of those requirements. Universal Health Servs., Inc. ex rel. Escobar v. United States, 579 U.S. 176, 195 (2016).
2. Ninth Circuit Enforces False Certification and Materiality Pleading Requirements
In McElligott v. McKesson Corp., No. 21-15477, 2022 WL 728903, at *1 (9th Cir. Mar. 10, 2022), appellant relators alleged that McKesson “knowingly present[ed], or cause[d] to be presented, a false or fraudulent claim for payment or approval” by making false certifications in violation of the FCA. The Ninth Circuit affirmed the district court’s dismissal of relators’ claims without leave to amend because the complaint failed to plead a claim for express false certification, as there were no allegations that “defendant submitted a claim for payment to the government in which it expressly certified that it had complied with a specific law or provision of the contract with which it knew it had not complied.” Id.
Nor did the relators sufficiently allege that Defendant made implied false certifications. “[T]he second amended complaint does not allege that, in its claims for payment, McKesson made specific representations about the medical supplies it provided that were rendered misleading half-truths by its failure to disclose noncompliance with material statutory, regulatory, or contractual requirements.” Id. Instead, “[a]s far as the complaint reveals, McKesson represented nothing more in its claims for payment than that it delivered certain medical supplies on certain dates,” and “[t]he complaint does not allege that those representations were false.” Id.
The Court also ruled that the relators failed to allege materiality, as “nothing in the complaint gives rise to a reasonable inference that the security of McKesson’s supply chain was material to the government’s decision to pay for medical supplies that McKesson actually delivered.” Id. at *2.
F. Scienter
1. Fourth Circuit Struggles in Determining When a Defendant’s Alleged Mistakes of Law Can Establish Scienter
In two recent cases, Fourth Circuit panels divided as to whether a defendant’s alleged misinterpretation of a complex regulation could establish scienter under the FCA.
In the first case, United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340 (4th Cir. 2022), Judge Wilkinson, joined by Judge Richardson, affirmed the district court’s dismissal of an FDCA case and imported the scienter standard from the Supreme Court’s Fair Credit Reporting Act decision in Safeco Ins. Co. of America v. Burr, 551 U.S. 57 (2007), into the FCA context. Safeco “set forth a two-step analysis” in determining whether a defendant has acted in reckless disregard of the law. Sheldon, 24 F.4th at 347. First, a court asks “whether defendant’s interpretation was objectively reasonable.” Id. The second step is “determining whether authoritative guidance might have warned defendant away from that reading.” Id. This test is appropriate in FCA cases, reasoned the majority, because the “FCA defines ‘knowingly’ as including actual knowledge, deliberate ignorance, and reckless disregard. . . . [and] Safeco interpreted ‘willfully’ to include both knowledge and recklessness.” Id. at 348.
The court then applied Safeco to the facts. This case concerned the Medicaid Drug Rebate Statute, which requires “manufacturers seeking to have their drugs covered by Medicaid [to] enter into Rebate Agreements with the Secretary of Health and Human Services and provide quarterly rebates to states on Medicaid sales of covered drugs. . . . For covered drugs, the rebate amount is the greater of two numbers: (1) the statutory minimum rebate percentage, or (2) the difference between the Average Manufacturer Price and the Best Price,” the latter of which is essentially “the lowest price available from the manufacture.” Id. at 345.
Plaintiff employee filed a qui tam suit against Forest Laboratories, LLC under the FCA, alleging that Forest gave discounts to customers but failed to account for these discounts in calculating Best Price, resulting in false reports to the government. Id. at 343–44. Forest argued that it correctly, or at least reasonably, interpreted the meaning of “Best Price” and therefore did not knowingly defraud the government.
The majority agreed. Pursuant to the Safeco standard, “[u]nder the FCA, a defendant cannot act ‘knowingly’ if it bases its actions on an objectively reasonable interpretation of the relevant statute when it has not been warned away from that interpretation by authoritative guidance. This objective standard precludes inquiry into a defendant’s subjective intent.” Id. at 348. Forest did not “act knowingly under the FCA” because “Forest’s reading of the Rebate Statute was at the very least objectively reasonable and because it was not warned away from that reading by authoritative guidance.” Id. at 343–44, 347.
Judge Wynn dissented. He accused the majority of “effectively neuter[ing] the False Claims Act . . . by eliminating … two of its three scienter standards (actual knowledge and deliberate ignorance) and replacing the remaining standard with a test (objective recklessness) that only the dimmest of fraudsters could fail to take advantage of.” Id. at 357 (Wynn, J., dissenting). Judge Wynn would not have “imported” Safeco into the FCA, a “vastly different statutory context.” Id. at 361. The Fourth Circuit subsequently granted rehearing en banc, 2022 WL 1467710, but did not vacate the panel opinion.
The second case, United States ex rel. Gugenheim v. Meridian Senior Living, LLC, 36 F.4th 173 (4th Cir. 2022), concerned reimbursement for “personal care services,” including assisting with activities such as eating, dressing, and bathing, that are provided to elderly or disabled adults under North Carolina’s Medicaid program. The program authorizes a certain number of daily “personal care services” for elderly or disabled patients based on a patient’s personal needs. Id. at 175–76. Defendant adult-care homes billed for the authorized hours of personal care services rather than the actual amount of services provided. Id. at 177–78.
Plaintiff attorney filed a qui tam suit against the nursing homes under the FCA, alleging that the homes’ billing schemes violated the rules of the state Medicaid program. The district court granted summary judgment to the home, holding that the plaintiff failed to show that the home’s claims “were materially false or made with the requisite scienter.” Id. at 178.
A divided panel of the Fourth Circuit affirmed. At issue was whether the defendants knowingly submitted false claims to Medicaid. Judge Rushing, joined by Judge Wilkinson, concluded that the defendants did not. Id. at 175. They emphasized that state regulations defining billing for personal care services were unclear and that the defendants plausibly interpreted the regulations as allowing their billing practices. They then held that courts cannot infer scienter when defendants reasonably interpret ambiguous regulations:
We need not determine whether Defendants’ interpretation of [state regulations] is correct. The policy and related guidance from NC Medicaid are sufficiently ambiguous to foreclose the possibility of proving scienter based solely on the clarity of the regulation. We cannot infer scienter from an alleged regulatory violation itself, and we especially will not do so where there is regulatory ambiguity as to whether Defendants’ conduct even violated the policy.
Id. at 181 (quotation marks removed). The court then rejected plaintiff’s alternate argument that the home should “have sought more guidance about an ambiguous regulation” because there was no evidence that the home “knew, or even suspected, that [its] interpretation of [the regulation] was incorrect.” Id. Plaintiff failed to submit “any evidence that Defendants knew, or even suspected, that their interpretation of [the regulation] and the related guidance from NC Medicaid was incorrect (indeed, it may be right).” Id.
Senior Judge Traxler dissented and would have allowed the case to proceed to trial. The plaintiff submitted plausible evidence of overbilling and “that Defendants did next to nothing to educate themselves” about the regulation. Id. at 183 (Traxler, J., dissenting). Thus, “a reasonable jury could find that Defendants failed to make a reasonable and prudent inquiry into how [the regulation] affected their billing method and, instead, buried their heads in the sand to maximize their billings.” Id. at 190.
2. Fifth Circuit Reiterates Need to Allege Scienter
In United States ex rel. Jacobs v. Walgreen Company, 2022 WL 613160 (5th Cir. March 2, 2022), plaintiff pharmacist filed a qui tam suit against her employer Walgreens under the FCA, alleging that Walgreens submitted false claims for reimbursement to Medicare and Medicaid. The district court dismissed the case for failure to plead fraud with particularity. The Fifth Circuit affirmed in a short opinion.
The court began by describing the pleading requirements of the Act. A plaintiff must plead: “(1) a false statement or fraudulent course of conduct; (2) that was made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money (i.e., that involved a claim).” Id. at *1. But the plaintiff did not “plead[] facts supporting an inference that the allegedly fraudulent conduct amounted to anything more than innocent mistake or neglect.” Id. The complaint accordingly failed to state a claim because the FCA does not confer liability “for innocent mistakes or neglect.” Id. Indeed, the allegation that “Walgreens failed to correct certain billing mistakes once it discovered them” was an impermissibly “conclusory allegation[] that [did] not provide specifics as to the ‘who, what, when, where, and how of the alleged fraud.’” Id.
3. Seventh Circuit Reaffirms Objective Scienter Standard
In United States ex rel. Proctor v. Safeway, Inc., the relator alleged that between 2006 and 2015, Safeway knowingly submitted false claims to government health programs when it reported its “retail” price for certain drugs as its “usual and customary” price, even though many customers paid much less than the retail price due to discount programs. 30 F.4th 649, 652–54 (7th Cir. 2022). The allegations were almost identical to the allegations in United States ex rel. Schutte v. SuperValu, Inc., 9 F.4th 455 (7th Cir. 2021), which we covered in our 2021 Year End False Claims Act Update.
The Seventh Circuit decided SuperValu while Safeway was pending. Safeway, 30 F.4th at 657. In SuperValu, the Seventh Circuit held that the Supreme Court’s decision in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007) applied to the FCA’s scienter provision, meaning that a defendant does not act with “reckless disregard” as long as (1) its interpretation of the relevant statute or regulation is “objectively reasonable” and (2) no “authoritative guidance” warned it away from that interpretation. Id.
The court reached the same conclusion in Safeway, and further explained when guidance is “authoritative.” Id. at 660. In order for guidance to be “authoritative,” it must “come from a source with authority to interpret the relevant text.” Id. In addition to the source, the Seventh Circuit also considers whether that guidance was sufficiently specific to put a defendant on notice that its conduct is unlawful. Id. Accordingly, the court held that a single footnote in a lengthy manual that can be revised at any time is not authoritative guidance. Id. at 663
G. Sixth Circuit Holds that the Limitations Period for FCA Claims Begins to Run When Retaliation Occurs, Not When Relator Receives Notice
The Sixth Circuit recently reaffirmed that there is “no notice requirement” in the FCA statute of limitations for retaliation claims. El-Khalil v. Oakwood Healthcare, Inc., 23 F.4th 633 (6th Cir. 2022). The statute sets forth a three-year limitations period that begins to run when “the retaliation occurred.” Id. at 635 (quoting 31 U.S.C. § 3730(h)). The Court noted this conclusion is “hardly groundbreaking,” it merely codifies the “standard rule” that the “limitation period begins when the plaintiff ‘can file suit and obtain relief.’” Id. The El-Khalil Court did note, however, that equitable doctrines may toll the limitations period if an employer purposely delays its provision of notice in order to let the limitations period run and deprive the relator of a fair opportunity to bring suit. Id. at 636.
IV. CONCLUSION
We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2022 False Claims Act Year-End Update, which we will publish in January 2023.
____________________________
[1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Northern Virginia Company Settles False Claims Act Allegations of Improper Paycheck Protection Program Loan (Feb. 11, 2022), https://www.justice.gov/opa/pr/northern-virginia-company-settles-false-claims-act-allegations-improper-paycheck-protection.
[2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Physician Partners of America to Pay $24.5 Million to Settle Allegations of Unnecessary Testing, Improper Remuneration to Physicians and a False Statement in Connection with COVID-19 Relief Funds (April 12, 2022), https://www.justice.gov/opa/pr/physician-partners-america-pay-245-million-settle-allegations-unnecessary-testing-improper.
[3] See Press Release, U.S. Atty’s Office for the Eastern Dist. of NY, Contractor Pays $930,000 to Settle False Claims Act Allegations Relating to Medical Services Contracts at State Department and Air Force Facilities in Iraq and Afghanistan (March 8, 2022), https://www.justice.gov/usao-edny/pr/contractor-pays-930000-settle-false-claims-act-allegations-relating-medical-services.
[4] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, UC San Diego Health Pays $2.98 Million to Resolve Allegations of Ordering Unnecessary Genetic Testing (Jan. 11, 2022), https://www.justice.gov/opa/pr/uc-san-diego-health-pays-298-million-resolve-allegations-ordering-unnecessary-genetic-testing.
[5] See Press Release, U.S. Atty’s Office for the Southern Dist. of FL, Diabetic Shoe Company Agrees to Pay $5.5 Million to Resolve False Claims Act Allegations Regarding “Custom” Shoe Inserts (Jan. 12, 2022), https://www.justice.gov/usao-sdfl/pr/diabetic-shoe-company-agrees-pay-55-million-resolve-false-claims-act-allegations.
[6] See Press Release, U.S. Atty’s Office for the Dist. of MA, Cardinal Health Agrees to Pay More than $13 Million to Resolve Allegations that it Paid Kickbacks to Physicians (Jan. 31, 2022), https://www.justice.gov/usao-ma/pr/cardinal-health-agrees-pay-more-13-million-resolve-allegations-it-paid-kickbacks.
[7] See Press Release, U.S. Atty’s Office for the Dist. of NH, Catholic Medical Center Agrees to Pay $3.8 Million to Resolve Kickback-Related False Claims Act Allegations (Feb. 9, 2022), https://www.justice.gov/usao-nh/pr/catholic-medical-center-agrees-pay-38-million-resolve-kickback-related-false-claims-act.
[8] See Press Release, U.S. Atty’s Office for the Southern Dist. of OH, 3 Central Ohio health providers to pay more than $3 million for improper claims submitted to Medicare and Ohio Bureau of Workers’ Compensation (Feb. 15, 2022), https://www.justice.gov/usao-sdoh/pr/3-central-ohio-health-providers-pay-more-3-million-improper-claims-submitted-medicare-0.
[9] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Mallinckrodt Agrees to Pay $260 Million to Settle Lawsuits Alleging Underpayments of Medicaid Drug Rebates and Payment of Illegal Kickbacks (Mar. 7, 2022), https://www.justice.gov/opa/pr/mallinckrodt-agrees-pay-260-million-settle-lawsuits-alleging-underpayments-medicaid-drug.
[10] See Press Release, U.S. Atty’s Office for the Eastern Dist. of PA, Philadelphia Psychiatrist to Pay $3 Million to Resolve Allegations of False Workers’ Compensation Claims (Mar. 28, 2022), https://www.justice.gov/usao-edpa/pr/philadelphia-psychiatrist-pay-3-million-resolve-allegations-false-workers-compensation.
[11] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Florida’s BayCare Health System and Hospital Affiliates Agree to Pay $20 Million to Settle False Claims Act Allegations Relating to Impermissible Medicaid Donations (Apr. 6, 2022), https://www.justice.gov/opa/pr/florida-s-baycare-health-system-and-hospital-affiliates-agree-pay-20-million-settle-false.
[12] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Physician Partners of America to Pay $24.5 Million to Settle Allegations of Unnecessary Testing, Improper Remuneration to Physicians and a False Statement in Connection with COVID-19 Relief Funds (Apr. 12, 2022), https://www.justice.gov/opa/pr/physician-partners-america-pay-245-million-settle-allegations-unnecessary-testing-improper.
[13] See Press Release, U.S. Atty’s Office for the Northern Dist. of GA, Paul D. Weir, John R. Morgan, M.D., Care Plus Management, LLC, and Anesthesia Entities pay $7.2 million to Resolve Kickback and False Claims Act Allegations (Apr. 13, 2022), https://www.justice.gov/usao-ndga/pr/paul-d-weir-john-r-morgan-md-care-plus-management-llc-and-anesthesia-entities-pay-72.
[14] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Hearing Aid Company Eargo Inc. Agrees to Pay $34.37 Million to Settle Common Law and False Claims Act Allegations for Unsupported Diagnosis Codes (Apr. 29, 2022), https://www.justice.gov/opa/pr/hearing-aid-company-eargo-inc-agrees-pay-3437-million-settle-common-law-and-false-claims-act.
[15] See Press Release, U.S. Atty’s Office for the Southern Dist. of FL, Home Health Company Operating in Florida Pays $2.1 Million to Resolve False Claims Allegations (May 9, 2022), https://www.justice.gov/usao-sdfl/pr/home-health-company-operating-florida-pays-21-million-resolve-false-claims-allegations.
[16] See Press Release, U.S. Atty’s Office for the Western Dist. of NC, Healthkeeperz, Inc. To Pay $2.1 Million To Resolve False Claims Act Allegations (June 1, 2022), https://www.justice.gov/usao-wdnc/pr/healthkeeperz-inc-pay-21-million-resolve-false-claims-act-allegations.
[17] See Press Release, U.S. Atty’s Office for the Eastern Dist. of NY, Caris Life Sciences Pays over $2.8 Million to Settle False Claims Act Allegations from Delay in Submission of Genetic Cancer Screening Tests (June 1, 2022), https://www.justice.gov/usao-edny/pr/caris-life-sciences-pays-over-28-million-settle-false-claims-act-allegations-delay.
[18] See Press Release, U.S. Atty’s Office for the Northern Dist. of IL, Suburban Chicago Home Sleep Testing Company To Pay $3.5 Million To Settle Federal Health Care Fraud Suit (June 6, 2022), https://www.justice.gov/usao-ndil/pr/suburban-chicago-home-sleep-testing-company-pay-35-million-settle-federal-health-care#:~:text=CHICAGO%20%E2%80%94%20A%20suburban%20Chicago%20diagnostics,and%20unnecessary%20home%20sleep%20testing.
[19] See Press Release, Los Angeles Doctor to Pay $9.5 Million to Resolve Allegations of Fraud Against Medicare and Medi-Cal (June 10, 2022), https://www.justice.gov/usao-edca/pr/los-angeles-doctor-pay-95-million-resolve-allegations-fraud-against-medicare-and-medi.
[20] See Press Release, U.S. Atty’s Office for the Dist. of MA, Molina Healthcare Agrees to Pay Over $4.5 Million to Resolve Allegations of False Claims Act Violations (June 21, 2022), https://www.justice.gov/usao-ma/pr/molina-healthcare-agrees-pay-over-45-million-resolve-allegations-false-claims-act#:~:text=Molina%20Healthcare%20Agrees%20to%20Pay,Department%20of%20Justice.
[21] See Press Release, U.S. Atty’s Office for the Northern Dist. of NY, Government Contractor Agrees to Pay Record $48.5 Million to Resolve Claims Related to Fraudulent Procurement of Small Business Contracts Intended for Service-Disabled Veterans (Feb. 23, 2022), https://www.justice.gov/usao-ndny/pr/government-contractor-agrees-pay-record-485-million-resolve-claims-related-fraudulent.
[22] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, MOX Services Agrees to Pay $10 Million to Resolve Allegations of Knowingly Presenting False Claims to Department of Energy for Non-Existent Construction Materials (Mar. 7, 2022), https://www.justice.gov/opa/pr/mox-services-agrees-pay-10-million-resolve-allegations-knowingly-presenting-false-claims.
[23] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Freight Carriers Agree to Pay $6.85 Million to Resolve Allegations of Knowingly Presenting False Claims to the Department of Defense (Mar. 14, 2022), https://www.justice.gov/opa/pr/freight-carriers-agree-pay-685-million-resolve-allegations-knowingly-presenting-false-claims.
[24] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, UPS to Pay $5.3 Million to Settle False Claims Act Allegations for Falsely Reporting Delivery Times of U.S. Mail Carried Internationally (Mar. 21, 2022), https://www.justice.gov/opa/pr/ups-pay-53-million-settle-false-claims-act-allegations-falsely-reporting-delivery-times-us-0.
[25] See Press Release, U.S. Atty’s Office for the Northern Dist. of NY, Construction Company Agrees to Pay $2.8 Million to Resolve Allegations of Small Business Subcontracting Fraud (May 12, 2022), https://www.justice.gov/usao-ndny/pr/construction-company-agrees-pay-28-million-resolve-allegations-small-business.
[26] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, Seven South Korean Companies Agree to Pay Approximately $3.1 Million to Settle Civil False Claims Act Allegations for Bid Rigging on U.S. Department of Defense Contracts (May 18, 2022), https://www.justice.gov/opa/pr/seven-south-korean-companies-agree-pay-approximately-31-million-settle-civil-false-claims-act.
[27] See Press Release, U.S. Atty’s Office for the Dist. of WV, United States Attorney Chris Kavanaugh Announces $3,000,000 Settlement in False Claims Act Case Against HEYtex USA (May 25, 2022), https://www.justice.gov/usao-wdva/pr/united-states-attorney-chris-kavanaugh-announces-3000000-settlement-false-claims-act.
[28] See Press Release, U.S. Atty’s Office for the Dist. of CT, Connecticut Companies Pay $5.2 Million to Resolve Allegations of False Claims Act Violations Concerning Fraudulently Obtained Small Business Contracts (June 2, 2022), https://www.justice.gov/usao-ct/pr/connecticut-companies-pay-52-million-resolve-allegations-false-claims-act-violations.
[29] See Press Release, Office of Public Affairs, U.S. Dep’t of Justice, KBR Defendants Agree to Settle Kickback and False Claims Allegations (June 14, 2022), https://www.justice.gov/opa/pr/kbr-defendants-agree-settle-kickback-and-false-claims-allegations.
[30] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Loan Servicer Agrees to Pay Nearly $8 Million to Resolve Alleged False Claims in Connection with Federal Education Loans (Jan. 14, 2022), https://www.justice.gov/opa/pr/loan-servicer-agrees-pay-nearly-8-million-resolve-alleged-false-claims-connection-federal.
[31] See Press Release, U.S. Atty’s Office for the Middle Dist. of FL, TracFone Wireless to Pay $13.4 Million to Settle False Claims Relating to FCC’s Lifeline Program (Apr. 4, 2022), https://www.justice.gov/usao-mdfl/pr/tracfone-wireless-pay-134-million-settle-false-claims-relating-fcc-s-lifeline-program.
[32] See Press Release, U.S. Atty’s Office for the Dist. of CT, School and Owner Pay Over $1 Million to Resolve Allegations of Attempts to Improperly Influence the School’s Student Loan Default Rate (May 27, 2022), https://www.justice.gov/usao-ct/pr/school-and-owner-pay-over-1-million-resolve-allegations-attempts-improperly-influence.
[33] Brief for Amicus Curiae Senator Charles E. Grassley In Support of Petitioners, United States ex rel. Tracy Schutte, et al. v. Supervalu Inc., et al., https://www.supremecourt.gov/DocketPDF/21/21-1326/225832/20220519154806836_21-1326%20Amicus%20Brief.pdf.
[34] Colorado False Claims Act, House Bill 22-1119, https://leg.colorado.gov/sites/default/files/2022a_1119_signed.pdf.
[35] Id.
[36] Id.
[37] Id. at § 24-31-1204(1)(b).
[38] Id.
[39] Id.
[40] Id.
[41] https://www.cga.ct.gov/2022/TOB/S/PDF/2022SB-00426-R02-SB.PDF; http://www.legislature.mi.gov/documents/2021-2022/billintroduced/House/htm/2022-HIB-6032.htm.
[42] See N.Y. State Fin. L. § 189(1)(g), (4)(a); https://legislation.nysenate.gov/pdf/bills/2021/S8815.
[43] See https://oig.hhs.gov/fraud/state-false-claims-act-reviews/; 42 U.S.C. § 1396h(a).
[44] Id.
[45] Id.
[46] Id.
[47] Compare http://www.legislature.mi.gov/documents/2021-2022/billintroduced/House/htm/2022-HIB-6032.htm with 31 U.S.C. § 3730(d)(1).
[48] See John Elwood, Dismissing False Claims Act cases, promoting prescription fentanyl, and a capital case, SCOTUSBLOG (June 7, 2022, 8:25 PM), https://www.scotusblog.com/2022/06/dismissing-false-claims-act-cases-promoting-prescription-fentanyl-and-a-capital-case/.
The following Gibson Dunn lawyers assisted in the preparation of this alert: Jonathan M. Phillips, Winston Y. Chan, John D.W. Partridge, James L. Zelenay Jr., Reid Rector, Chelsea B. Knudson, Allison Chapin, Michael R. Dziuban, Tessa Gellerson, Ben Gibson, Katie King, Nick Perry, Becca Smith, Chumma Tum, Mike M. Ulmer, Tim Velenchuk, Blair Watler, and Josh Zuckerman.
Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s False Claims Act/Qui Tam Defense Group:
Washington, D.C.
Jonathan M. Phillips – Co-Chair, False Claims Act/Qui Tam Defense Group (+1 202-887-3546, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])
Joseph D. West (+1 202-955-8658, [email protected])
Robert K. Hur (+1 202-887-3674, [email protected])
Geoffrey M. Sigler (+1 202-887-3752, [email protected])
Lindsay M. Paulin (+1 202-887-3701, [email protected])
San Francisco
Winston Y. Chan – Co-Chair, False Claims Act/Qui Tam Defense Group (+1 415-393-8362, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
New York
Reed Brodsky (+1 212-351-5334, [email protected])
Mylan Denerstein (+1 212-351-3850, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Brendan Stewart (+1 212-351-6393, [email protected])
Casey Kyung-Se Lee (+1 212-351-2419, [email protected])
Denver
John D.W. Partridge (+1 303-298-5931, [email protected])
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Reid Rector (+1 303-298-5923, [email protected])
Dallas
Robert C. Walters (+1 214-698-3114, [email protected])
Andrew LeGrand (+1 214-698-3405, [email protected])
Los Angeles
Nicola T. Hanna (+1 213-229-7269, [email protected])
Timothy J. Hatch (+1 213-229-7368, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
James L. Zelenay Jr. (+1 213-229-7449, [email protected])
Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q2 2022. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:
- Halting Movement in U.K. Toward New Audit Regime but the U.K. Financial Reporting Counsel Remains Active
- Challenges to SEC (and Other?) Administrative Proceedings Progress
- Commenters Weigh in on SEC’s Climate Change Proposal
- ENABLERS Act Gets Fast-Tracked in the House
- U.S., U.K., and EU Sanctions Prohibit Accounting Services to Russia
- Supreme Court Upholds Arbitrability of Individual PAGA Claims
- Germany Proposes Whistleblower Law and Permits Hague Convention Pre-Trial Discovery
- Other Recent SEC and PCAOB Regulatory Developments
Accounting Firm Advisory and Defense Group:
James J. Farrell – Co-Chair, New York (+1 212-351-5326, [email protected])
Ron Hauben – Co-Chair, New York (+1 212-351-6293, [email protected])
Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])
Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In a highly anticipated judgment, the EU’s General Court has confirmed that on the basis of a referral request from a national EEA competition authority, the European Commission can review deals that do not trigger EU merger control thresholds or the merger control thresholds of any EEA Member State. The Court found that the Commission was justified to take jurisdiction over Illumina’s acquisition of Grail following a number of such referral requests. The judgment is a vindication of the Commission’s approach and whilst it brings clarity on this key jurisdictional principle, it will lead to greater uncertainty for merging parties.
The controversy
There is an ongoing global debate about whether deals that risk harming competition fly under competition authorities’ radars because they do not meet the relevant merger notification thresholds. In Europe, Article 22 of the EU Merger Regulation allows national competition authorities from the European Economic Area (EEA) to request the European Commission to examine deals that do not meet the automatic EU turnover thresholds. The Commission previously discouraged such referral requests when the relevant national merger notification thresholds were not met. However, because of a perceived “enforcement gap”, particularly in the digital and pharma sectors and particularly in relation to acquisitions by incumbents of nascent competitors who may have low or even no turnover in Europe, the Commission adopted guidance in March 2021 which changed this approach. Under this guidance, the Commission now encourages referral requests from national competition authorities where deals do not meet the relevant national thresholds but where a merger may harm competition in the EU internal market.
The Commission’s wide jurisdiction upheld
This principle has not been universally accepted and has been challenged in the proposed recent, and high profile, Illumina-Grail transaction. Illumina is a US-based genomics company and Grail is a US-based healthcare company which develops cancer detection tests based on next generation sequencing systems. Illumina’s proposed takeover of Grail was not notifiable at EU level nor in any EEA Member State.
On 19 April 2021, the Commission accepted a referral request from France, which was later joined by requests from Belgium, France, Greece, Iceland, the Netherlands and Norway, to examine the deal. Illumina appealed the Commission’s ability to take jurisdiction to the EU General Court on the basis that the transaction was not notifiable under the merger control laws of any EEA Member State.
In a judgment of 13 July 2022, the General Court upheld the Commission’s approach – this is a significant victory for the Commission with implications for companies considering global deals.
The details of the General Court judgment
First ground of appeal: jurisdiction
The main ground of Illumina’s appeal was that the Commission had no right to take jurisdiction on the basis of the different national referral requests since the relevant merger control thresholds were not triggered in any EEA Member State. The judgment contains an extensive analysis based on “literal, historical, contextual and teleological interpretations of Article 22”, and concludes that Article 22 does give the Commission the right to take jurisdiction in such circumstances.
The Court’s starting point is the language of Article 22 itself, which refers to the possibility for Member States to refer “any concentration” to the Commission which does not meet the automatic EU turnover thresholds, and which affects trade between Member States and threatens to significantly affect competition within the Member State(s) making the request. This is irrespective of the nature of national merger control rules or even their existence. In this regard, the Court also points to Article 22 referring to the fact that a Member State can make the request within 15 working days of the deal being notified or “otherwise being made known” to it – this demonstrates that the provision does not relate solely to deals which are notifiable at Member State level. This logic is further supported by the fact that the initial referral request can subsequently be joined by any Member State, again irrespective of whether the deal is notifiable in its jurisdiction.
The Court also provides a historical rationale, highlighting that one reason for the inclusion of Article 22 in the EU Merger Regulation was to allow Member States which did not have merger control law at the time (such as the Netherlands) to refer deals which may harm competition to be examined by the Commission, but without limiting it to that scenario or one where national merger control thresholds are met. Indeed, the Court stresses that whilst the primary mechanism for the Commission to examine deals is through the relevant EU-related turnover thresholds, Article 22 was designed as a supplementary mechanism to allow the Commission to examine deals which may harm competition but which do not meet those automatic thresholds.
Second ground of appeal: timing
The Court also looked at whether the Commission had acted in accordance with the timing provisions of Article 22. The core question was whether the relevant referral requests had occurred within the Article 22 time limits – these relate to when the respective Member States were “made known” of the deal. Illumina had argued that this date was significantly earlier than 19 February 2021, which was when the Commission invited the Member States to consider making an Article 22 referral request, inter alia because the deal had been publicly announced on 21 September 2020.
The Court did not accept this argumentation. It rather found that the “making known” was the “active transmission” to Member States of information allowing them to make an assessment of whether to make a referral request, and that in this case, that was the invitation letter from the Commission of 19 February 2021. Accordingly, all the referral requests were in time. The Court held that for reasons of legal certainty, the moment of “making known” has to be an objective point in time rather than a subjective criterion such as the public announcement of a deal which would require competition authorities to constantly review such announcements.
The Court did fault the Commission for not sending the invitation letter to Member States in a reasonable time (47 working days from when there was a complaint about the deal, with the Court suggesting that it could have been within 25 working days to mirror the phase one assessment period). However, this was held to not infringe Illumina’s rights of defence since that letter was only a preparatory act not affecting its legal situation, and it had had an opportunity to comment on the referral requests before the Article 22 Decision via which the Commission took jurisdiction.
Third ground of appeal: legitimate expectations
Illumina also argued that the change in the Commission’s Article 22 guidance violated its legitimate expectations – this argument was also dismissed by the Court. In line with existing case-law, the Court held that Illumina had failed to demonstrate that it had obtained specific, precise and actionable assurances from the Commission in relation to either the merger at issue or in relation to mergers that did not fall within the scope of national merger control rules in general. It therefore held that Illumina could not rely on the reorientation of the Commission’s decision-making practice (also noting in this regard that the Commission had previously discouraged rather than precluded notifications under Article 22 where national merger thresholds were not met).
The future
Illumina has already announced that it will appeal today’s judgment to the EU’s highest court, the European Court of Justice. Such an appeal will take at least 18 months but is not suspensory.
Today’s judgment is therefore a comprehensive vindication of the Commission’s approach and will embolden it to invite referrals from Member States where it considers that a deal that would otherwise not be notifiable in the EEA may harm competition. A sense of perspective is important – this does not mean open season for all deals because it is only deals that affect trade between EEA Member States and that threaten to significantly affect competition that can be referred, and the Court itself stressed these limitations. Nevertheless, it is clear that the judgment will lead to greater uncertainty for merging parties because if the argument can plausibly be made that a deal raises a potential competition issue, the Commission may end up examining it even if it is not otherwise notifiable anywhere in the EEA.
There are limits to how much this can be managed in advance. We nevertheless recommend that for such deals, companies and their advisors map out sufficiently in advance credible arguments why their deal will not harm competition and that where it is clear that there is a possibility of a referral request, they engage quickly with both the Commission and the relevant national competition authorities.
The following Gibson Dunn lawyers prepared this client alert: Nicholas Banasevic, Rachel Brass, Ali Nikpay, Christian Riis-Madsen, Stephen Weissman, Attila Borsos, and Mairi McMartin.
Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Antitrust and Competition practice group:
Antitrust and Competition Group:
Nicholas Banasevic* – Managing Director, Brussels (+32 2 554 72 40, [email protected])
Attila Borsos – Partner, Brussels (+32 2 554 72 10, [email protected])
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, [email protected])
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, [email protected])
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, [email protected])
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, [email protected])
* Nicholas Banasevic is Managing Director in the firm’s Brussels office and an economist by background. He is not an attorney and is not admitted to practice law.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This client alert provides an overview of shareholder proposals submitted to public companies during the 2022 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.
I. Summary of Top Shareholder Proposal Takeaways from the 2022 Proxy Season
In November 2021, the Staff issued Staff Legal Bulletin No. 14L (Nov. 3, 2021) (“SLB 14L”). In SLB 14L, the Staff rescinded Staff guidance and reversed no-action decisions published during the tenure of former Division Director Bill Hinman, upending the Staff’s recent approach to the application of the economic relevance exclusion in Rule 14a-8(i)(5) and the ordinary business and micromanagement exclusions in Rule 14a-8(i)(7). Moreover, SLB 14L indicated that the Staff would take a more expansive view to whether proposals raised significant policy issues that transcended ordinary business and would be more lenient in interpreting proof of ownership letters. The change of administration at the SEC and the issuance of SLB 14L appear to have served as an open season call for shareholder proponents: the number of proposals submitted surged, the percentage of proposals that shareholders were willing to withdraw as a result of negotiations dropped, and the number of proposals excluded through the no-action process plummeted. At the same time, recent amendments to Rule 14a-8 had only a very minor impact on shareholder submissions. As a result, shareholders were presented with more proposals on a wider range of topics with which they disagreed, with overall levels of voting support dropping notably. We discuss these trends and developments in further detail below:
- Shareholder proposal submissions rose again. For the second year in a row, the number of proposals submitted increased. In 2022, the number of proposals increased by 8% from 2021 to 868—the highest number of shareholder proposal submissions since 2016.
- The number of environmental and civic engagement proposals significantly increased, along with a continued increase in social proposals. Environmental and civic engagement proposals increased notably, up 51% and 36%, respectively, from 2021. And social proposals continued to increase, up 20% since 2021 and constituting the largest category of proposals submitted in 2022. In contrast, governance proposals declined 14% and executive compensation proposals declined 27%, each from the number of such proposals submitted in 2021. The five most popular proposal topics in 2022, representing 49% of all shareholder proposal submissions, were (i) climate change, (ii) special meetings, (iii) anti-discrimination and diversity, (iv) independent chair, and (v) lobbying spending and political contributions (which tied for fifth most common proposal topic).
- There was a significant decrease in the number of proposals excluded pursuant to a no-action request. The number of no-action requests submitted to the Staff during the 2022 proxy season decreased 10% from 2021, but nevertheless was higher compared to prior years, up 5% from 2020 and 7% from 2019. Most notably, the overall success rate for no-action requests plummeted to 38%, a drastic decline from success rates of 71% in 2021 and 70% in 2020. The 38% success rate was significantly below even the previous lowest exclusion rate in recent times, which occurred in the 2012 proxy season when the success rate dipped to 66%. Success rates in 2022 declined on every basis for exclusion, with the most drastic decline in success rates for procedural (56% in 2022, down from 84% in 2021), substantial implementation (13% in 2022, compared with 55% in 2021), and ordinary business grounds (24% in 2022, compared with 65% in 2021).
- While the number of proposals voted on increased significantly, overall voting support decreased, including average support for social and environmental proposals.In 2022, just over 50% of all proposals submitted were voted on, compared with 41% of submitted proposals that were voted on in 2021. Despite the increase in proposals voted on, average support for all shareholder proposals voted on decreased to 30.4% in 2022 from 36.3% in 2021. The decrease in average support was primarily driven by decreased support for both social and environmental proposals, with support for social (non-environmental) proposals decreasing to 23.2% in 2022 from 32.8% in 2021 and environmental proposals decreasing to 33.3% in 2022 from 43.5% in 2021. And in line with depressed support overall, the number of shareholder proposals that received majority support in 2022 was 55, down from 74 in 2021. But 2022 did mark the first year that two hot-button social proposals received majority support—multiple proposals requesting reports on gender/racial pay gaps and requesting racial/civil rights audits received majority support after coming close in recent years.
- Written Staff responses to each shareholder proposal no-action request returned mid-season. After discontinuing its longstanding practice of issuing a written response to each shareholder proposal no-action request in 2019, the Staff provided response letters to only 5% of no-action requests during the 2021 proxy season. In December 2021, the Staff announced that it was reconsidering its approach and would return to its historical practice of issuing a response letter for each no-action request. Following its announcement, the Staff immediately ceased communicating its responses via an online chart and commenced issuing response letters to each and every no-action request.
- Recent amendments to Rule 14a-8 appear to have had marginal impact on shareholder submissions. The 2022 proxy season was the first in which the September 2020 amendments to Rule 14a-8 took effect. Despite concerns voiced from some shareholder proponents and other stakeholders (including ongoing litigation over the new rules), the new rules do not appear to have had an appreciable effect on proponent eligibility or to have resulted in a significant increase in proposals eligible for procedural or substantive exclusion. In fact, as noted above, only 38% of no-action requests were successful in excluding shareholder proposals during the 2022 proxy season. The SEC is scheduled to consider proposing amendments to “update certain substantive bases for exclusion of shareholder proposals” under Rule 14a-8 at an open meeting to be held on July 13, 2022.
- Proponents continued to use exempt solicitations in record numbers. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing 34% over last year and 70% since 2020. Consistent with prior years, the vast majority of exempt solicitations filed in 2022 were filed by shareholder proponents on a voluntary basis—i.e., outside of the intended scope of the SEC’s rules—in order to draw attention and publicity to pending shareholder proposals.
The following Gibson Dunn attorneys assisted in preparing this update: Aaron Briggs, Elizabeth Ising, Thomas J. Kim, Julia Lapitskaya, Ronald O. Mueller, Lori Zyskowski, Geoffrey Walter, Victor Twu, Natalie Abshez, Meghan Sherley, and Andrea Shen.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group:
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, [email protected])
David Korvin – Washington, D.C. (+1 202-887-3679, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn’s Supreme Court Round-Up provides summaries of the Court’s opinions from this Term, a preview of cases set to be argued next Term, and other key developments on the Court’s docket. In the October 2021 Term, the Court heard argument in 63 cases, including 1 original-jurisdiction case.
Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.
To view the Round-Up, click here.
Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 6 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 15 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 33 petitions for certiorari since 2006.
* * * *
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.
Theodore B. Olson (+1 202.955.8500, [email protected])
Amir C. Tayrani (+1 202.887.3692, [email protected])
Jacob T. Spencer (+1 202.887.3792, [email protected])
Joshua M. Wesneski (+1 202.887.3598, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Decided June 30, 2022
Grande v. Eisenhower Medical Center, S261247
Yesterday, the California Supreme Court held that an employee who brings an employment class action against a staffing agency and executes a settlement agreement releasing the agency and its agents may bring a second class action against the staffing agency’s client premised on the same violations.
Background: Lynn Grande was assigned to work as a nurse at Eisenhower Medical Center by FlexCare, LLC, a temporary staffing agency. Grande filed a class action against FlexCare, alleging that it underpaid its employees. The parties reached a settlement and executed a release of claims.
Eight months after the court approved the settlement and entered judgment, Grande filed another wage and hour class action—this time against Eisenhower. Grande’s claims against Eisenhower were premised on the same violations over which she had sued FlexCare.
FlexCare moved to intervene in this follow-on case, arguing that Grande was precluded from suing Eisenhower because she had settled her claims against FlexCare in the earlier case. The trial court and the Fourth District Court of Appeal disagreed. The Court of Appeal held Grande wasn’t precluded from suing Eisenhower because it was neither a released party in the first case nor in privity with FlexCare. The court expressly disagreed with the Second District’s decision in Castillo v. Glenair, Inc. (2018) 23 Cal.App.5th 262, 266, which held that a class of workers could not “bring a lawsuit against a staffing company, settle that lawsuit, and then bring identical claims against the company where they had been placed to work.”
Issue: May an employee bring an employment class action against a staffing agency, settle the case and release the agency and its agents from liability, and then bring a second class action based on the same alleged violations against the staffing agency’s client?
Court’s Holding:
Yes, on the facts of this case. The settlement agreement releasing FlexCare didn’t name Eisenhower or otherwise suggest that it was meant to include Eisenhower. Nor was FlexCare in privity with Eisenhower, including because Eisenhower would not have been bound by an adverse judgment in the first case against FlexCare. As a result, Grande wasn’t barred from asserting the same claims against Eisenhower in a second case.
Although the release in the settlement agreement between a nurse and her staffing agency didn’t include the hospital where she worked, “future litigants can specify that their releases extend to staffing agency clients—if that result is intended.”
Chief Justice Cantil-Sakauye, writing for the Court
What It Means:
- The Court stated that its decision as to the scope of the settlement agreement was “fact- and case-specific,” but also cast some doubt on “the broader notion that a client is an ‘agent’ of a staffing agency.”
- In drafting settlement agreements, staffing agencies and other employers should consider specifically naming any relevant client, or at least including “clients” among the releasees, as the Court’s opinion preserves employers’ ability to “specify that their releases extend to staffing agency clients—if that result is intended.”
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice leaders:
Litigation Practice
Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected] |
Theane Evangelis +1 213.229.7726 [email protected] |
Appellate and Constitutional Law Practice
Thomas H. Dupree Jr. +1 202.955.8547 [email protected] |
Allyson N. Ho +1 214.698.3233 [email protected] |
Julian W. Poon +1 213.229.7758 [email protected] |
Blaine H. Evanson +1 949.451.3805 [email protected] |
Bradley J. Hamburger +1 213.229.7658 [email protected] |
Michael J. Holecek +1 213.229.7018 [email protected] |
Daniel R. Adler +1 213.229.7634 [email protected] |
Ryan Azad +1 415.393.8276 [email protected] |
Related Practice: Labor & Employment
Jason C. Schwartz +1 202.955.8242 [email protected] |
Katherine V.A. Smith +1 213.229.7107 [email protected] |
Decided June 30, 2022
West Virginia, et al. v. EPA, et al., No. 20-1530;
North American Coal Corp. v. EPA, et al., No. 20-1531;
Westmoreland Mining Holdings LLC v. EPA, et al., No. 20-1778; and
North Dakota v. EPA, et al., No. 20-1780
Today, the Supreme Court held 6-3 that Congress has not delegated broad authority to EPA to substantially restructure the American energy market.
Background: Under the Clean Air Act, the Environmental Protection Agency has authority to regulate emissions of pollutants from power plants by mandating the “best system” for reducing emissions. In 2015, EPA issued the Clean Power Plan, which required existing coal and gas power plants either to reduce their production of electricity or to offset their production by subsidizing the generation of natural gas, wind, or solar energy. The Clean Power Plan, however, was stayed in subsequent litigation and never took effect. In 2019, EPA issued a new rule—the Affordable Clean Energy Rule—that repealed and replaced the Clean Power Plan. EPA reasoned that the Clean Power Plan had exceeded its statutory authority.
After the 2019 rule was challenged in court, the D.C. Circuit vacated the rule and held that EPA had erred in concluding that it lacked authority to impose the Clean Power Plan. EPA subsequently planned to promulgate a new rule.
Issue: Whether the Clean Air Act empowers EPA to transform the electric generation sector.
Court’s Holding:
No. Under the Clean Air Act, Congress has not delegated to EPA broad authority to restructure the energy industry by requiring existing power plants to shift to different forms of energy production.
“[O]ur precedent counsels skepticism toward EPA’s claim that [the Clean Air Act] empowers it to devise carbon emission caps based on a generation shifting approach.”
Chief Justice Roberts, writing for the Court
What It Means:
- The Court concluded that in enacting the Clean Air Act, Congress did not empower EPA to substantially restructure the American electricity market by requiring a shift away from coal and gas power plants to other types of electric generation.
- For the third time in a year, the Court reaffirmed the principle that agency action with vast economic and political significance requires a clear delegation from Congress. Thus, although this decision marks the first time the Court has expressly referred to the “major questions doctrine” in a majority opinion, application of that doctrine is not new. The Court’s repeated application of the major questions doctrine signals a continuing commitment by the Court to limit executive agencies’ regulation of particularly significant matters to circumstances where Congress clearly delegated such regulatory authority to the agency. The Court’s robust application of this doctrine will have potentially significant applications for a wide range of agency actions that assert broad power over important economic and political matters.
- In employing the major questions doctrine to resolve this case, the Court did not defer to EPA’s interpretation of the Clean Air Act. This result follows from the nature of the major questions doctrine, which obligates agencies to identify a clear statement of congressional authorization to justify extraordinary and far-reaching agency regulatory initiatives. In such cases, ambiguity in a statutory grant of authority is fatal to the agency’s regulatory efforts, leaving no room for deference.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
Thomas H. Dupree Jr. +1 202.955.8547 [email protected] |
Allyson N. Ho +1 214.698.3233 [email protected] |
Julian W. Poon +1 213.229.7758 [email protected] |
Lucas C. Townsend +1 202.887.3731 [email protected] |
Bradley J. Hamburger +1 213.229.7658 [email protected] |
Related Practice: Environmental Litigation and Mass Tort
Stacie B. Fletcher +1 202.887.3627 [email protected] |
Daniel W. Nelson +1 202.887.3687 [email protected] |
David Fotouhi +1 202.955.8502 [email protected] |
Related Practice: Administrative Law and Regulatory Practice
Eugene Scalia +1 202.955.8673 [email protected] |
Helgi C. Walker +1 202.887.3599 [email protected] |
Related Practice: Energy, Regulation and Litigation
William S. Scherman +1 202.887.3510 [email protected] |