San Francisco partner Ryan Murr, Washington, D.C. partner Stephen Glover and San Francisco partner Branden Berns are the authors of “Behind The ‘CVR Spin’ Method Of Unlocking Assets In M&A” [PDF] published by Law360 on March 11, 2024.
These decisions highlight how courts are continuing to grapple with challenges to DEI initiatives.
Last week, the Second Circuit and a district court in Texas issued decisions in cases involving challenges to DEI. In a case challenging a diversity scholarship program, the Second Circuit held that associations seeking to litigate based on injuries to their members must name at least one injured member to establish standing. And in deciding a challenge to a funding program administered by the federal Minority Business Development Agency, a district court in the Northern District of Texas held that the program violates the equal protection guarantee of the Fifth Amendment by presuming that certain racial groups are disadvantaged as part of determining their eligibility for assistance. Together, the decisions highlight how courts are continuing to grapple with challenges to DEI initiatives.
I. In Do No Harm v. Pfizer, the Second Circuit held that an association must name an injured member to establish standing.
On March 6, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of Do No Harm’s reverse-discrimination case against Pfizer in Do No Harm v. Pfizer, Inc., — F.4th —, 2024 WL 949506 (2d Cir. Mar. 6, 2024). The Second Circuit held that an organization must name at least one affected member to establish Article III standing under the “clear language” of Supreme Court precedent. The holding has implications for several other ongoing lawsuits in which plaintiff advocacy groups represented by the same law firm have relied on organizational standing to challenge diversity initiatives on behalf of anonymous members.
A. Background
On September 15, 2022, conservative medical advocacy organization Do No Harm filed suit against Pfizer, alleging that Pfizer discriminated against white and Asian students by excluding them from its Breakthrough Fellowship Program. Do No Harm v. Pfizer, Inc., 646 F. Supp. 3d 490 (S.D.N.Y. 2022). The program’s stated aim is to create a new generation of leaders from underrepresented groups by providing college seniors with summer internships, two years of employment post-graduation, mentoring, and a two-year scholarship for a full-time master’s program. To be eligible, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm alleged that the criteria violate (1) Section 1981 of the Civil Rights Act of 1866 because the program is a contract that discriminates on the basis of race, (2) Title VI of the Civil Rights Act of 1964 because Pfizer receives federal funds to operate a racially discriminatory program, (3) the Affordable Care Act, and (4) multiple New York state laws banning racially discriminatory internships, training programs, and employment.
Do No Harm brought the suit on behalf of two purported members, anonymous Members A and B. Via anonymous declarations, Do No Harm stated that Member A is white, Member B is Asian-American, and both are Ivy League university juniors otherwise eligible for the scholarship and “able and ready” to apply. Do No Harm requested a temporary restraining order, and preliminary and permanent injunctions against the program’s eligibility criteria.
B. Analysis
In December 2022, a district court in the Southern District of New York denied Do No Harm’s motion for a preliminary injunction and dismissed the case for lack of subject matter jurisdiction. In particular, the court found that Do No Harm did not have Article III standing because it did not identify at least one member by name.
The association appealed to the Second Circuit, which heard oral argument on October 3, 2023.
In its opinion issued on March 6, the Second Circuit explained that the “decisive issues” in the appeal were (1) whether an association that relies on injuries to individual members to establish Article III standing on a preliminary injunction must name at least one injured member; and (2) whether a case should be dismissed or allowed to proceed if the plaintiff fails to establish Article III standing on a motion for preliminary injunction, but alleges facts sufficient to establish standing under the less onerous pleading standard.
On standing, the Second Circuit concluded that the district court was correct in its determination that Do No Harm lacked Article III standing because it did not name any member injured by Pfizer’s alleged discrimination. Relying on its decision in Cacchillo v. Insmed, Inc., 638 F.3d 401 (2d Cir. 2011), the court noted that the plaintiff’s burden to demonstrate standing for a preliminary injunction is “no less than that required on a motion for summary judgment.” As a result, the court was “not decid[ing] whether, at the pleading stage, Do No Harm was required to name names.”
Because Do No Harm was subject to a summary judgment burden of proof, it was required to “set forth by affidavit or other evidence specific facts” demonstrating that the association’s members suffered an injury in fact—here, by showing that members were ready and able to apply to the challenged program but for its allegedly discriminatory criteria. The court explained that while “a name on its own is insufficient to confer standing,” disclosure of members’ names “shows that identified members are genuinely ready and able to apply, and are not merely enabling the organization to lodge a hypothetical legal challenge.” As a result, the Second Circuit held that “an association must identify by name at least one injured member for purposes of establishing Article III standing under a summary judgment standard,” which is the same standard that is applicable on a motion for preliminary injunction.
Regarding the dismissal question, Do No Harm argued that even if it failed to establish standing on its motion for preliminary injunction, the fact that it had properly alleged standing under the pleading standard should preclude dismissal. Recognizing that other circuits have decided the issue differently, the Second Circuit upheld the district court’s dismissal of the case, explaining that “when a court determines it lacks subject matter jurisdiction, it cannot consider the merits of the preliminary injunction motion and should dismiss the action in its entirety.”
Judge Wesley wrote a concurring opinion, agreeing with the majority that Do No Harm lacked standing and that the proper action was to dismiss the case. But Judge Wesley disagreed about why Do No Harm lacked standing. In his view, Do No Harm lacked standing because it did not show an imminent injury from the program’s selection process. Judge Wesley noted that Do No Harm had submitted “virtually identical declarations” from anonymous members that were “vague and conclusory” and did not substantiate “a concrete readiness to apply” to the challenged program. According to Judge Wesley, under a summary judgment standard that was not enough to demonstrate standing.
II. Nuziard v. Minority Business Development Agency applies SFFA to a federal agency
On March 5, 2024, a federal district court held in Nuziard v. Minority Business Development Agency, No. 4:23-cv-00278-P, 2023 WL 3869323 (N.D. Tex.), that the racial presumption used in apportioning federal funds for minority business assistance violates the Fifth Amendment’s equal protection guarantee. The decision extends the Supreme Court’s reasoning in SFFA to federal agencies administering grant programs, holding that “[t]hough SFFA concerned college admissions, nothing in the decision indicates that the Court’s holding should be constrained to that context.”
A. Background
The Minority Business Development Agency (MBDA) is a federal agency within the Department of Commerce dedicated to assisting “socially or economically disadvantaged individuals.” 15 U.S.C. § 9501(9)(A). The MBDA’s formative statute defines the term “socially or economically disadvantaged individual” as “an individual who has been subjected to racial or ethnic prejudice or cultural bias . . . because of the identity of the individual as a member of a group, without regard to any individual quality of the individual that is unrelated to that identity.” 15 U.S.C. § 9501(15)(A). Under the statute, certain groups of people, like Black or African Americans, Hispanics or Latinos, American Indians or Alaska Natives, Asians, and Native Hawaiians or other Pacific Islanders, are presumed to be socially disadvantaged individuals. If individuals from other groups apply for funding through the MBDA, they must produce sufficient evidence to rebut the presumption that they are not disadvantaged in order to be eligible for assistance.
Three business owners sued the MBDA, alleging that they were able and ready to apply for MBDA programming, but the agency improperly required them to show why they were, in fact, socially or economically disadvantaged when it did not require this showing for other ethnic groups. The business owners claimed that this practice is unconstitutional.
B. Analysis
In a 93-page opinion, a district court in the Northern District of Texas held that the MBDA’s presumption that certain ethnicities are “socially or economically disadvantaged” violates the Fifth Amendment’s equal protection component.
Addressing the issue of standing first, the court held that two of the three plaintiffs had standing because they met the race-neutral criteria for the programs and took concrete steps to apply. While these two plaintiffs never actually applied for the program, the court found that they were harmed nevertheless because of the MBDA’s “imposition of additional obstacles [in the application process] because of their race.” The court reasoned that “it’s not that they were denied benefits they would otherwise certainly get, but that they didn’t have a shot because of their skin color.” The court held that the third plaintiff lacked standing because it was not clear that he manifested the requisite intent to apply for the funding.
The court then turned to the Agency’s argument that its presumption of social or economic disadvantage satisfies strict scrutiny because it remedies the effects of discrimination in access to credit and in private contracting markets. Regarding MBDA’s arguments about discrimination in access to credit, the court agreed that the “disenfranchisement” of minority business enterprise is “beyond dispute,” but held that the MDBA’s interest in remedying these inequalities “is not compelling because it concerns private-sector credit disparities, and the record does not show government participation contributed to such disparities.”
Regarding the MBDA’s assertion that it had a compelling interest in eliminating discrimination in private contracting markets, the court found this category to be too broad. However, the court agreed that the MBDA did have a compelling interest in addressing discrimination in government contracting, relying on the agency’s proffered statistical evidence of disparities.
Even so, the court held that the MBDA’s program for addressing its compelling interest in eliminating discrimination in government contracting was not narrowly tailored. Citing SFFA, the court held that the ethnicity classifications used by the MDBA were both over- and under-inclusive. They were underinclusive because they “arbitrarily exclude[d]” many disadvantaged individuals, like those from the Middle East and some parts of Asia, and they were overinclusive because they “include[d] large swaths of individuals without ever asking if individual applicants belonging to those groups have experienced discrimination.” The court also held that the presumption operated as a stereotype and did not have a logical endpoint, echoing the factors considered by the Supreme Court in SFFA.
In evaluating whether the program was narrowly tailored, the court also considered the factors set out by the Supreme Court in Paradise v. United States, 480 U.S. 149 (1987), which require that a narrowly tailored remedy be necessary, flexible, and minimally impactful to third parties. The court held that the MBDA’s presumption was neither necessary nor flexible enough to achieve the MDBA’s compelling interest, but that a “generous factfinder” could determine that available alternatives reduced the impact to third parties. Nevertheless, because the Agency’s presumption did not satisfy the other narrow-tailoring factors, it failed strict scrutiny.
The court concluded by granting summary judgment for two of the three plaintiffs on their equal protection claims, and permanently enjoining the MBDA from presuming that certain ethnicities were “socially or economically disadvantaged.” The court summed up its decision on the reasoning that “[r]ather than picking winners and losers based on skin pigmentation, if a ‘rising tide lifts all boats,’ a holistic, race-neutral approach to assisting marginalized businesses would serve [the Agency’s] interests just as well.”
The government has 60 days to appeal the district court’s decision.
Prior editions of our DEI Task Force Update may be found on our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update
The following Gibson Dunn lawyers prepared this update: Jason Schwartz, Katherine Smith, Mylan Denerstein, Zakiyyah Salim-Williams, Molly Senger, Blaine Evanson, Matt Gregory, Zoë Klein, Mary Lindsey Krebs*, and Lauren Meyer*.
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, any member of the firm’s DEI Task Force or Labor and Employment practice group, or the following authors and practice leaders:
Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202.955.8242, [email protected])
Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213.229.7107, [email protected])
Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212.351.3850, [email protected])
Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202.955.8503, [email protected])
Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202.955.8571, [email protected])
Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949.451.3805, [email protected])
Matt Gregory – Partner, Appellate & Constitutional Law Group
Washington, D.C. (+1 202.887.3635, [email protected])
*Mary Lindsey Krebs and Lauren Meyer are associates in the firm’s Washington, D.C. office. Mary Lindsey currently is admitted to practice law only in Tennessee, and Lauren is a recent law graduate and not admitted to practice law.
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
An Overview of the Highlights and Key Differences to the Proposed Rules
On March 6, 2024, the Securities and Exchange Commission (“SEC” or “Commission”), in a divided 3-2 vote along party lines, adopted final rules establishing climate-related disclosure requirements for U.S. public companies and foreign private issuers in their annual reports on Form 10-K and Form 20-F, as well as for companies looking to go public in their Securities Act registration statements. The Commission issued the Proposing Release in March 2022, which we previously summarized here, and received more than 22,500 comments (including more than 4,500 unique letters) from a wide range of individuals and organizations. The Adopting Release is available here and a fact sheet from the SEC is available here. A summary table discussing in more detail the notable changes between the Adopting Release and the Proposing Release is provided below.
We will provide more resources. Register here for Gibson Dunn’s webcast covering key aspects of the final rules and litigation developments on Tuesday, March 12, 2024. Our review of the final rules and Adopting Release is ongoing. We will publish a revised and more detailed summary of the final rules and related topics.
Overview of the final rules. The final rules will require disclosure in annual reports and registration statements of:
- Material impacts on operations. How any climate-related risks have had, or are reasonably likely to have, material impacts on a company’s results of operations, strategy, or financial condition.
- Impact on the company. How any such climate-related risks have materially affected or are reasonably likely to materially affect a company’s outlook, strategy, and business model, as well as a new financial statement note reporting expenditures and costs above a de minimis threshold resulting from severe weather events, other “natural conditions,” and certain carbon offsets and renewable energy certificates (“REC”).
- Risk management/oversight process. Board and management governance and practices related to climate-related risk identification, assessment, management, and oversight.
- GHG emissions and assurance. Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions, if material, for accelerated and large accelerated filers only, with phased-in assurance by an independent GHG emissions attestation provider.
- Targets/goals. Information regarding climate-related targets or goals that have materially affected, or are reasonably likely to materially affect, the company’s results of operations, business, or financial condition.
- Mitigation efforts. Transition plans to address material transition risks, scenario analyses used for assessing material climate-related risk impacts, and internal carbon pricing if its use is material to managing material climate-related risks.
Significant changes from the rule proposal. The Commission made several notable changes to the proposed requirements, including to:
- eliminate Scope 3 GHG emissions reporting requirements;
- limit the requirement to report Scope 1 and 2 GHG emissions only if material, and exempt non-accelerated filers, smaller reporting companies and emerging growth companies from emissions reporting;
- prolong the phase-in period for third-party assurance requirements for emissions reporting, and require only large accelerated filers to eventually (by 2033) obtain attestation at a “reasonable assurance” level;
- remove the requirement to disclose directors’ climate-related expertise;
- limit the Regulation S-X (“Reg. S-X”) financial footnote requirement to (1) expenditures, charges, and losses incurred as a result of severe weather events and other natural conditions that are 1% or more of either net income before tax and/or stockholders’ equity, depending on whether such amounts are expensed or capitalized, and (2) carbon offsets and renewable energy credits that are a material component of a company’s plan to achieve its disclosed climate-related targets or goals; and
- adopt a new requirement to disclose, outside of the financial statements, the amount of material expenditures incurred as a result of any transition plan.
More broadly, the final rules adopt “materiality” qualifiers for many of the disclosure requirements, and the number of prescriptive disclosure requirements has been reduced. The preamble to the final rules also states that “traditional” notions of “materiality” will apply, as defined in Supreme Court precedents. Notwithstanding these changes, the final rules impose a significant reporting burden on companies and require substantial planning to prepare to comply.
Compliance phase-in period. The final rules will become effective 60 days after publication in the Federal Register (available here). The requirement to comply with the final rules will phase in over time, based on a company’s filer status. Registration statements will be subject to these disclosure obligations based on the fiscal years being reported. The first required disclosures for U.S. public companies with a calendar-end fiscal year will begin with the annual report on Form 10-K filed in:
|
Disclosure |
Large Accelerated Filers |
Accelerated Filers* |
Non-Accelerated Filers / Smaller Reporting Companies / Emerging Growth Companies |
|
Reg. S-K & Reg. S-X requirements other than: |
2026 |
2027 |
2028 |
|
Certain quantitative & qualitative disclosures under Items 1502(d)(2), 1502(e)(2), & 1504(c)(2) |
2027 |
2028 |
2029 |
|
Scopes 1 & 2 GHG Emissions** |
2027 |
2029 |
N/A |
|
Limited Assurance of GHG Emissions |
2030 |
2032 |
N/A |
|
Reasonable Assurance of GHG Emissions |
2034 |
N/A |
N/A |
|
Inline XBRL Tagging for Reg. S-K Requirements*** |
2027 |
2027 |
2028 |
* This applies only to Accelerated Filers that are not also Smaller Reporting Companies or Emerging Growth Companies.
** Scope 1 & 2 GHG emissions for the most recent fiscal year may be reported as late as the second quarter Form 10-Q deadline.
*** Reg. S-X requirements will be tagged with the first disclosure.
|
Disclosure Category |
Proposing Release Standards |
Adopting Release Changes |
|
Climate-Related Risk Oversight & Management (Items 1501 & 1503, Reg. S-K) |
Describe climate-related risk oversight and management, including the role of the board in overseeing and management in assessing and managing climate-related risks, and related risk management processes. |
Adopted substantially as proposed. Notable Changes:
|
|
Climate-Related Risks and Impacts (Item 1502, Reg. S-K) |
Describe material climate-related risks, including:
|
Adopted with significant revisions. Notable Changes:
|
|
GHG Emissions Reporting Disclosures (Items 1504 & 1505, Reg. S-K) |
All companies must disclose Scope 1 and Scope 2 GHG emissions. All companies (except smaller reporting companies) must disclose Scope 3 GHG emissions if (i) material to the company or (ii) the company has set a GHG emissions target that includes Scope 3. Attestation is required for Scope 1 and Scope 2 for large accelerated and accelerated filers, subject to a phase in from limited assurance to reasonable assurance within two to four fiscal years after the compliance date. No attestation is required for Scope 3. |
Adopted, with significant revisions, as Items 1505 & 1506. Notable Changes:
|
|
Targets, Goals & Transition Plans Disclosures (Item 1506, Reg. S-K) |
Describe GHG emission or other climate-related targets or goals, including pathway to achievement, progress made, and use of carbon offsets or RECs. |
Adopted, with some revisions, as Item 1504. Notable Changes:
|
|
Climate-Related Financial Statement Disclosure (Rules 14-01 and 14-02 of Reg. S-X) |
Disclose (i) climate-related financial metrics related to the impacts of severe weather events and activities to reduce GHG emissions or exposure to transition risks if the absolute value of those impacts or expenditures/costs, as applicable, represents at least 1% of its corresponding financial statement line item and (ii) the impact of climate-related events on estimates and assumptions. Disclosures must be provided for the company’s most recently completed fiscal year and for each historical fiscal year included in the financial statements in the filing. |
Adopted with significant revisions. Notable Changes:
|
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, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance, Environmental, Social and Governance (ESG), Capital Markets, Administrative Law and Regulatory, and Environmental Litigation and Mass Tort practice groups:
Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
James J. Moloney – Orange County (+1 1149.451.4343, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Michael Scanlon – Washington, D.C.(+1 202.887.3668, [email protected])
Mike Titera – Orange County (+1 1149.451.4365, [email protected])
Aaron Briggs – San Francisco (+1 415.393.8297, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
Environmental, Social and Governance (ESG):
Susy Bullock – London (+44 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Cynthia M. Mabry – Houston (+1 346.718.6614, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])
Selina S. Sagayam – London (+44 20 7071 4263, [email protected])
William E. Thomson – Los Angeles (+1 213.229.7891, [email protected])
Capital Markets:
Andrew L. Fabens – New York (+1 212.351.4034, [email protected])
Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415.393.8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213.229.7242, [email protected])
Administrative Law and Regulatory:
Eugene Scalia – Washington, D.C. (+1 202.955.8543, [email protected])
Jonathan C. Bond – Washington, D.C. (+1 202.887.3704, [email protected])
Environmental Litigation and Mass Tort:
Stacie B. Fletcher – Washington, D.C. (+1 202.887.3627, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])
Abbey Hudson – Los Angeles (+1 213.229.7954, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
From the Derivatives Practice Group: We continue to see a lot of activity around virtual assets in Hong Kong, with Hong Kong’s Securities and Futures Commission weighing in most recently.
New Developments
- CFTC’s Global Markets Advisory Committee Advances Three Recommendations. On March 7, the CFTC’s Global Markets Advisory Committee (GMAC), sponsored by Commissioner Caroline D. Pham, advanced three new recommendations intended to (1) promote U.S. Treasury markets resiliency and efficiency, (2) provide resources on the upcoming transition to T+1 securities settlement, and (3) publish a first-ever digital asset taxonomy to support U.S. regulatory clarity and international alignment. [NEW]
- CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will consider current topics and developments in the areas of central counterparty risk and governance, market structure, climate-related risk, and emerging technologies affecting derivatives and related financial markets. [NEW]
- CFTC Staff Issues Advisory Regarding FBOT Regulatory Filings. On March 1, the CFTC’s Division of Market Oversight announced that it issued an advisory notifying all foreign boards of trade (FBOTs) registered under Part 48 of the CFTC’s regulations that, beginning April 1, 2024, certain regulatory filings (covered filings) should be submitted through the CFTC’s online filings portal, which has been updated for FBOT use. The portal has been available to registered FBOTs for the submission of public filings since March 1. Covered filings will be accepted via email until March 31. Beginning April 1, FBOTs should submit all Covered Filings exclusively through the portal. [NEW]
- CFTC Extends Public Comment Period for Proposed Rule on Real-Time Public Reporting Requirements and Swap Data Recordkeeping and Reporting Requirements. On February 26, the CFTC announced that it is extending the deadline for the public comment period on a proposed rule that makes certain modifications to the CFTC’s swap data reporting rules in Parts 43 and 45 related to the reporting of swaps in the other commodity asset class and the data element appendices to Parts 43 and 45 of the CFTC’s regulations. The deadline is being extended to April 11, 2024. The proposed rule was published in the Federal Register on December 28, 2023, with a 60-day comment period scheduled to close on February 26, 2024. [NEW]
- CFTC Staff Issues No-Action Letter Regarding Pre-Trade Mid-Market Mark for Certain Interest Rate Swaps Referencing SOFR. On February 22, the CFTC’s Market Participants Division (MPD) issued a no-action letter applicable to all registered swap entities in relation to the requirement in Regulation 23.431 that swap dealers and major swap participants (swap entities) disclose to certain counterparties the Pre-Trade Mid-Market Mark (PTMMM) of a swap. The no-action letter states that MPD will not recommend the CFTC take an enforcement action against a registered swap entity for its failure to disclose the PTMMM to a counterparty in certain interest rate swaps referencing the Secured Overnight Financing Rate that are identified in the no-action letter, provided that: (1) real-time tradeable bid and offer prices for the swap are available electronically, in the marketplace, to the counterparty; and (2) the counterparty to the swap agrees in advance, in writing, that the registered swap entity need not disclose a PTMMM for the swap. According to the CFTC, the no-action letter provides a similar no-action position as that in CFTC Staff Letter No. 12-58 for certain interest rate swaps referencing the London Interbank Offered Rate. CFTC Commissioner Christy Goldsmith Romero objected to the no-action letter, arguing that it inappropriately shifts the burden of understanding swap dealer’s conflicts and incentives back onto counterparties, upending the Dodd-Frank Act’s intent.
- CFTC Approves Three Proposed Rules and Other Commission Business. On February 20, the CFTC approved three proposed rules through its seriatim process: (1) Regulations to Address Margin Adequacy and to Account for the Treatment of Separate Accounts by Futures Commission Merchants; (2) Foreign Boards of Trade; and (3) Requirements for Designated Contract Markets and Swap Execution Facilities Regarding Governance and the Mitigation of Conflicts of Interest Impacting Market Regulation Functions. All three proposals have a comment deadline of April 22, 2024. Additionally, the CFTC issued an order of exemption from registration as a derivatives clearing organization (DCO) to Taiwan Futures Exchange Corporation and approved an amended order of registration for ICE NGX Canada, Inc., adding environmental contracts to the scope of contracts it is eligible to clear as a DCO.
- CFTC Extends Comment Period on Proposed Rules for Operational Resilience Frameworks. On February 20, the CFTC extended the comment period on its proposed rules implementing requirements for operational resilience frameworks for futures commission merchants, swap dealers and major swap participants. The new deadline is April 1, 2024.
New Developments Outside the U.S.
- SFC Issues Guidance on Disciplinary Process Under Virtual Assets Regime. On February 28, Hong Kong’s Securities and Futures Commission (SFC) published a guide outlining the disciplinary process under the new licensing regime for virtual asset trading platforms (AMLO VATP Regime). Under the new regime, introduced via an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), the SFC has the power to discipline its licensees, comprising firms, their responsible officers and those involved in their management, if it finds that such licensee’s conduct suggests that it is, or was at any time, guilty of misconduct or not fit and proper. The disciplinary process under the AMLO VATP Regime is based largely on the disciplinary process applicable to persons licensed by or registered with the SFC (including those involved in their management) under the Securities and Futures Ordinance (Cap. 571). The SFC indicated that when determining whether to take disciplinary action and the level of sanction, the SFC will consider, among other things, the nature and seriousness of the conduct, the amount of profits accrued or loss avoided, and circumstances specific to the firm or individual. [NEW]
- HKMA Sets Out Expectations on Tokenized Product Offerings. On February 20, the Hong Kong Monetary Authority (HKMA) published a circular covering the sale and distribution of tokenized products. According to the HKMA, the prevailing supervisory requirements and consumer/investor protection measures for the sale and distribution of a product are also applicable to its tokenized form as it has terms, features and risks similar to those of the underlying product. The HKMA clarified that authorized institutions should conduct adequate due diligence and fully understand the tokenized products before offering them to customers and on a continuous basis at appropriate intervals. Authorized institutions are also expected to act in the best interest of their customers and make adequate disclosure of the relevant material information about a tokenized product, including its key terms, features and risks. Finally, the HKMA indicated that authorized institutions should put in place proper policies, procedures, systems and controls to identify and mitigate the risks arising from tokenized product-related activities.
- HKMA Sets Standards for Digital Asset Custodial Services. On February 20, the HKMA issued guidance for authorized institutions interested in offering custody services for digital assets. The HKMA expects authorized institutions to undertake a comprehensive risk assessment followed by the implementation of appropriate policies to manage identified risks. The entire process should be overseen by the board and senior management. The HKMA also requires authorized institutions to conduct independent systems audits, store a substantial portion of client digital assets in cold storage, ensure that private keys are secured within Hong Kong and provide all records to HKMA whenever requested. Authorized institutions should notify the HKMA and confirm that they meet the expected standards in the guidance within 6 months from the date of the guidance (i.e. February 20, 2024).
New Industry-Led Developments
- ISDA Publishes Whitepaper Charting the Next Phase of India’s OTC Derivatives Market. On March 4, ISDA published a new whitepaper that explores the growth of India’s financial markets and makes a series of market and policy recommendations to encourage the further development of a safe and efficient over-the-counter (OTC) derivatives market. The whitepaper proposes several initiatives that industry participants and regulators could take that ISDA believes will create deeper and more liquid domestic derivatives markets and enhance risk management practices. The recommendations are centered on five key pillars: (1) Broaden product development, innovation and diversification; (2) Foster adoption of similar market and risk principles across regulatory regimes; (3) Enhance market access and diversification of participants in the OTC derivatives market; (4) Ensure growth in a safe and efficient manner; and (5) Encourage greater alignment with international principles and practices. [NEW]
- ISDA Extends Digital Regulatory Reporting InitiativeDRR: The Answer to Reporting Rule Rush. On February 26, ISDA reported that it has worked to extend its Digital Regulatory Reporting (DRR) initiative to cover the rush of reporting rules, which starts with Japan on April 1, followed by the EU on April 29, the UK on September 30 and Australia and Singapore on October 21. ISDA stated that iIn each case, regulators are revising their rules to incorporate globally agreed data standards in an effort to improve the cross-border consistency of what is reported and the format in which it is submitted – a process that started in December 2022 with the rollout of the first phase of the US Commodity Futures Trading Committee’s revised swap data reporting rules.
The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.
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, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:
Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])
Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])
Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])
Darius Mehraban, New York (212.351.2428, [email protected])
Jason J. Cabral, New York (212.351.6267, [email protected])
Adam Lapidus – New York (212.351.3869, [email protected])
Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])
Roscoe Jones Jr., Washington, D.C. (202.887.3530, [email protected])
William R. Hallatt, Hong Kong (+852 2214 3836, [email protected])
David P. Burns, Washington, D.C. (202.887.3786, [email protected])
Marc Aaron Takagaki, New York (212.351.4028, [email protected])
Hayden K. McGovern, Dallas (214.698.3142, [email protected])
Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
This update provides a recap of 2023 highlights for capital markets, M&A activity, royalty finance transactions and clinical funding arrangements, along with expectations for 2024.
The past five years have been particularly tumultuous in the biopharma sector. Strong capital markets and M&A activity into early 2020 were whipsawed during the pandemic, with equity valuations climbing significantly through early 2021 before dropping dramatically through the fourth quarter of 2023. While dedicated healthcare funds have remained in the market during this time, generalist funds pulled back significantly in 2022 and 2023, leaving the sector with insufficient capital on the whole to support the number of public (and aspiring to be public) biopharma companies. This was reflected in the fact that over 200 Nasdaq-listed biopharma companies were trading below their cash balances as of Q32023. As a result, many biopharma companies sought less dilutive sources of capital, including royalty-based financing and third-party funding of clinical trials, while others explored sales, reverse mergers and liquidations. At the same time, a select group of companies with particularly attractive assets (either de-risked or in a therapeutic space with high investor interest) were still able to raise capital on favorable terms.
Starting in the fourth quarter of 2023, we saw the XBI rally with the broader market, which seemed to signal a bottoming out of the market and an ability more broadly to access capital. Also during this time, large pharma has amassed substantial cash balances coming out of the pandemic and from the sale of blockbuster GLP-1 drugs. This led to a strong year in 2023 for larger M&A transactions (over $1 billion), albeit with the sense that it was a buyer’s market taking advantage of the lower equity valuations of the target companies. Looking ahead, we expect a more stable capital environment in 2024, which will support capital formation and continued M&A activity, although uncertainty remains with increased geopolitical tensions, a pending presidential election in the United States and continued economic uncertainty globally.
As we enter this new year, we are cautiously optimistic that the coming year will provide a favorable deal environment for the biopharma sector and represent a return to a more balanced environment. Please read more below.
We invite you to join our team of seasoned attorneys and industry leaders for a webcast, where we will provide a recap of 2023 highlights for capital markets, M&A activity, royalty finance transactions and clinical funding arrangements, along with expectations for the Life Sciences deal market in 2024.
Register for our Webcast: Please join us on March 12, 2024: “Life Sciences Review and Outlook 2024.”
Gibson Dunn’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 leader or member of the firm’s Life Sciences practice group, or the authors in San Francisco:
Ryan Murr (+1 415.393.837, [email protected])
Branden Berns (+1 415.393.4631, [email protected])
Todd Trattner (+1 415.393.8206, [email protected])
Karen Spindler (+1 415.393.8298, [email protected])
Melanie Neary (+1 415.393.8243, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
In 2023, the U.S. Department of Justice heavily favored plea agreements over non-prosecution agreements and deferred prosecution agreements to resolve corporate criminal cases.
In 2023, the U.S. Department of Justice (“DOJ”) continued its recent trend of resolving fewer cases using corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”).[1] DOJ overwhelmingly favored corporate guilty pleas last year, with a total of 48 plea agreements compared to 19 NPAs and DPAs publicized by year-end.
In this client alert, we: (1) report key statistics regarding corporate resolutions, including an analysis of NPAs, DPAs, and Corporate Enforcement Policy (“CEP”) disgorgement from 2000 through the present and of corporate guilty pleas between 2022 and 2023; (2) assess recent developments in DOJ and SEC enforcement policy and priorities; (3) survey recent developments in DPA regimes abroad; and (4) summarize the agreements from July 31, 2023[2] through December 31, 2023.
Chart 1 below reflects the NPAs and DPAs that Gibson Dunn has identified through public-source research from 2000 through the end of 2023. Of the 19 total agreements in 2023, there were 12 DPAs and seven NPAs. The SEC, consistent with its trend since 2016, did not enter into any NPAs or DPAs in 2023.
Chart 2 reflects total monetary recoveries related to publicly available NPAs and DPAs from 2000 through the end of 2023. At approximately $1.5 billion, 2023 recoveries associated with DPAs and NPAs are higher than those in 2022; however, with the exception of 2022, they remain strikingly low compared to recoveries in the years following the 2008 economic recession, with the next-lowest recovery occurring in 2017, at approximately $2.7 billion. At $4.7 billion, recoveries associated with plea agreements in 2023 far outstripped those associated with NPAs and DPAs.
Chart 3 reflects the relative mix of NPAs, DPAs, and declinations-with-disgorgement since DOJ first began issuing the latter agreements under the then-FCPA Pilot Program in 2016. In 2023, DOJ has issued three public declinations-with-disgorgement pursuant to its Corporate Enforcement Policy, the highest number since 2018, when it issued four such resolution letters.
Charts 4 and 5 below focus on 2022 and 2023, and show the numbers of DPAs, NPAs, plea agreements, and declinations‑with‑disgorgement in those years, as well as recoveries associated with each category of agreement.[3] These charts illustrate well a recent statement by Acting Assistant Attorney General Nicole Argentieri in November 29, 2023, that DOJ has “been using all options when it comes to the appropriate form of our resolutions, including CEP declinations, non-prosecution agreements, deferred prosecution agreements, and guilty pleas.”[4]
It is too early to tell whether an increased use of guilty pleas may be contributing to the relative decline in NPAs and DPAs. We do note, however, that 2022 and 2023 included several high-dollar-value, parent company-level guilty pleas, suggesting that DOJ could be increasingly pursuing guilty pleas in more complex cases. Indeed, in 2022 and 2023, all of the resolutions with recoveries over $1 billion were guilty pleas; there has not been a DPA involving recoveries of $1 billion or more since 2021. Enforcement activity is variable, however, with the natural lifecycles of investigations sometimes yielding what appear to the public to be burst of activity followed by periods of relative quiet. Thus, while we can note, for example, that DOJ Antitrust concluded eight public NPAs and DPAs in 2020-21 compared to three in 2022-23, and that the U.S. Attorney’s Office for the Central District of California entered into five public NPAs and DPAs in 2020-21 and none in 2022-23, it is difficult to say whether these statistics signal any kind of shift in focus or standards or if they simply illustrate the natural ebb and flow of enforcement actions.
The form, structure, and elements of corporate resolutions continues to evolve. More than 20 years ago, Gibson Dunn led the dramatic shift to NPAs and DPAs from corporate pleas. The explosion of policy initiatives by DOJ will shape the landscape in the coming years. What is particularly noteworthy is the range of U.S. Attorneys’ offices prosecuting corporate cases from Mississippi to North Dakota to Oregon. Historically, corporate prosecutions were concentrated in the biggest DOJ offices or Main Justice units, but it is now routine that any one of the 93 U.S. Attorneys’ offices feel empowered to prosecute corporations.
Continued Developments in DOJ Corporate Enforcement Policy
Corporate Enforcement Landscape in 2023
In the final months of 2023, DOJ continued to emphasize that corporate enforcement is in an “era of expansion and innovation” when discussing its corporate enforcement policies, priorities, and actions over the past year.[5]
DOJ continued to make clear that the intersection of national security and corporate crime is one area of significant expansion. In September 21, 2023 remarks, Principal Associate Deputy Attorney General (“PADAG”) Marshall Miller reiterated DOJ’s increased corporate enforcement efforts in the national security realm and cautioned that, for companies who operate in parts of the world controlled by autocracies, “the message is simple: national security laws must rise to the top of your compliance risk chart.”[6] In an address on October 4, 2023, Deputy Attorney General (“DAG”) Monaco similarly described the “rapid expansion of national security-related corporate crime” as the “biggest shift in corporate criminal enforcement” that she has seen in her time in government.[7] PADAG Miller further reinforced this viewpoint in an address on November 28, 2023, stating that DOJ was “seeing national security dimensions in more familiar areas of corporate crime” and noting that “intellectual property theft and international corruption, for example, interrupt supply chains, divert disruptive technologies to dark places, and fuel the misdeeds of rogue nation-states.”[8] PADAG Miller used the occasion to highlight that DOJ was “surging resources to address the challenge – adding more than 25 new corporate crime prosecutors to our National Security Division and increasing by 40% the number of prosecutors in the Criminal Division’s Bank Integrity Unit.”[9]
DOJ also emphasized that it has developed new tools and remedies to punish and deter wrongdoing. As DAG Monaco noted in October 4, 2023 remarks, DOJ has recently announced resolutions that “include divestiture of lines of business, specific performance as part of restitution and remediation, and tailored compensation and compliance requirements.”[10] For example, DAG Monaco pointed to the DPAs with pharmaceutical companies Teva and Glenmark as the first time that DOJ required divestiture as part of a corporate criminal resolution, as both companies were required to divest business lines that allegedly were central to the companies’ price-fixing conspiracy.[11] DAG Monaco cited the Suez Rajan resolution as another example in which the Department employed specific performance as a remedy—the company was required to transport nearly one million barrels of contraband Iranian crude oil to the United States, where it now is subject to civil forfeiture proceedings.[12] On November 29, 2023, Acting AAG Argentieri highlighted DOJ’s use of data analytics to identify potential corporate misconduct.[13] Acting AAG Argentieri also made clear that while DOJ has “been using all options when it comes to the appropriate form of our resolutions,” it will “not hesitate to require a guilty plea where the circumstances warrant it, particularly where the nature and circumstances of the offense are especially egregious.”[14]
Both DAG Monaco and Acting AAG Argentieri have also touted early successes of the Department’s pilot program on Compensative Incentives and Clawbacks, which was announced in March 2023 and detailed in a prior Gibson Dunn client alert.[15] DAG Monaco described the pilot program as “already bearing fruit,” pointing to the recent resolutions with Albemarle and Corficolombiana which included incentive requirements pursuant to the pilot program’s requirement that companies include compliance-promoting criteria in their compensation systems.[16] In the Albemarle resolution, the company received credit for proactively withholding future bonuses of employees who engaged in misconduct in the form of an offset against its criminal monetary penalty equal to the amount of the bonuses that were withheld.[17] Corficolombiana agreed to implement compliance criteria in its compensation and bonus system.[18]
In the final months of 2023, DOJ underscored also the Department’s continued “innovation” in the realm of voluntary self-disclosure, including a new uniform safe harbor policy for disclosures made following mergers and acquisitions, which we cover in more detail in the next section of this report.[19] PADAG Miller made clear that DOJ has placed a “new and enhanced premium on voluntary self-disclosure” throughout 2023.[20] Specifically, he highlighted the Department’s aim for consistency and transparency with its uniform roll-out of a single voluntary self-disclosure policy across U.S. Attorneys’ Offices, discussed in further detail in our 2023 Mid-Year Corporate Resolutions Update.[21] In her address on November 29, 2023, Acting AAG Argentieri explained that these policies encouraging companies to voluntarily self-disclose misconduct serve another valuable purpose—namely, allowing DOJ “to build stronger cases against culpable individuals more quickly.”[22] In support, she cited the fact that 14 individuals had been charged in connection with the Fraud Section’s 2023 corporate resolutions and declinations with disgorgement.[23]
Announcement of Consumer Protection Branch Voluntary Disclosure Policy
On March 3, 2023, DOJ publicly released a voluntary self-disclosure policy for the Consumer Protection Branch (“CPB”) of the Civil Division. The policy, dated February 2023, is designed to encourage companies to voluntarily self-disclose to the CPB “potential violations of federal criminal law involving the manufacture, distribution, sale, or marketing of products regulated by, or conduct under the jurisdiction of, the Food and Drug Administration (FDA), the Consumer Product Safety Commission (CPSC), the Federal Trade Commission (FTC), or the National Highway Traffic Safety Administration (NHTSA),” and also to disclose “potential misconduct involving failures to report to, or misrepresentations to, those agencies.”[24] The policy states that as long as there are no aggravating actors, CPB will not seek a corporate guilty plea for disclosed conduct if the company has: (1) voluntarily self-disclosed directly to CPB; (2) fully cooperated as described in JM § 9-28.700; and (3) timely and appropriately remediated the criminal conduct as described in U.S.S.G. § 8B2.1(b)(7), “including providing restitution to identifiable victims and improving its compliance program to mitigate the risk of engaging in future illegal activity.”[25] In addition, the policy provides that “CPB will not require the imposition of an independent compliance monitor for a cooperating company that voluntarily self-discloses the relevant conduct if, at the time of resolution, the company also demonstrates that it has implemented and tested an effective compliance program as described in U.S.S.G. § 8B2.1.”[26] This new policy likely will trigger more corporate self-disclosures and may be the fodder for more NPAs and DPAs.
Announcement of M&A Safe Harbor Policy
On October 4, 2023, in remarks at the Society of Corporate Compliance and Ethics’ Annual Compliance & Ethics Institute, DAG Monaco announced that, for the first time, DOJ has adopted a uniform safe harbor policy for voluntary disclosures that companies make in the context of mergers and acquisitions (“M&A”).[27] This new M&A Safe Harbor Policy is the latest in a series of DOJ updates that are aimed at incentivizing voluntary self-disclosures. DAG Monaco explained that DOJ seeks to incentivize acquiring companies to “timely disclose misconduct uncovered during the M&A process” by clarifying timelines and conduct necessary to achieve a presumption of declination for an acquired entity’s misconduct.[28]
The new Mergers & Acquisitions Safe Harbor Policy applies department-wide to conduct discovered and disclosed by an acquiring company during the M&A process—whether before or after closing. Under the policy, acquiring companies will receive the presumption of a declination if they promptly and voluntarily disclose misconduct discovered in bona-fide, arms-lengths M&A transactions, provided that they cooperate with DOJ, timely and “fully remediate” the misconduct, and make appropriate restitution and disgorgement.[29] DAG Monaco explained that, “[to] ensure predictability,” DOJ was setting “clear timelines” for the disclosure and remediation. Specifically, under the policy, companies have a baseline of six months from the date of closing to disclose misconduct discovered at the acquired entity (regardless of whether the misconduct was discovered pre- or post-acquisition) and a baseline of one year from the date of closing to fully remediate the misconduct.[30] However, these deadlines are subject to a reasonableness analysis dependent on the facts, circumstances, and complexity of a particular transaction. For example, DAG Monaco explained that DOJ could extend these deadlines in certain circumstances and that “companies that detect misconduct threatening national security or involving ongoing or imminent harm can’t wait for a deadline to self-disclose.”[31] Under the policy, aggravating factors at the acquired company also will not impact the acquiring company’s ability to receive a declination.[32] Depending on the circumstances, the acquired entity may also qualify for voluntary self-disclosure benefits, including potentially a declination.[33]
Creation of the International Corporate Anti-Bribery Initiative
In a November 29, 2023 keynote address at the 40th International Conference on the Foreign Corrupt Practices Act (“FCPA”), Acting AAG Argentieri emphasized DOJ’s continued coordination with foreign authorities on investigations that involve misconduct in multiple countries.[34] Acting AAG Argentieri announced the creation of the International Corporate Anti-Bribery initiative (“ICAB”)—a new initiative intended to build on and deepen DOJ’s partnerships with foreign enforcement authorities. ICAB, which will be led by three prosecutors with corruption experience, seeks to strengthen DOJ’s ability to identify, investigate, and prosecute foreign bribery offenses in certain targeted regions.[35]
Continued Developments in SEC Corporate Enforcement Policy
Culture of Proactive Compliance
In addition to the developments in DOJ enforcement policy described above, the SEC also provided insight into its corporate enforcement policies, priorities, and actions over the past year.[36]
In an October 24, 2023 address at the New York City Bar Association’s Compliance institute, SEC Enforcement Director, Gurbir Grewal, provided guidance on how compliance professionals, who “serve as the first lines of defense against misconduct,” can work to create a “culture of proactive compliance.”[37] Director Grewal explained that proactive compliance requires three components: (1) education, (2) engagement, and (3) execution. He first explained that compliance professionals must educate themselves “about the law and [relevant] external developments,” such as new actions, examination priorities, or SEC rules, with a particular focus on “emerging and heightened risk areas.”[38] Director Grewal stated that compliance professionals must “really engage” with their company’s business units and seek to understand “their activities, strategies, risks, financial incentives, counterparties, sources of revenue and profits.”[39] Director Grewal then noted that proactive compliance also requires effective implementation of meaningful policies and procedures, through “leadership, training, constant oversight and the right tone at the top.”[40] He stressed the importance of self-reporting, adding that, if compliance officials were to detect a securities violation, “the best thing to do would be to self-report and cooperate.”[41]
Director Grewal also addressed the issue of Chief Compliance Officer (“CCO”) liability, which he referred to as “the proverbial elephant that shows up in any room where a regulator like me is speaking to those working in compliance.”[42] Director Grewal emphasized that the SEC does “not second-guess good faith judgments of compliance personnel made after reasonable inquiry and analysis.”[43] He explained that the SEC generally brings enforcement actions against CCOs where: (1) they affirmatively participated in misconduct unrelated to their compliance role or responsibilities; (2) they misled regulators; or (3) there was a “wholesale failure” by the CCO in carrying out their compliance responsibilities.[44] As an example of the first category, Director Grewal cited the case of Steven Teixeira, the Chief Compliance Officer of a U.S. unit of a Chinese international payment processing company, LianLian Global.[45] The SEC charged Teixeira with insider trading based on allegations that he “traded based on material nonpublic information that he surreptitiously obtained from his girlfriend’s laptop about upcoming mergers and acquisitions in which her employer was involved” and then traded on that information.[46] For the second category, Director Grewal pointed to the SEC’s case against Meredith Simmons.[47] Ms. Simmons was charged with “aiding and abetting and causing a firm’s books and records violation when she provided backdated and factually inaccurate compliance review memos to the SEC, falsely claiming that she created the memos contemporaneously with the reviews”[48] while acting in her capacity of CCO for a New York-based hedge fund.[49] Director Grewal described the “wholesale failure” cases as “rare,” noting that such cases generally involved “no education, no engagement and no execution.”[50]
International Developments
As noted in previous updates (see, e.g., our 2021 Year-End Update), several countries outside the United States have developed DPA-like regimes in the past several years. In particular, such agreements have now been used by enforcement agencies in Brazil (see our 2019 Year-End Update for details), Canada (see our 2018 Mid-Year Update for details), France (see our 2019 Year-End and 2020 Mid-Year Updates for details), Singapore, and the United Kingdom (see our 2014 Year-End Update for details), with varying degrees of frequency. Notably, Canada saw its second-ever DPA-like agreement (known as a remediation agreement) in 2023, and following a two-year hiatus on DPAs in the UK, 2023 saw its first-ever use by an enforcement entity other than the Serious Fraud Office.
United Kingdom
In a significant development, on December 5, 2023, the UK’s Crown Prosecution Service (“CPS”) entered into its first-ever DPA with a corporate entity. Previously, DPAs had only been used by the UK’s Serious Fraud Office (“SFO”). Entain plc, a London-headquartered global online sports betting and gaming business, entered into the DPA with the CPS to resolve allegations that Entain had failed to prevent bribery by its third-party suppliers and employees in Turkey, in violation of Section 7 of the UK Bribery Act (Failure to Prevent Bribery).[51] The alleged offenses took place from July 2011 to December 2017 in Turkey, leading to an investigation by HM Revenue and Customs.[52] Entain has since exited its business from Turkey and significantly strengthened its global compliance controls. According to the CPS, the full statement of facts will be published after any criminal proceedings against individuals are completed.
As part of the agreement, Entain agreed to pay a total of £615 million ($782.9 million as of the time of this writing).[53] This figure includes a financial penalty and disgorgement of profits of £585 million, payment of CPS’s costs of £10 million, and a charitable payment of £20 million.[54] In the court’s approval of the agreement, Entain was credited for its “extensive cooperation” with the investigation.[55] And in determining that a DPA was an appropriate resolution, the court considered the disproportionate consequences (e.g., Entain potentially losing its licenses in other jurisdictions) that the company might have suffered if the company had been criminally prosecuted instead.[56]
Although it is the first time that the CPS has utilized this resolution mechanism, the Entain DPA is the second-largest corporate criminal settlement in UK history, surpassed in value only by the SFO’s DPA with Airbus in 2020, which we discussed in our 2020 Mid-Year Update. It remains to be seen whether CPS will expand its use of DPAs in corporate criminal proceedings, but companies facing criminal charges in the UK will undoubtedly look to the Entain DPA as a test case going forward.
France
After a quiet first few months of the year, France’s prosecuting agencies entered into multiple DPA-like agreements (known as convention judiciaire d’intérêt public, or “CJIPs”) since May 2023.
On May 15, 2023, Guy Dauphin Environnement (“GDE”), a recycling and waste management company, entered into a CJIP with the French National Prosecutor’s Office (“PNF”) to resolve allegations of public corruption related to the construction of a landfill.[57] The PNF alleged that GDE attempted to influence a local government council’s decision regarding the landfill by inviting the president of the council and his chief of staff to lunches and dinners, and by considering the appointment of the president of the council to GDE’s supervisory board, among other favors.[58] Under the CJIP, GDE agreed to pay a fine of €1.23 million (approximately USD $1.35 million) and spend three years implementing a compliance program supervised by the French Anti-Corruption Agency.[59]
Additionally, on May 15, 2023, Bouygues Bâtiment Sud Est, an engineering, construction, and real estate development firm, and its subsidiary Linkcity Sud Est, a real estate developer, entered into a CJIP with the PNF to resolve allegations that the companies benefited from irregularities in the awarding of several public procurement contracts. Specifically, the companies allegedly provided employees of the Hospital of Annecy Genevoi, a state-owned entity, with restaurant invitations and concert tickets in connection with the award of several construction projects, and several procurement selection criteria were allegedly disregarded throughout the contract process as a result of these favors.[60] As part of the CJIP, Bouygues Bâtiment Sud Est and Linkcity Sud Est agreed to pay a fine of €7.96 million (approximately USD $8.7 million) and submit to the supervision of the French Anti-Corruption Agency for a three-year period for purposes of developing the companies’ compliance program.[61]
On June 27, 2023, Technip UK Limited, a subsidiary of TechnipFMC plc, and Technip Energies France SAS, a subsidiary of Technip Energies NV—all global providers of oil and gas services, entered into a CJIP with the PNF to resolve allegations of bribery and corruption of foreign public officials between 2008 and 2012 related to Technip’s subsea projects in Africa.[62] Under the CJIP, Technip UK and Technip Energies France agreed to pay fines of €154.8 million and €54.1 million, respectively, for a total of €208.9 million (approximately $227.5 million as of this writing).[63]
On October 11, 2023, Acieries Hachette et Driout, a steel mill in Saint-Dizier, France, signed a CJIP with the financial prosecutor of the Tribunal judiciaire de Belfort.[64] According to the financial prosecutor, an investigation revealed that Acieries Hachette et Driout produced checks to another company as a bribe to ensure that this company would sell Hachette’s steel products to Cryostar, an industrial equipment supplier in the medical and industrial gas, natural gas, hydrogen, and clean energy fields. Acieries Hachette et Driout was instructed to pay €1.2 million in fines to settle the allegations.
On November 28, 2023, the Seves Group SARL and Sediver SAS signed a CJIP with the Financial Public Prosecutor at the Paris judicial court.[65] According to the allegations, the two companies fraudulently obtained public contracts in the Democratic Republic of Congo as part of several projects to modernize electrical infrastructure. These companies obtained these contracts by paying Fichtner, a company appointed by the World Bank to manage the infrastructure rehabilitation program. The scheme was then reproduced in Algeria, Nigeria, and Libya. The World Bank had been investigating this program since January 2015. Sediver self-reported the scheme to the Financial Public Prosecutor in Nanterre in April 2017. The CJIP imposes a fine of more than €13 million and requires the implementation of a compliance program under the supervision of the French Anti-Corruption Agency for a term of three years.
On November 29 2023, the Marseille prosecutor’s office validated three CJIPs entered into with companies of the Omnium development group.[66] An investigation had been opened into SEMIVIM (a “bailleur social,” which is a local company that develops then rents housing at moderate rates, and often is treated like a governmental service) in the city of Martigues, under suspicion of bribery in the allocation of construction projects during a public bidding process. The Société d’isolation et de peinture Omnium, Sud est étanchéité, and Entreprise Ventre, three companies of the Omnium group, were accused of bribing an employee of SEMIVIM to secure these projects. One of the Omnium executives admitted that the company was awarded a construction project called “Paradis Saint Roch” as a result of his participation in this scheme. The companies were indicted in May 2022 on counts of corruption of a person charged with a public service mission, influence-peddling on a person charged with a public service mission, concealment of favoritism, and concealment of illegal taking of interests. The companies of the Omnium group must pay a public interest fine of €1,700,000. A three-year compliance program must also be established under the control of the French Anti-Corruption Agency. And the CJIP requires payments of €125,000 to SEMIVIM and €125,000 to the municipality of Martigues in compensation for their damages. The investigation into other actors in the bribery scheme is ongoing.
Finally, on December 4, 2023, the French National Financial Prosecutor’s Office validated a CJIP with ADP Ingénierie, a company of Groupe ADP.[67] ADP operates three Paris airports and 26 international airports, and ADP Ingénierie provides engineering for airport development projects. The agreement terminates the investigations relating to bribery in contracts concluded by ADP Ingénierie in Libya in 2007 and 2008, and in the Emirate of Fujairah in 2011. To settle the allegations, the company agreed to pay a fine of €14.6 million under the terms of the CJIP. The also CJIP provides that ADP International and its subsidiaries are subject to a compliance program of two years managed by an independent Integrity Compliance Officer (not by the French Anti-Corruption Agency), and ADP SA agreed to implement improvements to its group-wide compliance program.
Canada
On May 17, 2023, the Public Prosecution Service of Canada (PPSC) announced that Ultra Electronics Forensic Technology Inc. (UEFTI), a 3D imaging and automated ballistic identification company, had entered into a remediation agreement with the PPSC earlier in the year, to resolve allegations of public corruption related to the bribing of government officials in the Philippines. UEFTI allegedly attempted to bribe the two officials to win a contract with the Philippine National Police for a ballistic identification system.[68]
As part of the four-year remediation agreement, UEFTI agreed to pay a penalty of C$6,593,178 (approximately USD $4.9 million); a surcharge of C$659,318 (approximately USD $492,000); and forfeiture of C$3,296,589 (approximately USD $2.5 million). UEFTI must also cooperate in any future investigations related to the conduct and submit to the supervision of an external auditor for a four-year term, paid for by UEFTI.[69]
2023 Agreements Since Mid-Year Update
The remainder of this alert summarizes corporate resolutions from July 31, 2023 to December 31, 2023. The appendix at the end of the alert provides key facts and figures regarding these resolutions, along with links to the resolution documents themselves (where available).
Albemarle Corporation (NPA)
On September 28, 2023, Albemarle Corporation (“Albermarle”), a specialty chemicals manufacturing company, entered into a three-year NPA with the U.S. Department of Justice’s Criminal Division, FCPA Section, and the U.S. Attorney’s office for the Western District of North Carolina.[70] The agreement resolved allegations of a bribery conspiracy involving public officials in Vietnam, Indonesia, and India from 2009 through 2017.[71] The government alleged that the company conspired to pay bribes to government officials through its third-party sales agents and subsidiary employees, in exchange for obtaining and retaining chemical catalyst business with state-owned refineries worth approximately $98.5 million.[72] According to the agreement, Albermarle self-reported the conduct 16 months after learning of the misconduct but the government did not view the disclosure as “reasonably prompt” under the Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy and the U.S. Sentencing Guidelines.[73]
In connection with the agreement, Albemarle agreed to pay a total of $218.4 million, including $98.2 million in penalties.[74] Albemarle also agreed to pay another $98.5 million in forfeiture of the proceeds of the alleged violation, of which DOJ credited $81.9 million on account of the company’s agreement to pay $103.6 million in disgorgement and prejudgment interest to resolve a parallel investigation by the SEC.[75] The agreement imposes additional corporate obligations on the Company, including a requirement to self-report evidence or allegations of conduct that may constitute a violation of the FCPA anti-bribery or accounting provisions, and to modify its compliance program to ensure it maintains an effective system of internal accounting controls and a rigorous anti-corruption compliance program, but does not impose an independent monitor.
Amani Investments, LLC (Guilty Plea)
On January 19, 2023 Amani Investments, LLC, (“Amani”), a registered Money Service Business and operator of kiosks that exchanged U.S. currency for Bitcoin, entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of California to resolve allegations that Amani violated the federal Bank Secrecy Act, which requires money services businesses to report each transaction involving more than $10,000 in currency via a Currency Transaction Report (“CTR”).[76] According to the agreement, on multiple occasions Amani exchanged over $10,000 in U.S. currency for Bitcoin without filing a CTR, resulting in more than $1,000,000 in unreported transactions.[77]
Pursuant to the agreement, Amani agreed to forfeit a 2019 Mercedes-Benz, several gold coins, approximately 0.041836 Bitcoin, a Bitcoin Casascius coin (a physical coin that contains a Bitcoin redemption code), and $1,000,000 in U.S. currency.[78] The parties also agreed that the government would recommend to the court a two- to three-level reduction in the computation of the applicable offense level for sentencing purposes if Amani clearly demonstrates acceptance of responsibility for its conduct including by meeting with and assisting the probation officer in the preparation of the pre-sentence report, being truthful and candid with the probation officer, and not otherwise engaging in conduct that constitutes obstruction of justice.[79] Amani expressly reserved the right to argue that it is unable to pay a fine, and that no fine be imposed.[80]
In sentencing Amani, the court accepted the agreed-upon forfeiture order proposed by the parties.[81] The court also sentenced Amani to 36 months of probation.[82] Neither the plea agreement nor judgment contained any heightened compliance or reporting requirements.
Aylo Holdings S.à.r.l. (DPA)
On December 21, 2023, Aylo Holdings S.à.r.l. (formerly known as “MindGeek S.à.r.l.”) and its subsidiaries (collectively referred to as “MindGeek”) entered into a DPA with the United States Attorney’s Office for the Eastern District of New York to resolve allegations that MindGeek, which operated and maintained websites through which third parties could post and distribute pornographic videos, engaged in “unlawful monetary transactions” from 2017 to 2020.[83] Such transactions included receiving payments for hosting videos from certain content providers despite having indications that those providers engaged in sex trafficking and misled numerous actresses to participate in pornographic films by luring the actresses with advertisements for “modeling” jobs and only later revealing the true nature of the work.[84] According to DOJ’s allegations, those content providers proceeded to misrepresent to their victims that the films would not be posted online and, in some cases, would pressure women into participating with threats of legal action, “outing,” or canceling their flights home if they failed to perform.[85]
The DPA requires MindGeek, which did not self-disclose its conduct to DOJ, to pay a total monetary penalty of $1,844,953—including a $974,692 criminal fine and $870,261 in forfeiture—and to pay compensation to the individuals who were defrauded, or otherwise a victim of sex trafficking by the content providers at issue, and had their images posted on websites owned, operated, or controlled by MindGeek.[86] MindGeek also agreed to undergo a three-year monitorship by an independent compliance monitor with expertise in screening and monitoring illegal content for online platforms.[87]
Banque Pictet et Cie SA (DPA)
On December 4, 2023, the U.S. Department of Justice announced that Banque Pictet et Cie SA (“Banque Pictet”), a bank based in Switzerland, entered into a three-year DPA with the U.S. Attorney’s Office for the Southern District of New York, resolving allegations that the bank conspired with U.S. taxpayers to hide $5.6 billion in assets from the IRS in undeclared bank accounts.[88] This alleged conspiracy involved the bank helping U.S. taxpayers hide assets, sometimes through intermediaries, and then to repatriate assets to the United States to avoid discovery by U.S. authorities.[89] The alleged undeclared assets of U.S. taxpayers totaled approximately $5.6 billion across 1,637 bank accounts, and taxpayers allegedly evaded approximately $50.6 million in U.S. taxes through the conspiracy.[90] The bank also allegedly circumvented a Qualified Intermediary Agreement that the bank had signed with the IRS in April 2002 to ensure that U.S. securities held by the bank were subject to appropriate tax withholding.
Banque Pictet agreed to pay a total of approximately $122.9 million to the U.S. Treasury, which included approximately $31.8 million in restitution, $52.2 million in forfeiture, and a $39 million penalty.[91] Additionally, the bank agreed to provide annual reports attesting to its continuing compliance with the terms of the DPA and providing specific updates regarding its performance of the DPA’s terms. Among other terms, the DPA requires: continued cooperation with DOJ and the Internal Revenue Service, including compliance with requirements of the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Swiss Bank Program”),[92] a self-disclosure program announced by the Tax Division of DOJ in 2013, and under which a total of 84 banks self-disclosed misconduct in exchange for NPAs. The DPA also includes a requirement to close relevant accounts, a prohibition on opening additional violative accounts, and self-reporting of violations of other U.S. criminal laws during the DPA’s term.[93]
Binance (Guilty Plea)
Binance is the world’s largest crypto currency exchange by trading volume and it is an overseas, non U.S. company. On November 21, 2023, Binance reached a settlement to resolve a multi-year investigation with DOJ, the Commodity Futures Trading Commission (“CFTC”), the U.S. Department of Treasury’s Office of Foreign Asset Control (“OFAC”), and the Financial Crimes Enforcement Network (“FinCEN”).[94] Gibson Dunn represented Binance in this resolution.
Although Binance is a non-U.S. company, the enforcers alleged that it historically had U.S. users on its platform. As a result, the enforcers alleged that Binance needed to register as a foreign-located money services business and maintain an adequate anti-money laundering (“AML”) program under U.S. law because it did business “wholly or in substantial part” within the United States.[95]
Prior to the Binance resolution, resolutions with cryptocurrency exchanges generally involved U.S. exchanges, which are prohibited from providing financial services to persons in jurisdictions subject to sanctions regulated by OFAC.[96] As a non-U.S. person, Binance could do business in sanctioned jurisdictions.[97] However, because Binance’s platform historically had both U.S. users and users from sanctioned jurisdictions, enforcers alleged that Binance used a “matching engine [. . .] that matched customer bids and offers to execute cryptocurrency trades.”[98] The failure to have sufficient controls on the matching engine meant that it would “necessarily cause” transactions between U.S. users and users subject to U.S. sanctions.[99] Enforcers took the position that these transactions violated U.S. civil and criminal sanctions law because the International Emergency Economic Powers Act (“IEEPA”) prohibits, among other things, “causing” a violation of sanctions by another party.[100] In other words, by pairing trades between a historical U.S. user and person from a sanctioned jurisdiction, Binance was causing the U.S. person to violate their sanctions obligations. This resolution illustrates the breadth of U.S. jurisdiction to police sanctions offenses, even against non-U.S. companies.
Criminally, Binance pled guilty to (1) conspiracy to conduct an unlicensed money transmitting business, in violation of 18 U.S.C. § 1960 and 31 U.S.C. § 5330 for failure to register,[101] (2) failure to maintain an effective anti-money laundering program, in violation of 31 U.S.C. §§ 5318(h), 5322,[102] and (3) violating the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq.[103] Binance also entered into parallel civil settlements with FinCEN (failure to register, AML program) and OFAC (sanctions).[104] Further, Binance also entered into a settlement with the CFTC for violating various sections of the Commodities Exchange Act.[105]
As part of the resolution, which binds the entire DOJ Criminal and National Securities Divisions, Binance agreed to pay $4.3 billion to the U.S. government over an approximately 18-month period.[106] Binance also agreed to continue with certain compliance enhancements and agreed to a three-year DOJ monitorship.[107]
Centera Bioscience (Guilty Plea)
On October 30, 2023, Centera Bioscience (d/b/a Nootropics Depot), an Arizona-based marketer and distributor of pharmaceutical drugs, entered into a plea agreement with the U.S. Attorney’s Office for the District of New Hampshire, to resolve allegations that Centera Bioscience distributed misbranded drugs into interstate commerce that had not been approved by the Food and Drug Administration (FDA).[108] According to the plea agreement, Centera Bioscience “sold multiple drugs, including tianeptine, phenibut, adrafinil, and racetam drugs” on Nootropicsdepot.com and other online platforms between April 2018 and December 2021 in violation of 21 U.S.C. § 331(a), which prohibits introducing adulterated or misbranded drugs into interstate commerce.[109] These misbranded drugs were distributed throughout the United States, including in New Hampshire where the charges were brought, even though the FDA has not approved any of these drugs for use in the United States. The Company’s CEO, Paul Eftang, also pleaded guilty to the same offense.
As part of the plea agreement, Centera Bioscience agreed to forfeit $2.4 million and forfeit all drugs that had been seized in connection with this matter by the FDA and Customs and Border Protection.[110] The company also agreed to a term of three years of probation. Sentencing has been scheduled for February 5, 2024.
Corporación Financiera Colombiana SA (DPA)
On August 10, 2023, Corporación Financiera Colombiana SA (“Corficolombiana”) entered into a three-year DPA with the U.S. Department of Justice’s Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the District of Maryland to resolve allegations that the Company had conspired to offer and pay more than $23 million in bribes to high-ranking Colombian government officials to win a contract to construct and operate a highway toll road known as the Ocaña-Gamarra Extension, in violation of the FCPA.[111]
Pursuant to the DPA, Corficolombiana agreed to pay a criminal penalty of $40.6 million.[112] However, the DPA also includes a provision allowing the Company to credit up to half of that criminal penalty against the amount assessed against the company and its subsidiary, Estudios y Proyectos del Sol S.A.S. (“Episol”), by Colombia’s Superintendencia de Industria y Comercio (“SIC”), for violations of Colombian laws related to the same conduct, so long as the company and Episol drop their appeals of the SIC resolution.[113] In addition, Corficolombiana will pay over $40 million in disgorgement and prejudgment interest as part of a resolution of the SEC’s parallel investigation.[114] The company has implemented, and agreed to continue to implement, compliance policies and procedures to prevent and detect violations of the FCPA and other applicable anti-corruption laws, including implementing compliance criteria in its compensation and bonus system.[115] During the DPA’s term, Corficolombiana is also required to provide periodic reports regarding its compliance program and to self-report any evidence or allegations of further violations of FCPA anti-bribery or accounting provisions.[116]
Freepoint Commodities LLC (Guilty Plea)
On December 14, 2023, Freepoint Commodities LLC (“Freepoint”) entered into a three-year DPA with the DOJ’s Criminal Division Fraud Section and the U.S. Attorney’s Office for the District of Connecticut, to resolve allegations that Freepoint was involved in a corrupt scheme to pay bribes to Brazilian government officials in violation of anti-bribery provisions of the FCPA.[117] DOJ separately charged three individuals in relation to the alleged bribery scheme, including a Freepoint senior oil trader and agent.[118]
According to the DPA, from approximately 2012 and continuing through 2018, Freepoint employees and agents agreed to pay approximately $3.9 million to Eduardo lnnecco, a Brazilian oil and gas broker working as an agent for various energy trading companies including Freepoint.[119] Payments were allegedly made for the purpose of bribing Brazilian foreign officials to secure improper commercial advantages to obtain business from Petrobras, a Brazilian state-owned and state-controlled oil company.[120] Freepoint allegedly earned over $30 million in connection with the conduct at issue.[121]
Freepoint received cooperation credit despite its “limited” and “reactive” cooperation in early phases of the investigation.[122] Freepoint did not receive voluntary disclosure credit but received credit based on efforts to cooperate with the investigation, conducting internal analyses of the alleged conduct, and committing to enhance its compliance programs.[123] In light of the cooperation efforts, Freepoint’s criminal penalty was set at $68 million which reflected a discount of 15% off the bottom of the U.S. Sentencing Guidelines fine range, and forfeiture of over $30 million.[124] Freepoint has also agreed to disgorge more than $7.6 million to the Commodity Futures Trading Commission (“CFTC”) in a related matter which will be credited up to 25% of the forfeiture amount against disgorgement.[125]
Freepoint agreed to continue cooperating with DOJ in any ongoing or future criminal investigation relating to the conduct at issue, and to report evidence of any other conduct that would violate U.S. antibribery provisions.[126] It also agreed to continue implementing an effective corporate compliance program and report progress annually to the Fraud Section and the U.S. Attorney’s Office for the District of Connecticut for the term of the agreement, with a possible extension of an additional year if the Fraud Section and Office determine that Freepoint knowingly violates any provision of the agreement or fails to fulfill all obligations.[127]
GDP Tuning LLC and Custom Auto of Rexburg LLC (Guilty Plea)
On August 23, 2023, GDP Tuning LLC and Custom Auto of Rexburg LLC (d/b/a Gorilla Performance), and the companies’ owner, Barry Pierce (collectively, “Gorilla Performance Parties”), entered into a plea agreement with the U.S. Attorney’s Office for the District of Idaho and the Department of Justice’s Environment and Natural Resources Division to resolve allegations that Gorilla Performance Parties had conspired to violate the Clean Air Act (“CAA”).[128] The defendants admitted to purchasing and selling tuning devices and software that tampered with vehicles’ onboard diagnostic systems for emissions. These devices allowed vehicle owners to remove vehicle emissions control equipment without the vehicles’ on-board diagnostic systems detecting the removal and activating “limp mode,” which substantially reduces vehicles’ speeds. Such monitoring devices in vehicles are required under the CAA.[129]
Gorilla Performance Parties agreed to pay $1 million in criminal fines in total and to not manufacture, sell, or install devices that defeat vehicles’ emissions controls.[130] The defendants also agreed not to commit future violations of the CAA or other federal, state, or local laws or environmental regulations.[131] The maximum financial penalty is $500,000 or twice the gross gain, on the approximately $14 million in revenue the defendants received from the scheme.[132] The plea agreements also include five years of probation.[133] As of the date of this publication, the defendants had not been sentenced.
Glenmark Pharmaceuticals Inc., USA (DPA) and Teva Pharmaceuticals USA, Inc. (DPA)
On July 31, 2023, Glenmark Pharmaceuticals Inc., USA (“Glenmark”) entered into a three-year DPA with DOJ Antitrust Division resolving allegations of conspiracy to fix prices of pravastatin, a cholesterol drug, and other generic drugs sold in the United States in violation of the Sherman Act, 15 U.S.C. § 1.[134] Glenmark was charged with conspiring with Teva Pharmaceuticals, whose DPA was announced the same day and is discussed below, among other companies.
Glenmark agreed to a $30 million criminal penalty. The agreement notes that DOJ and Glenmark agreed to a penalty below the relevant Guidelines fine range due to Glenmark’s inability to pay a higher monetary penalty without substantially jeopardizing its continued viability.[135] In addition to the penalty, the agreement requires that Glenmark divest its pravastatin drug line—the Glenmark and Teva DPAs are the first to use the remedy of divestiture.[136] The company has implemented, and agreed to continue to implement, compliance policies and procedures to prevent and detect antitrust violations.[137] During the DPA’s term, Glenmark is required to provide periodic reports regarding its compliance program.[138]
Approximately one month later, on August 21, 2023, Teva Pharmaceuticals USA, Inc. (“Teva”) entered into a three-year DPA with DOJ Antitrust Division also resolving allegations of conspiracy to fix prices of pravastatin and other generic drugs sold in the United States in violation of the Sherman Act, 15 U.S.C. § 1.[139]
Teva agreed to a $225 million criminal penalty and to donate $50 million worth of certain medications to humanitarian organizations.[140] According to DOJ’s press release, this is the largest penalty to date for a domestic antitrust cartel.[141] In addition to the penalty, like the Glenmark DPA, the agreement requires Teva to divest its pravastatin drug line.[142] Unlike the Glenmark DPA, the agreement requires Teva to retain a monitor to facilitate, oversee, and report on the divestiture.[143] Teva’s DPA is particularly notable for its express discussions of both (1) the fact that a guilty plea would result in mandatory exclusion from federal programs and the collateral impact that a guilty plea would have on customers and employees; and (2) the fact that the DPA represents the parent company’s second such agreement, Teva having entered into a DPA in 2016 to resolve FCPA charges.[144] The DPA states that although DOJ “generally disfavors multiple deferred prosecution agreements, the resolution here is appropriate given that the matters at issue in the 2016 resolution did not involve recent or similar types of misconduct; the same personnel, officers, or executives; or the same entities; and in light of the extraordinary remedial measures required.”[145] This reflects the more nuanced approach to “recidivism” articulated in the 2023 revisions to DOJ’s Corporate Enforcement Policy, discussed in our 2023 Mid-Year Update.
H&D Sonography LLC (DPA)
On August 15, 2023, H&D Sonography LLC (“H&D”), a New Jersey-based diagnostic testing company, entered into a three-year DPA with the U.S. Attorney’s Office for the District of New Jersey to resolve allegations that H&D conspired to violate the federal Anti-Kickback Statute by overpaying physicians for office space in return for increased diagnostic test referrals.[146] According to the DPA, from January 2015 to December 2018, H&D subleased space in physicians’ offices for the purpose of conducting diagnostic tests.[147] H&D allegedly paid the physicians for more hours than it used, at times paying more than the offices’ monthly rents.[148] According to the government, in return for these payments the physicians referred patients to H&D, which then billed Medicare for the tests.[149]
The DPA does not impose any criminal penalties or restitution on H&D, nor does it impose a monitor. Concurrently with the DPA, H&D and its owners agreed to a $95,000 civil settlement to resolve allegations that H&D’s Medicare billing violated the False Claims Act.[150] The settlement states that $75,000 of the settlement amount is restitution.[151]
HealthSun Health Plans, Inc. (Declination with Disgorgement)
On October 25, 2023, DOJ’s Fraud Section issued a CEP declination to HealthSun Health Plans, Inc. (“HealthSun”).[152] The HealthSun declination is one of three CEP declinations issued by DOJ in 2023.[153] According to the declination letter, the government’s investigation found evidence that from approximately 2015 to 2020, HealthSun’s former Director of Medicare Risk Adjustment Analytics submitted, and caused HealthSun to submit to the U.S. Department of Health and Human Services’ Centers for Medicare & Medicaid Services (“CMS”), false and fraudulent information to increase reimbursements to HealthSun for certain Medicare Advantage enrollees.[154] DOJ alleged that CMS made approximately $53 million in overpayments to HealthSun because of HealthSun’s conduct. DOJ stated that it had declined to prosecute the case based on an assessment of the factors in the Corporate Enforcement and Voluntary Disclosure Policy, including HealthSun’s timely and voluntary self-disclosure of the misconduct, full and proactive cooperation, and timely and appropriate remediation.[155] According to the declination letter, HealthSun’s cooperation included producing information about all individuals involved in the misconduct and information obtained from imaging several business and personal cell phones; and its remediation included reporting and correcting the false information submitted to CMS and implementing and testing a risk-based Medicare Advantage compliance program.
In connection with the declination, HealthSun agreed to disgorge the approximately $53 million that DOJ alleged CMS overpaid.[156] In connection with the alleged scheme, the company’s former Director of Medicare Risk Adjustment Analytics has been charged with conspiracy to commit health care fraud, as well as wire fraud and major fraud against the United States.[157]
Lifecore Biomedical, Inc. (Declination with Disgorgement)
On November 16, 2023, DOJ’s Fraud Section and the United States Attorney’s Office for the Northern District of California informed Lifecore Biomedical, Inc. (“Lifecore”) that they were declining to prosecute the company for alleged bribes paid to Mexican government officials in violation of the FCPA.[158] According to the declination letter, Lifecore’s former subsidiary Yucatan Foods L.P. (“Yucatan”) owned and operated Procesadora Tanok S. de R.L. de C.V. (“Tanok”).[159] Yucatan and Tanok allegedly paid bribes to Mexican government officials before and after Lifecore acquired Tanok and Yukatan on December 1, 2018.[160] Specifically, the government alleged that individuals from the companies used a third party to pay approximately $14,000 in bribes to a Mexican government official to secure a wastewater discharge permit.[161] Tanok employees and agents also allegedly paid a third party approximately $310,000 to prepare fraudulent manifests while knowing that a portion of the funds were being used to bribe Mexican officials to sign the manifests.[162]
During Lifecore’s pre-acquisition diligence, a Yucatan officer involved in the misconduct took steps to conceal the misconduct from Lifecore and its auditor.[163] Once Lifecore discovered the misconduct during its post-acquisition integration, it conducted an internal investigation and voluntarily disclosed the conduct to DOJ.[164] Lifecore subsequently divested itself of the legacy Yucatan and Tanok business.[165]
The government stated in its declination letter that the financial benefit attributable to the alleged conduct was $1,286,060, and that Lifecore had incurred $879,555 in expenses by constructing a wastewater treatment plant and paying Mexican regulators the duties it owed.[166] Lifecore has agreed to disgorge the remaining $406,505.[167] Lifecore also agreed to continue to cooperate with the government’s ongoing investigation and to require any successor-in-interest to agree to the obligations in the letter, including continued cooperation with the government.[168]
New Orleans Steamboat Company (Guilty Plea)
On August 16, 2023, the New Orleans Steamboat Company (“NOSC”) entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of Louisiana, resolving allegations that it violated the Clean Water Act by discharging excess ballast material into the Inner Harbor Navigation Canal in New Orleans.[169] The allegations arose out of a 2019 incident in which a former NOSC employee notified the Louisiana State Police Hazmat Hotline that he had captured a video of NOSC employees and supervisors dumping a black, unknown waste material from the M/V City of New Orleans into the Inner Harbor Navigation Canal.[170] In exchange for NOSC’s guilty plea, the U.S. Attorney’s Office agreed it would not bring any other charges against NOSC or any related companion entity that operates out of the same office as NOSC arising from or related to the alleged conduct.[171]
Following the hearing, NOSC was sentenced to a $50,000 fine—the maximum penalty for the violation, one year probation, and a $400 special assessment fee.[172]
Nomura Securities International, Inc. (NPA)
On August 22, 2023, Nomura Securities International, Inc. (“NSI”), a U.S.-based broker-dealer subsidiary of Japanese financial services firm Nomura Holdings, entered into an NPA with the U.S. Attorney’s Office for the District of Connecticut.[173] The NPA resolved allegations that, from approximately 2009 to 2013, NSI, through its employees, engaged in a scheme to defraud its customers by making fraudulent misrepresentations in the purchase and sale of residential mortgage-backed securities.[174] NSI traders allegedly took “secret and unearned compensation from NSI customers” by misrepresenting certain pricing information in trades—for example, by lying to the buyer about the seller’s asking price.[175] NSI also allegedly took steps to conceal the fraudulent conduct from its customers and from employees who did not participate in the scheme.[176]
Pursuant to the NPA, NSI agreed to pay a penalty of $35 million and $807,718 in restitution to impacted customers.[177] The restitution amount credits NSI for remediation payments of $20,125,615 previously made to impacted customers in connection with NSI’s related settlement agreement with the SEC in 2019.[178] The agreement does not contain a requirement for NSI to retain an independent compliance monitor, both because NSI represented that it had taken steps to improve its compliance program to “prevent and detect violations of the securities fraud statutes and other applicable anti-fraud laws,” and because “certain structural changes in the secondary market for [residential mortgage-backed securities]” made it less likely that the relevant conduct would occur again.[179] However, the agreement does impose an ongoing obligation on NSI to self-report “any evidence or allegation of a criminal violation of U.S. federal law.”[180]
NuDay (Guilty Plea)
On September 8, 2023, NuDay entered into a plea agreement with the U.S. Attorney’s Office for the District of New Hampshire, to resolve three counts of failure to file export information, in violation of 13 U.S.C. § 305.[181] According to the plea agreement, NuDay, a New Hampshire-based nonprofit, made over 100 shipments of humanitarian goods to Syria between May 2018 and December 2021 while Syria was subject to sanctions.[182] NuDay allegedly claimed in shipping documents that these shipments were of nominal value to keep them below the $2,500 threshold, above which NuDay would have been required to file an Electronic Export Information through the Automated Export System maintained by the Census Bureau and U.S. Customs and Border Protection.[183] In reality, the value of some of NuDay’s shipments exceeded the threshold, with one of NuDay’s shipments valued at more than $8.3 million.[184] According to the agreement, NuDay used two companies to transport the goods: AJ Worldwide Services transported shipments from the United States to Turkey, and Safir Forwarding shipped them from Turkey to Syria.[185] As the exporting company, NuDay bore responsibility for providing AJ Worldwide Services with truthful information about the value of the goods and their ultimate destination for reporting to the United States Department of Commerce.[186] The plea agreement states that NuDay falsely informed AJ Worldwide Services that the final destination for the shipments was Turkey, rather than identifying the destination as Syria, which would have required an export license.[187]
In the plea agreement, NuDay and the government agreed on a recommended fine of $25,000 and five years of probation.[188] They also stipulated that the founder of NuDay, Nadia Alawa, and her family will have no further involvement with the organization.[189] On December 28, 2023, NuDay was sentenced to five years of probation, the maximum penalty for an organizational defendant.[190] NuDay was also ordered to pay a $25,000 fine.[191]
Pro-Mark Services, Inc. (NPA)
On October 30, 2023, the U.S. Department of Justice announced that Pro-Mark Services, Inc. (“Pro-Mark”) entered into a three-year NPA with the Department of Justice, Antitrust Division, and the U.S. Attorney’s Office for the District of North Dakota, resolving allegations concerning the award of federal construction contracts amounting to $70 million.[192] The agreement required the company to pay a criminal penalty of $949,000.[193]
Secor, Inc. & Matthew Castle (Guilty Plea)
On November 9, 2023, Secor, Inc. (“Secor”), a federal halfway house that contracted with the Federal Bureau of Prisons (“BOP”) to house inmates, entered into a plea agreement with the U.S. Attorney’s Office for the Western District of Virginia, to resolve allegations that Secor made materially false statements to the U.S. Bureau of Prisons (“BOP”) and committed wire fraud.[194] Secor’s former president and director, Matthew Castle pleaded guilty to the same charges.[195] According to the plea agreement, in 2018, Secor entered into a contract with the BOP that allowed some of the offenders under the care of Secor to be assigned to “home confinement,” meaning certain offenders would live at an approved residence not owned by Secor.[196] BOP agreed to pay Secor a per diem rate for offenders who resided at Secor’s facilities and a different per diem rate for those on home-confinement.[197] Under the terms of the contract, Secor was required to outfit home-confinement offenders with GPS monitoring equipment, and Secor personnel were required to personally visit each offender’s residence on at least a monthly basis to ensure the offender was living at their assigned residence and in accordance with applicable rules. In reality, according to its plea agreement, Secor did not issue the GPS monitoring equipment to many of the home-confinement offenders for whom it was required and failed to conduct requisite home visits.[198] Meanwhile, on multiple occasions, Castle completed BOP documentation certifying that he had conducted the required visits and noted no issues, according to his plea agreement.[199] Castle and Secor filed monthly invoices with the BOP for reimbursement, which BOP paid on the basis of Secor’s and Castle’s representations and contractual obligations.[200]
In connection with their plea agreements, Secor and Castle agreed to jointly and collectively pay $208,105 in restitution.[201] Secor agreed to serve one- to five-years’ probation, to be determined at sentencing, to pay $25,000 in criminal fines, and to forfeit $40,000.[202] Castle agreed to pay $5,000 in criminal fines and serve a term of imprisonment of 12-21 months, to be determined at sentencing.[203] Sentencing is currently scheduled to take place in March 2024.[204]
Sinister Manufacturing Company, Inc. (Guilty Plea)
On August 1, 2023, diesel parts manufacturer Sinister Manufacturing Company, Inc. (“Sinister Diesel”) entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of California and the Environmental Crimes Section of the Environmental and Natural Resources Division to resolve allegations that Sinister Diesel had conspired to violate the Clean Air Act and defraud the United States and violated the Clean Air Act by tampering with the monitoring device of an emissions control system of a diesel truck.[205] According to the plea agreement, Sinister Diesel manufactured and sold so-called “delete kits” that enabled diesel truck owners to disable and override emissions controls required by the U.S. Environmental Protection Agency (“EPA”).[206] The agreement also describes conduct to evade regulatory action, including conducting phone-only sales, removing violative products from the company’s website, and partnering with at least one other company to bundle products that together would allow “deleted” trucks to run without emissions controls.[207]
The district court sentenced Sinister Diesel on November 14, 2023 and entered judgment on November 17, 2023, imposing a $500,000 criminal fine ($250,000 for each count).[208] Separately, Sinister Diesel agreed to pay an additional $500,000 under a civil consent decree for a total fine of $1 million.[209] The district court sentenced Sinister Diesel to a three-year probational term, subject to Sinister Diesel’s compliance with the consent decree and no further violations of federal and state environmental laws.[210] Additionally, pursuant to the civil consent decree, Sinister Diesel agreed to—among other things—refrain from selling devices designed override a car’s emissions controls;[211] cease providing technical support and warranty coverage for such products;[212] implement a compliance program;[213] and make annual disclosures to the EPA and DOJ for four years regarding progress of its compliance measures.[214] The consent decree also includes a detailed table of fines for future violations of its prohibitions, including a fine of at least $500,000 for transferring intellectual property in violation of its terms.[215]
Suez Rajan Limited (Guilty Plea) and Empire Navigation Inc. (DPA)
On March 16, 2023, Suez Rajan Limited (“Suez Rajan”), a Marshall Islands shipping company, entered into a plea agreement with the U.S. Attorney’s Office for the District of Columbia to resolve allegations that Suez Rajan conspired to violate the IEEPA, which empowers the U.S. president to impose economic sanctions on foreign countries, including Iran.[216] According to the agreement, Suez Rajan violated U.S. sanctions on Iran by facilitating the illicit sale and transport of Iranian oil. Specifically, Suez Rajan used a chartered vessel to transport Iranian-origin crude oil to China and sought to obfuscate the origin of the crude oil by engaging in ship-to-ship transfers and masking the locations and identities of the vessels involved.[217] Suez Rajan pleaded guilty to one count of conspiracy to violate IEEPA.[218]
In the plea agreement, Suez Rajan and the government agreed to a sentence of three years of corporate probation and a fine of almost $2.5 million.[219] In addition, pursuant to a separate three-year DPA, Empire Navigation Inc., the operating company of the chartered vessel carrying the contraband cargo, agreed to cooperate and transport the Iranian oil to the United States as well as pay a separate $2.5 million fine. The cargo is now subject to a civil forfeiture action in the U.S. District Court for the District of Columbia.[220] As noted above, DOJ has recently touted this resolution as a rare case in which specific performance was required by the resolution.[221]
The Suez Rajan case is the first-ever criminal resolution involving a company that violated sanctions by facilitating the illicit sale and transport of Iranian oil.[222]
Tysers Insurance Brokers Ltd. and H.W. Wood Ltd. (DPAs)
On November 20, 2023, two UK reinsurance brokers—Tysers Insurance Brokers Ltd. and H.W. Wood Ltd. (collectively, “brokers”)—each entered into a three-year DPA with the U.S. Department of Justice in the Southern District of Florida.[223] The agreements settle charges of conspiracy to violate the anti-bribery provisions of the FCPA between 2013 and 2017.[224] The government alleges the brokers engaged in a scheme to bribe government officials in Ecuador through intermediaries, in an amount totaling approximately $2.8 million, to obtain and retain business with state-owned insurance companies.[225]
In connection with its DPA, Tysers agreed to pay a $36 million criminal penalty and $10.5 million in forfeiture.[226] H.W. Wood agreed that the appropriate fine under the U.S. Sentencing Guidelines would be $22.5 million in criminal penalties and $2.3 million in forfeiture.[227] However, due to H.W. Wood’s inability to pay that amount, the company agreed with DOJ to a reduced criminal penalty of $508,000 and no forfeiture amount.[228] In analyzing the company’s inability to pay, DOJ looked to the company’s financial condition and alternative sources of capital, among other factors included in DOJ’s Inability to Pay Guidance,[229] and concluded that paying a criminal penalty greater than $508,000 would “substantially threaten the continued viability” of H.W. Wood.[230] The agreements impose corporate obligations on the brokers, including a requirement to self-report any evidence or allegation of conduct that may constitute a violation of the FCPA anti-bribery provisions, and to modify its compliance program to ensure it maintains an effective system of internal accounting controls and a rigorous anti-corruption compliance program, but do not impose an independent monitor.[231] Both companies received cooperation and remediation credit of 25% off the bottom of the applicable U.S. Sentencing Guidelines fine range.[232]
View, Inc. (Guilty Plea)
On March 14, 2023, View, Inc., a California window manufacturing company with operations in Mississippi, entered into a plea agreement with the U.S. Attorney’s Office for the Northern District of Mississippi to resolve allegations that it negligently discharged wastewater into a Publicly Owned Treatment Works (POTW) without a permit, in violation of the Clean Water Act.[233] View, Inc.’s alleged unpermitted wastewater discharges allegedly accounted for approximately 40% of the relevant POTW’s permitted capacity.[234] The plea agreement does not contain an agreed‑upon penalty recommendation to the court nor does it contain recommendations for any other consequence.[235] The agreement states that the government will not charge View, Inc., former officers, directors, or employees with other offenses relating to the same charge.
On August 18, 2023, View, Inc. was sentenced to pay a $3 million fine and a community service payment to DeSoto County Regional Utility Authority of $450,000, in addition to a three‑year period of probation.[236] The judgment also notes that View, Inc. will enter into a separate, but related, civil Agreed Order with the Mississippi Commission on Environmental Quality, and under that agreement is expected to pay a civil penalty of $1.5 million.[237]
VIP Healthcare Solutions, Inc. (Guilty Plea)
On October 17, 2023, VIP Healthcare Solutions, Inc. (“VIP Healthcare”) entered into a plea agreement with the U.S. Attorney’s Office for the District of Puerto Rico and pleaded guilty along with the company’s secretary and president. The agreement resolved allegations that VIP Healthcare, which managed a diagnostic and treatment center in the Municipality of Cataño, falsely certified the truth and accuracy of information in its 2020 Paycheck Protection Program (PPP) loan application.[238] According to the agreement, among other things, the application falsely claimed that the company’s secretary owned 85% of the company and failed to list the company president as an owner.[239] According to the plea agreement, the parties agreed to a recommended sentence of two years of probation and a fine, but it does not recommend a specific fine amount.[240] On January 17, 2024, the court sentenced VIP Healthcare to two years’ probation but did not impose a fine.[241]
Western River Assets, LLC and River Marine Enterprises, LLC (Guilty Plea)
On October 17, 2023, Western River Assets, LLC and River Marine Enterprises, LLC entered into plea agreements with the U.S. Attorney’s Office for the Southern District of West Virginia, to resolve allegations that the two entities violated the Refuse Act of 1899, 33 U.S.C. §§ 407 and 411, which penalize discharge of refuse into navigable waters.[242] According to the plea agreements, Western River Assets owned a towboat, the M/V Gate City, and moored it along the West Virginia Shore of the Big Sandy River between 2010 and January 2018.[243] River Marine Enterprises operated the towboat during that time period.[244] On December 5, 2017, the Coast Guard issued an Administrative Order after an inspection, requiring the sole owner of the two companies, David K. Smith, to remove all oil and hazardous substances from the M/V Gate City by January 31, 2018.[245] On around January 10, 2018, before the contractors engaged by River Marine Enterprises were able to remove the oil and other substances, the M/V Gate City sank, discharging oil and other substances into the Big Sandy River.[246] The government alleged that as a direct result of the sinking and the spill, the City of Kenova closed its municipal drinking water intake for three days, and multiple regulatory agencies expended money and other resources to respond to the spill.[247]
According to the agreements, Western River Assets and River Marine Enterprises could each face a maximum fine of $200,000, probation for up to five years, and an order of restitution.[248] The agreements do not contain a recommended sentence.[249] The sentencing has yet to occur, but a sentencing hearing is scheduled on February 26, 2024.[250] Smith was charged with the same violation and also pleaded guilty on October 17, 2023.[251] He could face imprisonment for no less than one month and no more than a year, a fine up to $100,000, and supervised release for one year.[252]
Zona Roofing LLC (Guilty Plea)
On November 20, 2023, Zona Roofing LLC (“Zona”) entered into a plea agreement, through its owner and principal Yilbert Segura (“Segura”), with the U.S. Attorney’s Office for the District of New Jersey.[253] Zona was charged with two counts of Willful Violation of Occupational Safety and Health Administration (“OSHA”) standards by failing to provide fall protection and fall protection training to employees engaged in the replacement of a residential roof, resulting in the death of an employee.[254]
As part of the plea agreement, Zona, through Segura, was sentenced to five years’ probation, and ordered to pay $75,000 in restitution.[255] Additionally, Zona was ordered to comply with special conditions outlined in the Agreement, which require Zona to provide fall training and procedures to all employees and follow enhanced safety provisions for future construction projects.[256]
Z&L Properties (Guilty Plea)
On August 17, 2023, Z&L Properties Inc., (“Z&L Properties”), a California-based subsidiary of a Chinese property development company, entered into a plea agreement with the U.S. Attorney’s Office for the Northern District of California to resolve allegations that Z&L Properties conspired to commit and did commit honest services wire fraud.[257]
Although the plea agreement itself is sealed, a four-page Criminal Information alleges that between November 2018 and January 2020, Z&L Properties executives approved or paid bribes to a former member of the San Francisco Department of Public Works and another individual, including in the form of food, drink, transportation, and lodging during a trip to China in 2018 and thereby conspired to defraud the public of its right to honest services.[258] According to the Information, the purpose of these payments was to influence the official to act favorably with respect to Z&L Properties’ requests for city approvals needed to complete one of the company’s construction projects.[259]
On October 16, 2023, the court sentenced Z&L Properties to pay a $1 million fine, and to implement an anti-corruption compliance program as set out in the plea agreement.[260]
Appendix
The chart below summarizes the agreements concluded by DOJ from July 2023 through December 2023. The complete text of each publicly available agreement in hyperlinked in the chart.
The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA, DPA, or guilty plea, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the NPA or DPA, paid by the named entity and/or subsidiaries. The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in resolution agreements.
| U.S. Deferred Prosecution Agreements, Non-Prosecution Agreements, and Plea Agreements August-December 2023 | |||||||
| Company | Agency | Alleged Violation | Type | Monetary Recoveries | Monitoring & Reporting | Term of Agreement (Months) | |
| Albemarle Corporation | W.D. N.C. | FCPA | NPA | $218,509,663 | No monitor | 36 | |
| Amani Investments, LLC | E.D. Cal; U.S. Postal Inspection Service; FBI; IRS; DEA | Bank Secrecy Act; Conspiracy to avoid filing currency transaction reports. | Guilty Plea | $1,000,000 (and other assets) | N/A | N/A | |
| Aylo Holdings, S.a.r.l. | E.D.N.Y. | Unlawful Monetary Transactions (18 U.S.C. 1957) | DPA | $1,844,953 | 36 month compliance monitor | 36 | |
| Banque Pictet et Cie SA | S.D.N.Y. | Tax Evasion | DPA | $122,900,000 | No monitor | 36 | |
| Binance Holdings Limited | DOJ.; W.D. Wash; CFTC; FinCEN; OFAC | AML | Guilty Plea | $4,316,126,163 | 3-year independent compliance consultant | N/A | |
| Centera Bioscience | D. N.H. | Distribution of misbranded drugs | Guilty Plea | $2,400,000 | 3-years’ probation | N/A | |
| Corporación Financiera Colombiana SA | DOJ Fraud.; D. Md. | FCPA | DPA | $80,600,000 | No monitor | 36 | |
| Empire Navigation Inc. | D.D.C.; DOJ NSD | Trade Sanctions/IEEPA/Export Controls | DPA | $2,500,000 | No | 36 | |
| Freepoint Commodities LLC | D. Conn; DOJ Fraud | FCPA | DPA | $98,551,150 | No monitor | 36 | |
| GDP Tuning LLC; Custom Auto of Rexburg LLC | D. Idaho; DOJ Environmental Crimes Section, EPA Criminal Enforcement | Clean Air Act | Guilty Plea | $1,000,000 | 5 years’ probation | N/A | |
| Glenmark Pharmaceuticals Inc., USA | DOJ, Antitrust Division | Sherman Antitrust Act | DPA | $30,000,000 | Self-reporting | 36 | |
| H&D Sonography | D.N.J. | Anti-Kickback Statute | DPA | $95,000 | No monitor | 36 | |
| H.W. Wood Ltd | S.D. Fl | FCPA | DPA | $508,000 | No monitor | 36 | |
| HealthSun Health Plans, Inc. | DOJ Fraud | False Claims; Wire Fraud | Declination with Disgorgement | $53,170,115 | No monitor | N/A | |
| Lifecore Biomedical, Inc. | DOJ Fraud; N.D. Cal. | FCPA | Declination with Disgorgement | $406,505 | No monitor | N/A | |
| New Orleans Steamboat Co. | E.D. La.; EPA; DOT | Clean Water Act | Guilty Plea | $50,400 | N/A | N/A | |
| Nomura Securities International, Inc. | D. Conn.; DOL | Securities Fraud | NPA | $55,933,332 | No monitor | 12 | |
| NuDay | D. N.H. | Export Controls | Guilty Plea | $25,000 | No monitor | N/A | |
| Oregon Tool, Inc. | D. Or. | AML | NPA | $1,724,803 | No monitor | N/A | |
| Pro-Mark Services, Inc. | DOJ, Antitrust Division; D. N.D. | Conspiracy to defraud the United States | NPA | $949,000 | No monitor | 36 | |
| River Marine Enterprises | S.D. WV; EPA | Discharge of refuse into navigable waters | Guilty plea | Pending | N/A | N/A | |
| Secor, Inc. | W.D.Va.; Russell County Sheriff’s Office, Bureau of Prisons | Wire fraud; Making materially false statements | Guilty Plea | $278,105 | 1 – 5 years’ probation | NA | |
| Sinister Manufacturing Company, Inc. | E.D. Cal; EPA; FBI; DOJ ENRD Division | Clean Air Act | Guilty Plea | $1,000,000 | N/A | N/A, 36 month probation | |
| Suez Rajan Limited | D.D.C.; DOJ NSD | Trade Sanctions/IEEPA/Export Controls | Guilty plea | $2,500,000 | N/A | 36 | |
| Teva Pharmaceutical Industries USA, Inc. | DOJ, Antitrust Division | Sherman Antitrust Act | DPA | $225,000,000 | Yes, to oversee divestiture of pravastatin drug line | 36 | |
| Tysers Insurance Brokers | S.D. Fl | FCPA | DPA | $46,589,275 | No monitor | 36 | |
| View, Inc. | N.D. Miss; EPA | Clean Water Act | Guilty plea | $4,950,000 | N/A | N/A | |
| VIP Healthcare Solutions, Inc. | D.P.R. | Making a false statement in connection with a Paycheck Protection Program (PPP) loan application | Guilty Plea | $0 | 2-years’ probation | NA | |
| Western River Assets | S.D. WV; EPA | Refuse Act of 1899 – Discharge of refuse into navigable waters | Guilty plea | Pending | N/A | N/A | |
| Zona Roofing LLC | D.N.J.; OSHA | Occupational Safety and Health Administration standards | Guilty Plea | $75,000 | N/A | 5-years’ probation | |
| Z&L Properties | N.D. Cal. | Honest services wire fraud | Guilty Plea | $1,000,000 | No | N/A | |
__________
[1] This update addresses developments and statistics through December 31, 2023. NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly used by DOJ. They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees. Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing a compliance program or cooperating with a monitor who reports to the government. Although NPAs and DPAs are used by multiple agencies, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified over 700 agreements initiated by DOJ, and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”).
[2] For an analysis of corporate resolutions from the first half of 2023, please see Gibson Dunn’s Mid-Year Corporate Resolutions Update at https://www.gibsondunn.com/corporate-resolutions-update-2023/.
[3] Gibson Dunn began tracking corporate guilty pleas in 2022.
[4] U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Keynote Address at the 40th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-address-40th.
[5] U.S. Dep’t of Justice, Deputy Attorney General Lisa O. Monaco Announced New Safe Harbor Policy for Voluntary Self-Disclosures Made in Connection with Mergers and Acquisitions (Oct. 4, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-announces-new-safe-harbor-policy-voluntary-self (hereinafter “Monaco Remarks”).
[6] U.S. Dep’t of Justice, Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the Global Investigations Review Annual Meeting (Sept. 21, 2023), https://www.justice.gov/opa/speech/principal-associate-deputy-attorney-general-marshall-miller-delivers-remarks-global (hereinafter “Miller Remarks”).
[7] Monaco Remarks.
[8] U.S. Dep’t of Justice, Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the New York City Bar Association’s International White Collar Crime Symposium (Nov. 28, 2023), https://www.justice.gov/opa/speech/principal-associate-deputy-attorney-general-marshall-miller-delivers-remarks-new-york.
[9] Id.
[10] Monaco Remarks.
[11] Id.
[12] Id.
[13] U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Keynote Address at the 40th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-address-40th.
[14] Id.
[15] Id.; see also U.S. Dep’t of Justice, Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national; U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Remarks at the American Bar Association 10th Annual London White Collar Crime Institute (Oct. 10, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-remarks-american-bar.
[16] Monaco Remarks.
[17] Id.; see also U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Remarks at the American Bar Association 10th Annual London White Collar Crime Institute (Oct. 10, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-remarks-american-bar.
[18] Deferred Prosecution Agreement, United States v. Corporacion Financiera Colombiana SA, No. 8:23-CR-00262 (D. Md. Aug. 10, 2023).
[19] E.g., Monaco Remarks.
[20] Miller Remarks.
[21] Miller Remarks.
[22] U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Keynote Address at the 40th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-address-40th.
[23] Id.
[24] U.S. Dep’t of Justice, Voluntary Self-Disclosure Policy for Business Organizations (Feb. 2023), https://www.justice.gov/file/1571106/download.
[25] Id.
[26] Id.
[27] Monaco Remarks.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] U.S. Dep’t of Justice, Acting Assistant Attorney General Nicole M. Argentieri Delivers Keynote Address at the 40th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2023), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-address-40th.
[35] Id.
[36] SEC, Remarks at New York City Bar Association Compliance Institute (Oct. 24, 2023), https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423 (hereinafter “Grewal Remarks”).
[37] Id.
[38] Id.
[39] Id.
[40] Id.
[41] Id.
[42] Id.
[43] Id.; see also In the Matter of the Application of Thaddeus J. North, Admin. Proc. File No. 3-17909 (Oct. 29, 2018) (Commission Opinion) (collecting Commission decisions) (“These decisions reflect the principle that, in general, good faith judgments of CCOs made after reasonable inquiry and analysis should not be second guessed.”), www.sec.gov/files/litigation/opinions/2018/34-84500.pdf, aff’d sub nom. North v. S.E.C., 829 Fed. App’x 729, 730 (D.C. Cir. Oct. 23, 2020).
[44] Grewal Remarks.
[45] Id.; Securities and Exchange Commission, “SEC Charges Stockbroker and Friend with Insider Trading” (June 29, 2023), www.sec.gov/news/press-release/2023-124.
[46] Grewal Remarks.
[47] Id.
[48] Id.
[49] In the Matter of Meredith A. Simmons, Admin. Proc. File No. 3-20114 (Sept. 30, 2020), www.sec.gov/files/litigation/admin/2020/34-90061.pdf.
[50] Grewal Remarks.
[51] Deferred Prosecution Agreement, Rex v Entain plc, December 5, 2023, https://www.entaingroup.com/media/hyakjf4z/entain-deffered-prosecution-agreement-05122023.pdf.
[52] Id.
[53] Id.
[54] Id.
[55] Approved Summary Judgement, Rex and Entain plc, December 5, 2023, https://www.entaingroup.com/media/lr3h0zfl/entain-approved-summary-of-judgement-regarding-dpa-05122023.pdf.
[56] Id.
[57] Guy Dauphin Environnement CJIP (May 15, 2023), https://www.justice.gouv.fr/sites/default/files/2023-06/CJIP_GDE_20230517.pdf.
[58] Id.
[59] Id.
[60] Bouygues Bâtiment Sud Est and Linkcity Sud Est CJIP (May 15, 2023), https://www.justice.gouv.fr/sites/default/files/2023-06/CJIP_BBSE_LYSE_20230523.pdf.
[61] Id.
[62] Press Release, Technip Energies to Resolve Outstanding Matters with the French Parquet National Financier (Nov. 30, 2023), https://www.ten.com/en/media/press-releases/technip-energies-resolve-outstanding-matters-french-parquet-national-financier.
[63] TechnipFMC, TechnipFMC Reaches Resolution of French Parquet National Financier (PNF) Investigation (Nov. 30, 2023), https://www.technipfmc.com/en/investors/financial-news-releases/press-release/technipfmc-reaches-resolution-of-french-parquet-national-financier-pnf-investigation.
[64] Acieries Hachette et Driout CJIP (October 11, 2023), https://rebeca-documentation.finances.gouv.fr/exl-php/resultat/rebeca_portail_recherche_avancee_internet?WHERE_IS_DOC_REF_LIT=DOC00448542&.
[65] Seves Group SARL and Sediver SAS CJIP (November 28, 2023), https://www.agence-francaise-anticorruption.gouv.fr/files/files/CJIP/231128_CJIP%20SEVES%20SEDIVER.pdf.
[66] D’Isolation et de Peinture Omnium and Omnium Develloppement CJIP (November 29, 2023), https://www.agence-francaise-anticorruption.gouv.fr/files/files/CJIP/CJIP%20OMNIUM/CJIP%20SAS%20D’ISOLATION%20ET%20DE%20PEINTURE%20OMNIUM.pdf.
[67] ADP Ingenierie CJIP (December 4, 2023), https://rebeca-documentation.finances.gouv.fr/exl-php/resultat/rebeca_portail_recherche_avancee_internet?CTX=NOFACETTE&WHERE_IS_DOC_REF_LIT=DOC00447085.
[68] Press Release, Public Prosecution Service of Canada (May 17, 2023), https://www.ppsc-sppc.gc.ca/eng/nws-nvs/2023/17_05_23.html.
[69] Id.
[70] See Non-Prosecution Agreement, United States v. Albermarle Corp. (Sept. 28, 2023), https://www.justice.gov/media/1316796/dl?inline.
[71] Id. at A-5.
[72] Id.
[73] Id. at 1-2.
[74] Id. at 4.
[75] Id. at 3.
[76] Plea Agreement, United States v. Amani Investments, LLC, No. 2:23-cr-00014-JAM (E.D. Cal. Feb. 7, 2023).
[77] Id. at 14-16.
[78] Id.
[79] Id. at 8.
[80] Id. at 8.
[81] Final Order of Forfeiture, United States v. Amani Investments, LLC, No. 2:23-cr-00014-JAM (E.D. Cal. Oct. 23, 2023).
[82] Judgment, United States v. Amani Investments, LLC, No. 2:23-cr-00014-JAM (E.D. Cal. Sep. 15, 2023).
[83] Deferred Prosecution Agreement, Aylo Holdings S.à.r.l. and the U.S. Attorney’s Office for the Eastern District of New York (Dec. 21, 2023), https://www.justice.gov/d9/2023-12/2023.12.21_dpa_final_court_exhibit_version_0.pdf (“Aylo DPA”).
[84] Aylo DPA Attachment B, Criminal Information at 4-10; Aylo DPA Attachment C, Statement of Facts at C-6-12; Press Release, GirlsDoPorn Owners and Employees Charged in Sex Trafficking Conspiracy (Oct. 10, 2019), https://www.justice.gov/usao-sdca/pr/girlsdoporn-owners-and-employees-charged-sex-trafficking-conspiracy (“Content Provider Press Release”); Criminal Complaint, United States v. Michael James Pratt, et al., 3:19-CR-04488 (S.D. Cal. Oct. 10. 2019) at 1-4 (“Content Provider Criminal Complaint”).
[85] Content Provider Press Release; Content Provider Criminal Complaint; Press Release, Adult Film Performer Pleads Guilty in GirlsDoPorn Sex Trafficking Conspiracy (Dec. 17, 2020), https://www.justice.gov/usao-sdca/pr/adult-film-performer-pleads-guilty-girlsdoporn-sex-trafficking-conspiracy.
[86] Aylo DPA at 8-9.
[87] Id. at 12-13.
[88] Press Release, U.S. Dep’t of Justice, Swiss Private Bank, Banque Pictet, Admits to Conspiring with U.S. Taxpayers to Hide Assets and Income in Offshore Accounts (Dec. 4, 2023), https://www.justice.gov/usao-sdny/pr/swiss-private-bank-banque-pictet-admits-conspiring-us-taxpayers-hide-assets-and-income.
[89] Criminal Information, United States v. Banque Pictet & Cie SA, No. 1:23-CR-631 (S.D.N.Y. Dec. 4, 2023), at 5-6.
[90] Deferred Prosecution Agreement with, United States v. Banque Pictet & Cie SA, No. 1:23-CR-631 (S.D.N.Y. Nov. 16, 2023), Statement of Facts at 2-3.
[91] Deferred Prosecution Agreement, United States v. Banque Pictet & Cie SA (November, No. 1:23-CR-631), at 5-6 (S.D.N.Y. Nov. 16, 2023), at 2-3.
[92] Id. at 5.
[93] Id. at 5-10.
[94] See Binance Blog, Binance Announcement: Reaching Resolution with U.S. Regulators (Nov. 21, 2023), https://www.binance.com/en/blog/leadership/binance-announcement-reaching-resolution-with-us-regulators-2904832835382364558.
[95] 31 C.F.R. § 1010.100(ff).
[96] See, e.g., Press Release, U.S. Dep’t of the Treasury, Treasury Announces Two Enforcement Actions for Over $24M and $29M Against Virtual Currency Exchange Bittrex, Inc. (Oct. 11, 2022), https://home.treasury.gov/news/press-releases/jy1006 (announcing an enforcement action against Bittrex, Inc., a virtual currency exchange that was based in Washington state).
[97] See International Emergency Economic Powers Act (IEEPA), 50 U.S.C. § 1701(a)(1)(A) (empowering the President to prohibit transactions by “any person, or with respect to any property, subject to the jurisdiction of the United States.”); see also Office of Foreign Assets Control, Frequently Asked Questions: 11. Who Must Comply with OFAC Regulations?, https://ofac.treasury.gov/faqs/11 (“U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all U.S. incorporated entities and their foreign branches. In the cases of certain programs, foreign subsidiaries owned or controlled by U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S.-origin goods to comply.”).
[98] Attachment A, “Statement of Facts,” to the Plea Agreement in United States v. Binance Holdings Ltd., No. 23-178RAJ (Nov. 21, 2023), https://www.justice.gov/opa/media/1326901/dl?inline (hereinafter “Binance SOF”) at 7, ¶ 22.
[99] Id.
[100] 50 U.S.C. § 1705(a) (“It shall be unlawful for a person to violate, attempt to violate, conspire to violate or cause a violation of any license, order, regulation, or prohibition issued [pursuant to IEEPA].”).
[101] Plea Agreement in United States v. Binance Holdings Ltd., No. 23-178RAJ (Nov. 21, 2023), https://www.justice.gov/opa/media/1326901/dl?inline (hereinafter “Binance Plea Agreement”), at 2 ¶ 2.
[102] Id.
[103] Id.
[104] See Nikhilesh De, Binance to Make ‘Complete Exit’ From U.S., Pay Billions to FinCEN, OFAC on Top of DOJ Settlement, CoinDesk (Nov. 21, 2023), https://www.coindesk.com/policy/2023/11/21/binance-to-make-complete-exit-from-us-pay-billions-to-fincen-ofac-on-top-of-doj-settlement/.
[105] Id.
[106] Binance Plea Agreement at 17 ¶ 24.
[107] Id at 23 ¶ 32.
[108] Plea Agreement, Centera Bioscience (d/b/a Nootropics Depot), No. 23-cr-69-TSM-01/02 (D.N.H. Aug. 15, 2023), at 1.
[109] Id. at 2.
[110] Id. at 6.
[111] Deferred Prosecution Agreement, United States v. Corporacion Financiera Colombiana SA, No. 8:23-CR-00262 (D. Md. Aug. 10, 2023).
[112] Id.
[113] Id.
[114] Id.
[115] Id.
[116] Id.
[117] Deferred Prosecution Agreement, United States v. Freepoint Commodities LLC, No. 3:23-cr-00224 (D. Conn. Dec. 14, 2023), at 1 (hereinafter “Freepoint DPA”), https://www.justice.gov/opa/media/1329266/dl?inline.
[118] See DOJ Press Release, “Commodities Trading Company Agrees to Pay Over $98M to Resolve Foreign Bribery Case,” (Dec. 14, 2023), https://www.justice.gov/opa/pr/commodities-trading-company-agrees-pay-over-98m-resolve-foreign-bribery-case.
[119] Freepoint DPA, Statement of Facts at 2, 5.
[120] Id. at 3, 5-12.
[121] Freepoint DPA at 11.
[122] Id. at 4.
[123] Id. at 4-5.
[124] Id. at 6.
[125] Id.; see also DOJ Press Release.
[126] Freepoint DPA at 6-8.
[127] Id. at 3, 13-15.
[128] Press Release, U.S. Dep’t of Justice, Idaho Diesel Parts Companies and Owner Agree to Pay $1 Million After Pleading Guilty to Selling and Installing Illegal Defeat Devices (Aug. 23, 2023), https://www.justice.gov/usao-id/pr/idaho-diesel-parts-companies-and-owner-agree-pay-1-million-after-pleading-guilty-selling.
[129] Plea Agreement, United States v. GDP Tuning LLC, No. 4:23-CR-00168, at 23 (D. Idaho June 23, 2023).
[130] Press Release, U.S. Dep’t of Justice, Idaho Diesel Parts Companies and Owner Agree to Pay $1 Million After Pleading Guilty to Selling and Installing Illegal Defeat Devices (Aug. 23, 2023), https://www.justice.gov/usao-id/pr/idaho-diesel-parts-companies-and-owner-agree-pay-1-million-after-pleading-guilty-selling.
[131] Plea Agreement, United States v. GDP Tuning LLC, No. 4:23-CR-00168 (D. Idaho June 23, 2023), at 6.
[132] Id. at 4.
[133] Id.
[134] Deferred Prosecution Agreement, United States v. Glenmark Pharm. Inc., USA, No. 2:20-cr-00200-RBS (E.D. Pa. Aug. 21, 2023).
[135] Id. at 7.
[136] Id. at 9; Press Release, U.S. Dep’t of Justice, Major Generic Drug Companies to Pay Over Quarter of a Billion Dollars to Resolve Price-Fixing Charges and Divest Key Drug at the Center of Their Conspiracy (Aug. 21, 2023), https://www.justice.gov/opa/pr/major-generic-drug-companies-pay-over-quarter-billion-dollars-resolve-price-fixing-charges.
[137] Id. at 22.
[138] Id. at 25.
[139] Deferred Prosecution Agreement, United States v. Teva Pharm. USA, Inc., No. 2:20-cr-00200-RBS (E.D. Pa. Aug. 21, 2023) (hereinafter “Teva DPA”).
[140] Id. at 7, 10.
[141] Press Release, U.S. Dep’t of Justice, Major Generic Drug Companies to Pay Over Quarter of a Billion Dollars to Resolve Price-Fixing Charges and Divest Key Drug at the Center of Their Conspiracy (Aug. 21, 2023), https://www.justice.gov/opa/pr/major-generic-drug-companies-pay-over-quarter-billion-dollars-resolve-price-fixing-charges.
[142] Teva DPA at 9.
[143] Id.
[144] Id. at 4.
[145] Id.
[146] Deferred Prosecution Agreement, United States v. H&D Sonography LLC, Mag. No. 23-11136 (D.N.J. Aug. 17, 2023), ¶ 1.
[147] Id. at Attach. A, ¶ 6.
[148] Id. at Attach. A, ¶¶ 6-7.
[149] Id. at Attach. A, ¶ 11.
[150] Settlement Agreement, United States v. H&D Sonography LLC, Mag. No. 23-11136 (D.N.J. Aug. 18, 2023), ¶¶ 1, C-E.
[151] Id. at ¶ 1.
[152] Declination Letter, HealthSun Health Plans, Inc. (Oct. 25, 2023).
[153] See generally CEP Declinations, https://www.justice.gov/criminal/criminal-fraud/corporate-enforcement-policy/declinations.
[154] Id. at 1.
[155] Id. at 1-2.
[156] Id. at 2.
[157] Press Release, U.S. Dep’t of Justice, Former Executive at Medicare Advantage Organization Charged for Multimillion-Dollar Medicare Fraud Scheme (Oct. 26, 2023), https://www.justice.gov/opa/pr/former-executive-medicare-advantage-organization-charged-multimillion-dollar-medicare-fraud.
[158] Letter from Glenn S. Leon, Chief, U.S. Dep’t of Justice, Fraud Section & Ismail J. Ramsey, U.S. Attorney for the Northern District of California, to Manuel A. Abascal, Counsel for Lifecore Biomedical, Inc. (Nov. 16, 2023), https://www.justice.gov/criminal/media/1325521/dl?inline.
[159] Id.
[160] Id.
[161] Id.
[162] Id.
[163] Id.
[164] Id.
[165] Id.
[166] Id.
[167] Id.
[168] Id.
[169] Title 33, U.S.C. § 1319 (c)(2)(A); Plea Agreement, United States v. New Orleans Steamboat Company, No. 2:23-cr-00108-JCZ-DPC, at 1 (E.D. La. Aug. 16, 2023).
[170] Factual Basis for Plea Agreement, United States v. New Orleans Steamboat Company, No. 2:23-cr-00108-JCZ-DPC, at 1 (E.D. La. Aug. 16, 2023).
[171] Plea Agreement, at 1.
[172] Judgment, United States v. New Orleans Steamboat Company, No. 2:23-cr-00108-JCZ-DPC (E.D. La. Aug. 24, 2023).
[173] Non-Prosecution Agreement, Nomura Securities International, Inc. (Aug. 22, 2023), at 1 (hereinafter “NSI NPA”); see also Press Release, U.S. Dep’t of Labor, Nomura Securities International Agrees to Pay $35 Million Penalty Stemming from Its Participation in Securities Fraud Scheme (Aug. 22, 2023), https://www.oig.dol.gov/public/Press%20Releases/Nomura%20Securities%20International%20Agrees%20to%20Pay%20$35%20Million%20Penalty%20Stemming%20from%20Its%20Participatio.pdf.
[174] NSI NPA at 7.
[175] Id. at 11.
[176] Id.
[177] Id. at 12.
[178] Id.
[179] Id. at 3.
[180] Id. at 2.
[181] Plea Agreement, United States v. NuDay, 23-cr-00072-JL-TSM-1 (D.N.H. Aug. 18 2023); see also Press Release, U.S. Dep’t of Justice, NuDay Charity Pleads Guilty in Connection with the Illegal Export of Goods to Syria (Sept. 8, 2023), https://www.justice.gov/usao-nh/pr/nuday-charity-pleads-guilty-connection-illegal-export-goods-syria.
[182] Plea Agreement, United States v. NuDay, 23-cr-00072-JL-TSM-1 (D.N.H. Aug. 18 2023) at 2.
[183] Id. at 3
[184] Id.
[185] Id. at 2.
[186] Id.
[187] Id.
[188] Id. at 4.
[189] Id.
[190] Press Release, U.S. Dep’t of Justice, NuDay Charity Sentenced for Illegal Exports to Syria (Dec. 28, 2023), https://www.justice.gov/usao-nh/pr/nuday-charity-sentenced-illegal-exports-syria.
[191] Id.
[192] Case, U.S. Dep’t of Justice, Antitrust Division, United States v. Pro-Mark Services, Inc. (Nov. 8, 2023), https://www.justice.gov/atr/case/us-v-pro-mark-services-inc.
[193] Id.
[194] Plea Agreement of Secor, Inc., Dkt. Entry 3, United States v. Matthew Castle & Secor, Inc., 1:23-CR-00014-RSB (Oct. 10, 2023).
[195] Plea Agreement of Matthew Castle, Dkt. Entry 2, United States v. Matthew Castle & Secor, Inc., 1:23-CR-00014-RSB (Oct. 10, 2023).
[196] Agreed Statement of Facts Sufficient to Establish a Factual Basis for a Guilty Plea, at 2, Dkt. Entry 4, United States v. Matthew Castle & Secor, Inc., 1:23-CR-00014-RSB (Oct. 10, 2023).
[197] Id. at 2-3.
[198] Id. at 3-4.
[199] Id. at 4.
[200] Id.
[201] Plea Agreement of Matthew Castle, supra, at 5; Plea Agreement of Secor, Inc., supra, at 3.
[202] Plea Agreement of Secor, Inc., supra, at 3.
[203] Plea Agreement of Matthew Castle, supra, at 3.
[204] See Dkt. Entry 19, United States v. Matthew Castle & Secor, Inc., 1:23-CR-00014-RSB.
[205] Plea Agreement at 2, United States v. Sinister Mfg. Co., 2:23-CR-168-JAM (E.D. Cal. Aug. 1, 2023), ECF No. 10 (hereinafter “Sinister Diesel Plea Agreement”); Judgment, United States v. Sinister Mfg. Co., 2:23-CR-168-JAM (E.D. Cal. Nov. 17, 2023), ECF No. 22 (entering judgment for one count under 18 U.S.C. § 371, “Conspiracy to Violate the Clean Air Act and to Defraud the United States,” and one count under 42 U.S.C. § 7413(c)(2)(C), “Tampering with a Monitoring Device or Method Required Under the Clean Air Act”) (hereinafter “Sinister Diesel Judgment”).
[206] Sinister Diesel Plea Agreement, Ex. A at A-2 to A-9.
[207] Id.
[208] Sinister Diesel Judgment at 5; Sentencing Minutes Entry, 2:23-CR-168-JAM (Nov. 14, 2023), ECF No. 21; Sinister Diesel Plea Agreement at 3.
[209] Sinister Diesel Plea Agreement at Ex. B, ¶ 11 (United States v. Sinister Mfg. Co., 2:23-CV-01580-JDP (E.D. Cal. Aug. 1, 2023)).
[210] Sentencing Minutes Entry, 2:23-CR-168-JAM, ECF No. 21; Sinister Diesel Plea Agreement at 4-5.
[211] Sinister Diesel Plea Agreement at Ex. B, ¶¶ 16-19.
[212] Id.
[213] See id. at Ex. B, ¶¶ 15-30.
[214] Id. at Ex. B, ¶¶ 31, 82.
[215] Id. at Ex. B, ¶ 37.
[216] Plea Agreement, United States v. Suez Rajan Limited, No. CR 23-088-02, Dkt. 6 (D.D.C. March 16, 2023).
[217] Statement of Offense, United States v. Suez Rajan Limited, No. CR 23-088-02, Dkt. 7 (D.D.C. April 19, 2023); see also Stefania Palma and Chris Cook, “Owner of ship seized carrying Iranian oil pleads guilty in US court,” Financial Times (Sept. 7, 2023), https://www.ft.com/content/0441b637-15e7-4cec-8fd0-84c86ea1d529.
[218] Plea Agreement, United States v. Suez Rajan Limited, No. CR 23-088-02, Dkt. 6 (D.D.C. March 16, 2023).
[219] Id.
[220] Id.
[221] Monaco Remarks.
[222] Press Release, U.S. Dep’t of Justice, The Government Also Seized Almost One Million Barrels of Iranian Crude Oil (Sept. 8, 2023), at 1, https://www.justice.gov/usao-dc/pr/justice-department-announces-first-criminal-resolution-involving-illicit-sale-and.
[223] See Deferred Prosecution Agreement, United States v. Tysers Ins. Brokers Ltd. (Nov. 20, 2023) (https://www.justice.gov/media/1325796/dl?inline) (“Tysers DPA”); Deferred Prosecution Agreement, United States v. H.W. Wood Ltd. (Nov. 20, 2023) (https://www.justice.gov/media/1325801/dl?inline) (“H.W. Wood DPA”).
[224] Tysers DPA at A-5; H.W. Wood DPA at A-4.
[225] Tysers DPA at A-6; H.W. Wood DPA at A-5
[226] Tysers DPA at 43.
[227] H.W. Wood DPA at 9, 11.
[228] Id. at 11
[229] Oct. 8, 2019 Memorandum from Assistant Attorney General Brian Benczkowski to All Criminal Division Personnel re: Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty.
[230] H.W. Wood DPA at 5.
[231] Tysers DPA at 6-8, 48; H.W. Wood DPA at 6-8, 45.
[232] Id.
[233] Plea Agreement, United States v. View, Inc., No. 3:22-CR-151 (N.D. Miss. March 14, 2023) (hereinafter “View, Inc. Plea Agreement”).
[234] See DOJ Press Release, “California Company Sentenced for Illegally Discharging Wastewater From Olive Branch Manufacturing Plant,” (Aug. 15, 2023), https://www.justice.gov/usao-ndms/pr/california-company-sentenced-illegally-discharging-wastewater-olive-branch.
[235] Id.
[236] Judgment, United States v. View, Inc., No. 3:22CR00151-001 (N.D. Miss. Aug. 18, 2023), 2-4.
[237] Id. at 3.
[238] Plea Agreement at 1, 10-12, United States v. VIP Healthcare Sols., Inc., No. 3:23-cr-00058 (D.P.R. Oct. 17, 2023), ECF No. 77 (hereinafter “VIP Healthcare Plea Agreement”).
[239] Id. at 10-11.
[240] Id. at 3.
[241] Judgment, United States v. VIP Healthcare Sols., Inc., No. 3:23-cr-00058 (D.P.R. Jan. 17, 2024), ECF No. 107.
[242] Plea Agreement, United States v. Western River Assets, LLC, No. 23-cr-00005 (S.D.W. Va. Oct. 18, 2023) (hereinafter “Western River Assets Plea Agreement”); Plea Agreement, United States v. River Marine Enterprises, LLC, No. 23-cr-00005 (S.D.W. Va. Oct. 18, 2023) (hereinafter “River Marine Enterprises Plea Agreement”).
[243] Western River Assets Plea Agreement, at 11-12; River Marine Enterprises Plea Agreement, at 11-12.
[244] Id.
[245] Id.
[246] Id.
[247] Id.
[248] Western River Assets Plea Agreement, at 2; River Marine Enterprises Plea Agreement, at 2.
[249] Id.
[250] Order, United States v. Smith et al, 23-cr-00005 (S.D.W. Va. Oct. 18, 2023), at 3.
[251] Plea Agreement, United States v. Smith, No. 23-cr-00005 (S.D.W. Va. Oct. 18, 2023), at 1.
[252] Id. at 2.
[253] Plea Agreement, United States v. Zona Roofing LLC, No. 2:23-mj-16119-JRA, at 1 (D.N.J. Nov. 20, 2023).
[254] Id.
[255] Id.
[256] Id. at 2-5.
[257] Press Release, Company Admitted Its Chairman Bribed Former San Francisco Department of Public Works Head Mohammed Nuru with Meals, Hotel During China Trip (Oct. 16, 2023), https://www.justice.gov/usao-ndca/pr/property-developer-zl-properties-fined-1-million-after-pleading-guilty-honest-services (hereinafter “Z&L Properties Press Release”).
[258] Criminal Information, United States v. Z&L Properties, Inc., No, 3:23-cr-00221 (N.D. CA. (July 18, 2023)) (hereinafter “Z&L Properties Criminal Information”).
[259] Id.
[260] See Z&L Properties Press Release.
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This edition of Gibson Dunn’s Federal Circuit Update for February 2024 summarizes the current status of several petitions pending before the Supreme Court, and recent Federal Circuit decisions concerning printed publications, written description, claim construction, and inequitable conduct.
Federal Circuit News
Noteworthy Petitions for a Writ of Certiorari:
There were no new potentially impactful petitions filed before the Supreme Court in February 2024. We provide an update below of the petitions pending before the Supreme Court that were summarized in our January 2024 update:
- In Vanda Pharmaceuticals Inc. v. Teva Pharmaceuticals USA, Inc. (US No. 23-768), after the respondents waived their right to file a response, the Court requested a response, which is due March 18, 2024. Three amicus curiae briefs have been filed.
- In Ficep Corp. v. Peddinghaus Corp. (US No. 23-796), the respondent filed its opposition brief on February 23, 2024.
- The Court denied the petitions in Liquidia Technologies, Inc. v. United Therapeutics Corp. (US No. 23-804) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd. (US No. 23-315).
Federal Circuit Practice Update
Promptu Systems Corp. v. Comcast Corp. et al., No. 22-1093 (Fed. Cir. Feb. 16, 2024): The Federal Circuit (Moore, C.J., Prost and Taranto, JJ. (per curiam)) issued sua sponte an order in four related cases (Nos. 19-2368 (consolidated with 19-2369), 20-1253, 22-1093, 22-1939) clarifying that Rule 28 of the Federal Rules of Appellate Procedure prohibits counsel from exceeding the word count through incorporation by reference. The appellee incorporated by reference multiple pages of argument from the brief in one case into another and was asked by the Court why appellee should not be sanctioned. Although the Court chose not to award sanctions in this case, it made clear that “violating these provisions in the future will likely result in sanctions.”
New Oral Argument Scheduling Conflicts Guidance. On February 26, 2024, the clerk’s office provided guidance clarifying what would be considered allowable and unallowable scheduling conflicts for upcoming oral argument sessions. This guidance is published here.
Upcoming Oral Argument Calendar
The list of upcoming arguments at the Federal Circuit is available on the court’s website.
Key Case Summaries (February 2024)
Weber, Inc. v. Provisur Technologies, Inc., No. 22-1751, 22-1813 (Fed. Cir. Feb. 8, 2024): Weber filed petitions for inter partes review (“IPR”) against Provisur’s patents directed to high-speed mechanical slicers used in food processing plants to slice and package foods, like meats and cheeses. The invalidity grounds asserted in the IPR petitions included combinations based on Weber’s operating manuals. The Patent Trial and Appeal Board (“Board”) concluded that Weber’s operating manuals were not prior art printed publications.
The panel (Reyna, J., joined by Hughes and Stark, JJ.) reversed-in-part, vacated-in-part, and remanded. The Court concluded that Weber’s operating manuals were printed publications because they were intended to be “accessible to interested members of the relevant public by reasonable diligence” and were not subject to confidentiality restrictions by Weber’s copyright notice and terms and conditions.
RAI Strategic Holdings, Inc. v. Philip Morris Products, S.A., No. 22-1862 (Fed. Cir. Feb. 9, 2024): Philip Morris filed a petition for post-grant review challenging RAI’s patent directed to electrically powered smoking articles. The Board found that the claims lacked written description support because the claimed “length of about 75% to 85% of a length of the disposable aerosol forming substance” for the heating member was narrower than the ranges disclosed in the specification. Specifically, the specification disclosed ranges of 75% to 125%, 85% to 110%, and 90% to 110%. No range disclosed in the specification contained the upper limit of 85%.
The Federal Circuit (Stoll, J., joined by Chen and Cunningham, JJ.) affirmed-in part, vacated-in-part, and remanded. The Court vacated the Board’s determination that the broader ranges disclosed in the specification did not provide written description support for the narrower claimed range. “Given the predictability of electro-mechanical inventions such as the one at issue here, and the lack of complexity of the particular claim limitation at issue—i.e., reciting the length of a heating member—a lower level of detail is required to satisfy the written description requirement than for unpredictable arts.” Specifically, there was no evidence that changing the length of the heating member changed the invention’s operability, effectiveness, or other parameters.
Promptu Systems Corp. v. Comcast Corp. et al., No. 22-1939 (Fed. Cir. Feb. 16, 2024): Promptu sued Comcast for infringing Promptu’s patents directed to speech recognition technology. Promptu stipulated to non-infringement under the district court’s constructions, and challenged the constructions on appeal.
The Federal Circuit (Taranto, J., joined by Moore, C.J., and Prost, J.) vacated and remanded. The Court held that the district court erred or erred-in-part in its construction of four claims terms because the constructions were not consistent with disclosures in the specification. The Court additionally explained that “only those terms need be construed that are in controversy, and only to the extent necessary to resolve the controversy.” Thus, although the Court determined that the district court’s construction of certain terms were too narrow, it was unclear what aspects of those terms needed clarification “for resolution of the liability issues.” The Court therefore remanded to the district court to make that determination in the first instance.
Freshub, Inc. v. Amazon.com, Inc., No. 22-1391 (Fed. Cir. Feb. 26, 2024): Freshub sued Amazon for infringing Freshub’s patent related to voice-processing technology. Amazon denied infringement and asserted the defense that the patents are unenforceable due to inequitable conduct committed by Freshub’s parent company, Ikan Holdings LLC. Specifically, Amazon argued when Ikan revived the abandoned patent application from which the asserted patents claim priority, Ikan had intentionally misrepresented to the U.S. Patent and Trademark Office (“PTO”) that the application had been unintentionally abandoned when the abandonment was actually intentional. A jury found Amazon did not infringe the patents. Subsequently, the district court held a bench trial on the inequitable conduct claim, but found that Amazon had failed to prove the inequitable conduct by clear and convincing evidence.
The Federal Circuit (Taranto, J., joined by Reyna and Chen, JJ.) affirmed. The claim limitation at issue was whether Amazon’s shopping list met the “identify an item” limitation. Amazon presented evidence that the shopping-list feature added words to a shopping list whether or not it corresponded to a purchasable item, and therefore, did not meet the limitation. Although there was no claim construction narrowing the meaning of “item” to only purchasable items, this was one reasonable interpretation of the claim language, and therefore, the Court determined that substantial evidence supported the jury’s finding of noninfringement.
The Court also affirmed the district court’s rejection of Amazon’s inequitable conduct defense. “To prevail on the defense of inequitable conduct, the accused infringer must prove that the applicant misrepresented or omitted material information with the specific intent to deceive the PTO.” Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1287 (Fed. Cir. 2011) (en banc). While the Court found that Amazon had presented evidenced that Ikan’s counsel knew that the application had been abandoned, the Court determined that Amazon had not presented by clear and convincing evidence that Ikan intentionally abandoned the application. The Court determined that Amazon therefore could not show that counsel’s statement that the abandonment was unintentional was made with the specific intent to deceive the PTO.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups, or the following authors:
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Kate Dominguez – New York (+1 212.351.2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415.393.8224, [email protected])
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2023 proved that there is never a dull moment when it comes to the False Claims Act (FCA). It was an especially significant year in terms of enforcement developments.
The Department of Justice (DOJ) recovered approximately $2.7 billion through FCA settlements and judgments, making FY 2023 the 15th straight year in which recoveries exceeded $2 billion. The government and whistleblowers initiated more than 1,200 new FCA matters—a new record and a 26% increase over the previous one. Moreover, DOJ initiated 500 of these matters, the most by far in any given year since DOJ began releasing data tracking this metric. Even relator-initiated matters were significantly higher than in past years; at 712, FY 2023’s total is the third-highest since 2000. Simply put, DOJ and the relators’ bar were more active in FY 2023 than ever before. Their efforts, as in past years, were focused primarily in the healthcare space—although this past year saw a marked increase in recoveries from defense contractors, as well.
Last year was notable in other ways, too. Four years after announcing its FCA cooperation credit policy, DOJ began explicitly acknowledging certain companies’ cooperation in settlement agreements. Yet it did so with varying degrees of specificity regarding what the companies did to earn such credit, resulting in—at best—limited guidance for companies to follow in evaluating options for self-disclosure, cooperation, and remediation. Elsewhere, DOJ deepened its commitment to pursuing FCA allegations in the cybersecurity realm, and multiple states expanded their false claims laws. And while few caselaw developments could rival the two Supreme Court FCA decisions handed down in the first half of 2023, the latter half of the year still saw significant Circuit‑level decisions related to materiality, damages calculations, and the FCA’s anti‑retaliation provision, among other topics.
We cover all of this, and more, below. We begin by summarizing 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 since the publication of our 2023 Mid-Year Update.
As always, 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 avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.
I. FCA ENFORCEMENT ACTIVITY
A. NEW FCA ACTIVITY
By a wide margin, 2023 was a record year for new FCA enforcement actions. More FCA cases were opened in 2023 than any year for which data is available. The government and qui tam relators filed 1,212 new cases, a stunning 249 more cases from the record set in 2022 (representing a 26% increase). And, as highlighted by DOJ, “[t]he government and whistleblowers were party to 543 settlements and judgments, the highest number of settlements and judgments in a single year.”[1]
This increase reflects DOJ’s laser-like focus on FCA enforcement. Last year, the government initiated 500 cases based on referrals or investigations, as opposed to qui tam matters. This far surpasses the prior record, set in 1987, of 340 government‑initiated cases, and outstrips the 305 matters opened the year before. Simply put, DOJ is aggressively seeking possible claims on its own initiative.
Historically, the vast majority of FCA recoveries have come from cases where DOJ initiated the case or intervened. Presumably, this portends significant FCA recoveries in years to come.
Number of FCA New Matters, Including Qui Tam Actions
Source: DOJ “Fraud Statistics – Overview” (Feb. 22, 2024)
B. TOTAL RECOVERY AMOUNTS
In FY 2023, the total dollars recovered through FCA cases (just shy of $2.7 billion) represented a significant increase over the previous year ($2.2 billion), though it remained far short of 2021’s most recent highwater mark ($5.7 billion).
Importantly, 2023 saw a return to normalcy in terms of the percentage of recoveries in which the United States either intervened or initiated the case. DOJ’s decision on whether to intervene historically has been a critical inflection point in cases—and one that strongly predicts whether a case will be successful. In short, DOJ is good at picking “winners.” FY 2022 presented a stark anomaly where more than half the FCA recoveries recorded (54%) stemmed from cases brought by a relator without the support of DOJ. This past year, FY 2023, 16% of recoveries came from qui tam actions in which the government declined to intervene, generally consistent with the overall trend and similar to numbers most recently seen in 2015 and 2017. Even that percentage, though, demonstrates the increase in the relators’ bar taking these cases into discovery and obtaining recoveries in recent years. Since 2014, relators have recovered a total of approximately four times more in FCA cases than in all other years since 2000 combined.
Assuming this indicator remains roughly consistent, we may soon see recoveries surpassing the record set in 2014, given DOJ’s aggressive initiation of cases in FY 2023.
Settlements or Judgments in Cases Where the Government Declined Intervention as a Percentage of Total FCA Recoveries
Source: DOJ “Fraud Statistics – Overview” (Feb. 22, 2024)
C. FCA RECOVERIES BY INDUSTRY
The breakdown of FCA recoveries by industry shifted marginally in 2023. Consistent with existing trends, healthcare cases accounted for the lion’s share of recoveries—68%, equating to more than $1.8 billion. That, however, represents the lowest portion of FCA recoveries since 2017 (then 63%). This shift is largely due to increased recoveries related to Department of Defense (DOD) procurement, which made up 21% of recoveries in 2023, equating to over $550 million. The remaining 12% of recoveries (nearly $320 million) were from cases involving other industries.
Regarding the healthcare-related claims, DOJ touted its cases alleging Medicare Advantage fraud, unnecessary services and substandard care fraud, claims related to the opioid epidemic, and unlawful kickbacks. Beyond those cases, DOJ emphasized its enforcement efforts targeting government defense contractors, as well as COVID-19 and cybersecurity fraud.[2]
FCA Recoveries by Industry
Source: DOJ “Fraud Statistics – Health and Human Services”; “Fraud Statistics – Department of Defense”; “Fraud Statistics – Other (Non-HHS and Non-DoD)” (Feb. 22, 2024)
II. NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE SECOND HALF OF 2023
A. HEALTHCARE AND LIFE SCIENCE INDUSTRIES
- On July 13, a dermatology practice which operates 13 clinics in southeast Tennessee and north Georgia, and one of its dermatologists, agreed to pay $6.6 million to resolve allegations that they violated the FCA by overbilling federal healthcare programs for various dermatological surgeries and procedures. The government alleged that the practice and the physician falsely claimed that both the surgery and pathology portion of procedures were conducted by the dermatologist, when in fact certain portions were conducted by other individuals, and that the defendants regularly billed Medicare in a way that improperly bypassed Medicare’s “multiple procedure reduction rule.” As part of the settlement, the practice entered into a corporate integrity agreement (CIA) with the Department of Health and Human Services Office of the Inspector General (HHS-OIG), which focuses on the practice’s continuing obligation to properly bill and submit reimbursement claims to government payors. The settlement resolved a suit brought by a qui tam relator; the relator will receive $1.3 million of the settlement amount.[3]
- On July 14, an electronic health record (EHR) technology vendor agreed to pay $31 million to settle allegations that it violated the FCA and the federal Anti-Kickback Statute (AKS). The vendor allegedly misrepresented its software’s capabilities and falsely obtained certification from HHS under a program that grants incentive payments to incentivize healthcare providers that adopt EHR The vendor also allegedly provided unlawful remuneration to customers for referrals, including sales credits and tickets to sporting and entertainment events. This settlement is the latest in a series of resolutions with EHR vendors, including a $45 million settlement from late 2022 that we covered in our Year-End 2022 FCA Update. The settlement resolved a qui tam suit brought by two relators from a facility that used the company’s EHR software; the relators will receive nearly $5.6 under the settlement agreement.[4]
- On July 31, a Maine-based Medicare Advantage organization agreed to pay approximately $22.5 million to resolve allegations that it submitted inaccurate diagnosis codes for its enrollees, thereby increasing its reimbursements from Medicare. The government alleged that the provider reviewed the charts of its Medicare Advantage beneficiaries to identify additional diagnosis codes and then submitted those codes to Medicare although they were not supported by the patients’ medical records. The settlement resolved a qui tam suit brought by a former employee, who will receive approximately $3.8 million in the settlement.[5]
- On August 1, two pharmacy companies and their respective owners agreed to pay over $3.5 million to resolve allegations that they violated the FCA by billing Medicare for medications that were not actually dispensed. The companies also agreed to a five-year exclusion from participation in federal healthcare programs, surrendered their Drug Enforcement Agency (DEA) Certificates of Registration, and ceased operations.[6]
- On August 1, a clinical laboratory and its owner agreed to pay $5.7 million to settle an outstanding FCA judgment against them. An initial judgment of approximately $30.6 million was entered against the laboratory and owner in 2018 after a court found that the lab knowingly submitted false claims to Medicare for travel reimbursements. In particular, the court concluded that the lab billed Medicare for lab technician travel when specimens were not accompanied by technicians and billed travel for each specimen when groups of specimens were transported together. Due to the defendants’ inability to pay the original judgment in full, the laboratory and owner agreed to pay the new $5.7 million settlement over a period of five years. The settlement resolved a qui tam suit brought by the lab’s competitor, who will receive $1.3 million of the settlement. The settlement imposes future payment obligations in the event that certain contingencies transpire in relation to the laboratory owner’s income.[7]
- On August 10, a Florida-based durable medical equipment supply company agreed to pay $29 million to settle allegations that it fraudulently claimed reimbursement from Medicare and Medicare Advantage Plans for rental payments for oxygen equipment in excess of the 36-month cap on reimbursement. The settlement agreement stated that approximately $12.6 of the settlement amount constituted restitution. In conjunction with the DOJ settlement, the company also entered into a five-year CIA with HHS-OIG, which requires the company to undertake various compliance measures and to retain an independent compliance expert to review the company’s compliance program. The DOJ settlement resolved a qui tam suit brought by former employees, who will receive approximately $5.7 of the settlement amount.[8]
- On August 24, a Michigan pain management doctor and two pain center entities he owned and operated collectively agreed to pay $6.5 million to resolve a variety of FCA allegations. The government alleged that the doctor and entities billed Medicare and Medicaid for excessive and medically unnecessary urine drug tests irrelevant to patient treatment, additional laboratory charges not separately billable from the urine drug tests, routine moderate sedation services not actually required for interventional pain management procedures, and medically unnecessary or otherwise non-reimbursable back braces. The settlement resolves claims in two qui tam lawsuits, and the relators will collectively receive approximately $1.3 million of the settlement amount.[9]
- On August 30, a California company that operates multiple healthcare providers agreed to pay $5 million to resolve claims that it violated the FCA and the California FCA by causing the submission of false claims to California’s Medicaid program. The government alleged that the company billed for unallowable and/or inflated costs for services it provided to “Adult Expansion” population members (as defined under the Affordable Care Act). This settlement is the latest in a series of resolutions related to the Medicaid Adult Expansion program in California, through which the United States has recovered a total of $95.5 million. The allegations underlying the August 30 settlement stemmed from a qui tam suit by a former medical director, who will receive approximately $950,000 as his share of the recovery.[10]
- On September 13, a Texas company that managed and operated dermatology practices, surgical centers, and pathology laboratories across the United States agreed to pay approximately $8.9 million, including approximately $5.9 million in restitution, to resolve self-reported claims of potential violations of the FCA, the AKS, and the Stark Law. The government alleged that former senior managers of the company offered to increase the purchase price of 11 dermatology practices in exchange for agreements to refer laboratory services to affiliated entities after the acquisition. The government credited the company for self-reporting the alleged conduct at a time when the government was unaware of it. The settlement agreement itself, however, is not publicly available, and the press release announcing the settlement does not specify how much the cooperation credit reduced the amount the government otherwise would have sought to recover.[11]
- On September 15, a cardiac diagnostics company and its founder-owner agreed to pay approximately $4.5 million to resolve allegations that they paid physicians millions of dollars in the form of rent payments and referral fees to induce them to refer patients to the diagnostics company in violation of the AKS and the FCA. As part of the settlement, the government, the company and its founder-owner entered into a consent judgment for $64.4 million, which the government can seek to enforce if the required settlement payments are not made. The settlement agreement resolves a qui tam suit but does not specify the relator’s share of the recovery.[12]
- On September 30, a Connecticut-based healthcare and insurance company agreed to pay approximately $172 million to resolve allegations that it submitted, and failed to withdraw, inaccurate and untruthful diagnosis codes for its Medicare Advantage Plan enrollees. The government alleged that, as part of the company’s “chart review” program to identify all medical conditions that the charts supported and to assign the beneficiaries diagnosis codes for those conditions, the company added diagnosis codes that the patients’ healthcare providers had not included to inflate the payments the company received from the Centers for Medicare and Medicaid Services (CMS). In addition, the government alleged that the company failed to withdraw false diagnosis codes and repay CMS, including where the company itself added the codes and where providers included them initially and the company’s review did not support the use of the codes. Along with the settlement, the company entered into a five-year CIA with HHS-OIG, which requires (among other things) an independent review organization to audit the company with a focus on risk adjustment data.[13]
- On October 2, a Delaware-based specialty pharmacy and its CEO agreed to pay a total of $20 million to resolve FCA allegations premised on alleged AKS violations. Specifically, the government alleged that the company improperly waived Medicare and TRICARE patients’ copayments to induce patients to purchase the company’s services and specialty drugs, and that the company gave kickbacks to physicians to induce referrals in the form of gifts, dinners, and free administrative and clinical support services. The settlement stemmed from a qui tam suit brought by two former employees of the company, who together will receive approximately $4 million of the recovery.[14]
- On October 2, a California-based provider of genomic-based diagnostic tests agreed to pay $32.5 million to resolve allegations that it violated the FCA by improperly billing Medicare for the company’s principal laboratory test. In particular, the government alleged that the company violated the Medicare “14-Day Rule,” which governs reimbursement for laboratory tests for patients discharged after hospital stays. The settlement resolved two qui tam actions brought by two relators, who collectively will receive a share of approximately $5.7 million of the settlement.[15]
- On October 10, an Illinois-based cardiac imaging company and its founder agreed to pay approximately $85.5 million in an FCA resolution premised on alleged violations of the AKS and the Stark Law. The government alleged that the company paid above fair market value fees to cardiologists to supervise certain scans for patients the cardiologists referred to the company as improper referral; the fees allegedly included amounts for time that the cardiologists spent off-site or attending to other patients as well as for services beyond supervision that were not actually provided. The government also alleged that the company knowingly relied on a consultant’s fair market value analysis that was based on inaccurate information about the relevant services and that the consultant that provided the analysis later disclaimed. The company also entered into a five-year CIA with HHS-OIG, which imposes (among other obligations) an annual risk assessment and the retention of an independent review organization. The FCA settlement resolves a qui tam action brought by one of the company’s former billing managers, whose share of the government’s recovery had not been determined at the time the settlement was announced.[16]
- On October 17, multiple Michigan inpatient and hospitalist entities agreed to pay approximately $4.4 million to resolve allegations they violated the FCA by billing for services for beneficiaries located in Michigan and Indiana that were not rendered to the Michigan-based beneficiaries, permitting doctors to regularly bill impossible days of services, and by upcoding medical services (using more expensive billing codes than the codes corresponding to the services provided). The settlement resolves claims in two qui tam suits, with relators receiving approximately $767,000 of the settlement.[17]
- On October 30, a drug manufacturer and its founder agreed to pay at least $3.8 million and up to $50 million to resolve allegations that the company knowingly underpaid quarterly rebates to Medicaid programs for one of the company’s drugs. The government alleged that the drug manufacturer paused manufacturing of an acquired drug and later relaunched it as a reformulation (despite not changing any active ingredients) with a price increase of more than 400%. However, the manufacturer allegedly refused to pay the larger Medicaid rebate invoices tied to the price increase. The settlement amount is tied to certain financial contingencies.[18]
- On November 8, an eastern Kentucky hospital system and one of its physicians agreed to collectively pay approximately $3 million to resolve allegations that they violated the FCA by submitting claims for non-covered services to Medicare and Kentucky Medicaid. The government alleged that the hospital and physician billed, or caused to be billed, federal healthcare programs for reimbursement of services without the requisite documentation to support medical necessity of those services. The matter arose from the hospital system’s voluntary self-disclosure of the claims. The government stated explicitly that its recovery was limited to 1.5 times the amount of monetary loss caused by the alleged false claims, which is consistent with DOJ’s cooperation credit policy for FCA cases.[19]
- On November 9, DOJ announced that a healthcare management company, its executive, and six skilled nursing facilities agreed to a consent judgment in the amount of approximately $45.6 million to resolve claims that they violated the FCA and the AKS. The government alleged that under the direction and control of the management company and its executive, the skilled nursing facilities entered into medical directorship agreements that purported to compensate physicians for administrative services but actually provided kickbacks for physicians that referred patients to the skilled nursing facilities. The consent judgment calls for scheduled payments for each defendant based on their ability to pay, and the settlement contains a series of covenants by the government not to enforce the consent judgment as to certain assets, combined with provisions for increasing the payments owed by the defendants in the event of certain financial contingencies. In connection with the settlement agreement, the management company, one of the executives, and one of the skilled nursing facilities entered into a five-year CIA with HHS-OIG.[20]
- On December 6, a Pennsylvania-based company and its Illinois-based subsidiary agreed to pay more than $14.7 million to resolve allegations that they violated the FCA by knowingly submitting claims to federal healthcare programs for more expensive types of remote cardiac monitoring than what physicians had intended to order or that were medically necessary. According to the government, the companies ignored requests by physicians for types of monitoring that carried lower reimbursement rates than what the companies ended up billing. The settlement agreement resolved two qui tam actions brought by, respectively, an individual employee of one of the company’s customers and by an LLC. The individual will receive $2.3 million of the settlement share, and the LLC will receive approximately $270,000.[21]
- On December 19, a healthcare network agreed to pay $345 million to resolve allegations that it violated the FCA by knowingly submitting claims to Medicare for services that were referred to the network in violation of the Stark Law. In particular, the government alleged that senior management employed physicians and paid them above fair market value and in a way that took account of the volume of the physicians’ referrals to the network. The network allegedly continued this conduct despite warnings from a compensation valuation firm that the physician salaries exceeded fair market value. In connection with the settlement, the network entered into a five-year corporate integrity agreement with HHS-OIG. The settlement resolved a qui tam lawsuit brought by the network’s former Chief Financial and Chief Operating Officer, whose share of the recovery, according to the government “ha[d] not yet been determined” as of the time of the press release. The settlement agreement resolves only the allegations in the government’s partial complaint-in-intervention; as of this writing, the relator continues to pursue FCA claims premised on AKS allegations.[22]
- On December 20, a hospital operator agreed to pay $2 million, and to make additional payments in the event of certain contingencies, to resolve claims that the center violated the FCA. The government alleged that the center falsely claimed cost outlier payments—supplemental reimbursements by Medicare and TRICARE that aim to incentivize treatment for patients whose cost of care in an inpatient setting is particularly high. As part of the alleged conduct, the company improperly inflated its charges for inpatient care while underreporting charges on the cost reports it submitted to the government, and concealed an obligation to return outlier payments to which it was not entitled. The government also alleged that the company double‑billed the government for COVID-19 tests. The settlement resolved a qui tam suit brought by a former employee, who received approximately $300,000 of the settlement.[23]
- On December 21, a pharmaceutical company agreed to pay $6 million to resolve allegations that it violated the FCA by paying kickbacks in exchange for prescriptions. Specifically, the government alleged that the company knowingly paid for free genetic testing, as well as the associated fees; according to the government, the company knew the tests had to be positive for a certain genome in order for insurers to pay for the company’s medication. The settlement resolved a lawsuit brought by a qui tam relator, who will receive approximately $1.1 million of the federal settlement amount.[24]
- On December 21, a Missouri urgent care provider agreed to pay $9.1 million to settle allegations that it violated the FCA by submitting claims for physician services that actually were performed by non-physician practitioners. The settlement resolved allegations that the provider both upcoded billing for patient visits and submitted upcoded visit claims for COVID-19 vaccinations and patient care. The DOJ press release notes that the company “fully cooperated in the investigation,” but it is not clear whether DOJ awarded any cooperation credit on that basis. The press release did note that the company had voluntarily self‑disclosed separate conduct—the payment of bonuses to physicians in part based on the volume or value of referrals—to HHS-OIG in March 2021.[25]
- On December 22, a Pennsylvania manufacturer of durable medical equipment agreed to pay $2.5 million to resolve allegations that it violated the FCA by giving kickbacks to sleep laboratories. The government alleged that the manufacturer gave the laboratories free diagnostic sleep-respiratory disorder masks to induce prescriptions or referrals for masks the company manufactured for treatment of sleep disorders.[26]
B. GOVERNMENT CONTRACTING AND PROCUREMENT
- On July 21, a consulting firm agreed to pay approximately $377 million to resolve allegations that from 2011 to 2021 it violated the FCA by improperly billing unrelated or disproportionate costs to its government contracts. In particular, the government alleged that the firm billed the government for costs that were unallowable or that should have been allocated to commercial contracts instead of to government contracts. The settlement is the largest, by dollar value, since our 2023 Mid-Year Update, and is a rare example of an FCA settlement based on alleged violations of the federal cost accounting standards (CAS). The settlement resolved a qui tam suit brought by a former employee, who will receive almost $70 million of the settlement.[27]
- On July 21, two government contractors agreed to pay a total of $7 million to resolve allegations that they violated the FCA by falsely representing what methodology they used to measure customer satisfaction on certain government websites. The government alleged that the contractors were awarded a five-year contract with the Federal Consulting Group (a part of the U.S. Department of Interior) with the understanding that the company would measure customer satisfaction using the American Customer Satisfaction Index’s (ASCI) methodology, but that the company instead used a different methodology. The settlement resolves claims in a qui tam lawsuit brought by two relators, who will receive a total of $1.5 million of the settlement amount.[28]
- On August 4, an electronic connector manufacturing company agreed to pay approximately $18 million to settle allegations that it violated the FCA by submitting false claims for electrical connectors to the U.S. government and military. The company allegedly submitted claims for reimbursement of the connectors that did not meet the testing and manufacturing specifications required for the claims to be eligible for reimbursement.[29]
- On September 5, a New Jersey-based company paid approximately $4.1 million to resolve claims that it violated the FCA by failing to satisfy certain required cybersecurity controls in connection with information technology services provided to federal agencies. Specifically, the government alleged that the company failed to implement three required cybersecurity controls for Trusted Internet Connections with respect to General Services Administration (GSA) contracts from 2017 to 2021 within an internet protocol service it provided to federal agencies. The claims stemmed from a written self-disclosure of potential issues by the company, submitted to the GSA’s Office of Inspector General. The settlement agreement states that the company received credit for disclosure, cooperation, and remediation; although it does not specify the amount of the credit, it does detail certain cooperation and remediation steps the company took, such as identifying responsible individuals, disclosing facts it had gathered and attributing them to specific sources, assisting in damages calculations, and imposing employment consequences for responsible individuals.[30]
- On September 15, a Pennsylvania-based research and engineering services provider, agreed to pay $4.4 million to settle allegations that it violated the FCA by knowingly double billing for labor and material costs in relation to contracts with the U.S. Navy. The settlement agreement specifies that $2.1 million of the settlement amount constitutes restitution, and notes that there was a parallel administrative case that arose out of government audits of the relevant contracts and that the parties had agreed in principle to settle. It does not appear that there was a qui tam case underlying the settlement.[31]
- On September 28, a major military aircraft manufacturer agreed to pay $8.1 million to resolve allegations that it violated the FCA by failing to adhere to critical manufacturing requirements in the production of composite parts for certain aircraft sold to the United States military. The government alleged that the manufacturer failed to conduct routine checks and surveillance of machines used to cure certain composite parts, and that the manufacturer did not maintain required documentation concerning periodic testing of those machines. The settlement resolved a qui tam action by three whistleblowers who worked at the company’s manufacturing facility producing the composite parts; together they will receive approximately $1.5 million of the settlement.[32]
- On November 20, a Virginia-based tactical gear and equipment company agreed to pay nearly $2.1 to settle allegations that it submitted false claims in connection with the sale of “American-made” products that were actually manufactured in foreign countries in violation of the Trade Agreements Act and the Berry Amendment’s requirement that certain items purchased by DOD be 100% domestic in origin. The settlement resolved a qui tam suit brought by an employee, who will receive an unspecified portion of the settlement amount.[33]
C. OTHER
- On August 15, a Florida real estate broker and his companies agreed to pay $4 million to resolve FCA allegations that they knowingly provided false information in support of multiple Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Program (EIDL) loans. The government alleged that the broker submitted false and fraudulent applications and documents, including false tax documents and employee wage reports, to obtain four EIDL loans and 14 PPP loans. The government also claimed that he submitted false and fraudulent forgiveness applications wherein he falsely certified that the entire loan amounts were used to pay eligible business costs.[34]
- On September 28, a Florida-based automotive company agreed to pay $9 million to resolve allegations that it violated the FCA by knowingly providing false information in support of a PPP loan application it submitted. The government contended that the company certified it was a small business and had fewer than 500 employees, making it eligible for PPP funds designated for “small business concerns” under the CARES Act. According to the government, the company in fact had over 3,000 employees, it knew when it made the certifications that it was ineligible for the loan program, and the government later forgave the loan. The settlement resolved claims brought in a qui tam lawsuit, and the relator will receive approximately $1.6 million of the recovery amount.[35]
- On October 31, an energy company agreed to pay $16 million to resolve allegations that it under-reported and under-paid natural gas royalties owed to the United States under administrative regulations for natural gas exploration. The government contended that the company knowingly deducted the costs of placing natural gas in marketable condition (which companies must do at no cost to the government) from the royalties it owed the government, knowingly deducted the costs of transporting carbon dioxide from the royalties, and knowingly failed to pay royalties on carbon dioxide. The settlement also resolved ongoing Department of Interior administrative proceedings regarding the same alleged conduct.[36]
- On November 1, a restaurant chain with locations in New York and Arizona and its owner agreed to pay $2 million to resolve allegations that they violated the FCA by falsely certifying that the restaurant chain was eligible to receive a Restaurant Revitalization Fund (RRF) grant in the amount of $928,554. Specifically, the government alleged that by falsely certifying that the restaurant chain did not have more than 20 locations, when in fact it had 21, the restaurant chain and its owner falsely claimed eligibility for the RRF grant. The settlement resolved a complaint filed by a qui tam relator whose share of the settlement will be $200,000.[37]
- On December 5, a Dallas-based importer of industrial products and two Chinese companies agreed to pay approximately $2.5 million to resolve allegations that they violated the FCA by submitting false invoices for customs valuations, which in turn resulted in lower values for the imported goods and lost customs revenue. The settlement resolved a qui tam suit brought by two relators, who received a $500,000 share as part of the settlement agreement.[38]
- On December 7, a New Jersey-based public relations firm agreed to pay nearly $2.3 million to settle allegations that the company violated the FCA by wrongfully taking a loan from the PPP. The United States contended that the company knowingly applied for and received a $2 million PPP loan, despite the fact that it was ineligible to receive the funds because it was a required registrant under the Foreign Agent Registration Act. The company allegedly later sought and received forgiveness for the total loan value. The settlement agreement states that the government considers approximately $2.1 million of the $2.3 million settlement amount to be restitution. The qui tam relator who brought the original lawsuit will receive $229,000, or 10%, of the recovery amount.[39]
- On December 11, a Texas‑based roofing company agreed to pay $9 million to resolve allegations that it violated the FCA by falsely certifying that eight of its affiliate companies were eligible to receive PPP loans in the amount of $6.7 million, which were all later forgiven in full. The government alleged that by improperly claiming to have fewer than 500 employees, each applicant falsely represented that it was qualified as a small business eligible to receive a loan, when the applicants’ affiliations with each other meant that they collectively had more than 500 employees. The settlement resolved a lawsuit brought by a qui tam relator who will receive $1 million of the settlement amount.[40] The law firm that represented the relator characterized it in a blog post as a “data miner” that “analyzes PPP loan data for prospective cases.”[41]
III. LEGISLATIVE AND POLICY DEVELOPMENTS
A. FEDERAL POLICY AND LEGISLATIVE DEVELOPMENTS
1. DOJ’s Cooperation Credit Policy, Several Years On
In the aggregate, FCA resolutions afford a fairly clear window into DOJ’s programmatic enforcement priorities. While any given settlement agreement’s level of detail regarding the covered conduct is often vigorously negotiated, agreements—and the press releases that announce them—typically contain enough high-level information about the nature of the government’s allegations for other companies in various industries to identify the government’s focus areas.
The government’s approach to awarding cooperation credit in FCA cases is markedly less transparent. In May 2019, DOJ issued a policy—now codified at Section 4-4.112 of the Justice Manual—regarding the circumstances under which such credit could be awarded.[42] At the core of the policy are voluntary disclosure, cooperation in the government’s investigation, and remediation.[43] In announcing the policy, DOJ stated that “[m]ost frequently, cooperation credit will take the form of a reduction in the damages multiplier and civil penalties,” and that DOJ “may publicly acknowledge the company’s cooperation.”[44] However, beyond that general statement, and a statement in the policy that cooperation credit cannot result in a defendant paying less than single damages, the policy said precious little about how much cooperation credit DOJ would award in various circumstances. (Gibson Dunn’s 2019 analysis of the policy provided further details on the policy and the significant discretion it granted to the government.)
The triad of disclosure, cooperation and remediation described in the FCA policy is a familiar one. In the criminal sphere, DOJ has made these same three concepts the centerpiece of its enforcement regime—not only from the standpoint of whether and how much cooperation credit to award, but also in terms of what type of resolution vehicle to use.[45] In the criminal enforcement context, however, DOJ tends to be more explicit about how much cooperation credit it awards and the factors that lead it to do so.
For example, several of DOJ’s new voluntary disclosure policies clarify that for a company that has made a qualifying self‑disclosure, DOJ will seek penalties of no more than 50% of the applicable criminal penalties, if the government determines criminal penalties are necessary.[46] These policies also make clear that companies that meet the policies’ criteria for disclosure, cooperation and remediation will not face guilty pleas absent aggravating factors.[47] Such policies also go beyond general pronouncements, and deal with more specific types of fact patterns that companies often face—the most notable example being DOJ’s recent “safe harbor” policy for companies that make voluntary self-disclosures regarding misconduct discovered in the course of mergers and acquisitions.[48] In the text of specific resolution agreements, moreover, DOJ frequently “shows its work” by explaining how much cooperation credit it is awarding and why. For example, in a recent deferred prosecution agreement with a commodities company related to alleged U.S. Foreign Corrupt Practices Act violations, the government explicitly awarded credit for cooperation efforts but not for voluntary disclosure, and stated that the company was receiving a 15% discount off the bottom end of the applicable U.S. Sentencing Guidelines penalty range.[49]
By contrast, nearly five years on from the codification of DOJ’s FCA cooperation credit policy, it is difficult to discern how DOJ is assessing the forms of cooperation and remediation the policy deems relevant, and to what effect in terms of settlement amounts. Before 2023, DOJ seldom invoked the policy as having affected the terms of a settlement when announcing resolutions. Although certain resolutions from 2023 reflect a possible shift toward more frequent discussion of the policy and provide valuable details about its application in practice, the statements DOJ is making continue to provide more questions than answers. Several examples from 2023 bear this out:
- In one of the year’s notable cybersecurity-related FCA resolutions, DOJ “acknowledged that [the company] took a number of significant steps entitling it to credit for cooperating with the government.”[50] These included a written self-disclosure to the GSA after the company learned of the relevant issues; “an independent investigation and compliance review of the issues and . . . multiple detailed supplemental written disclosures” to GSA; identification of responsible individuals to DOJ; disclosure of facts the company uncovered in its investigation, including by attributing the facts to specific sources; assistance to DOJ in the analysis of potential damages; and “prompt and substantial remedial measures” such as compliance enhancements, “substantial capital investments” in compliance initiatives, and employment consequences for responsible individuals.[51] The agreement, however, spends less than three lines stating that the company received cooperation credit; it does not specify which if any of the company’s efforts carried more weight than others in the government’s determination to award cooperation credit. The agreement did identify the portion of the amount that the government considered to be restitution; assuming this reflects DOJ’s views of single damages, then the total settlement amount was approximately 1.5 times the alleged single damages.[52]
- In another resolution involving a hospital system, DOJ did not publish the settlement agreement itself, but explicitly stated in the press release announcing the settlement that “[b]ecause the company self-reported the conduct to the government, it was able to resolve its False Claims Act liability for only 1.5 times the amount of monetary loss caused by its false claims.”[53]
The second example above suggests that voluntary self‑disclosure may be the engine of the cooperation credit analysis. Yet without more explicit statements from DOJ as to how it views companies’ disclosure, cooperation and remediation efforts, it is difficult to know which factors are ultimately responsible for any given award of cooperation credit.
On another level, while both examples above suggest that settlement at 1.5 times single damages is within reach for companies that satisfy DOJ’s policy, another resolution from 2023 awarded credit under the policy but reflected a reduction to only 1.75 times single damages. Further, like other resolutions, this one did not state which aspects of the companies’ efforts led DOJ to think that further reductions were inappropriate.[54] At the same time, DOJ has been known to settle at 1.5 times single damages—or even less—without any mention of self-disclosure, thus raising questions around the incentives for self-disclosure in the first instance. For example, in October, a New Jersey public relations firm reached a settlement of FCA allegations related to PPP funds, and the settlement amount was approximately 1.1 times the government’s stated restitution figure.[55]
In short, while DOJ’s more frequent invocation of its cooperation credit policy is a welcome development, for the time being it has done little to answer the questions the policy itself left open regarding the value of disclosure, cooperation, and remediation. Time will tell whether future resolutions will continue the recent trend of explicitly noting companies’ cooperation, and whether they will reflect a more detailed—and uniform—approach by DOJ to explaining how much cooperation credit it is awarding and why.
2. Civil Cyber-Fraud Initiative
Since announcing its Civil Cyber-Fraud Initiative in October 2021, DOJ has increasingly used the FCA to address cybersecurity concerns, and 2023 was no exception. The Civil Cyber‑Fraud Initiative uses the FCA to encourage disclosure and to hold accountable entities and individuals that put U.S. information or information systems at risk by knowingly providing deficient cybersecurity products or services, misrepresenting their cybersecurity practices or protocols, or violating obligations to monitor and report cybersecurity incidents and breaches.[56] Several recent cases highlight a growing trend of using the FCA to target government contractors that are required to meet certain cybersecurity requirements, even when no beach has occurred:
- In the cybersecurity-related FCA resolution mentioned above, the information services technology company paid $4.1 million to settle FCA allegations after self-disclosing potential issues with certain cybersecurity controls.[57] The company, which provides secure public internet connection capabilities to federal agencies, was contractually required to comply with the Office of Management and Budget’s Trusted Internet Connections initiative at all times. After identifying concerns with certain security controls that allegedly affected the company’s compliance with critical capabilities, the company self-disclosed the concern and implemented measures to remediate the issue.
- In a recently unsealed qui tam complaint stemming from the Civil Cyber-Fraud Initiative, a relator alleged that a university submitted false cybersecurity certifications to DOD. Despite making certifications of compliance with National Institute of Standards and Technology (NIST) requirements, the relator claims that the university failed to store controlling unclassified information in NIST-compliant applications, and replaced legitimate risk assessments with templates designed to simply “check the box.”[58]
These cases demonstrate that DOJ’s use of the FCA to pursue cybersecurity enforcement extends beyond commercial defense or cybersecurity-related contracts to any government agreement that includes representations about cybersecurity compliance. Healthcare companies should take note and pay particular attention to government contract provisions governing the storage, protection, and transmittal of protected health information and personal identifiable information, which may contain specific cybersecurity requirements or representations.
Cybersecurity enforcement will be an area to watch as it relates to self-disclosure in particular. In October 2023, DOD, the GSA, and NASA proposed a rule that would amend the Federal Acquisition Regulation (FAR) to require government contractors to disclose cybersecurity incidents within eight hours of discovering them, and to provide other periodic updates on efforts to remediate cybersecurity incidents.[59] Even though such disclosures to the government would not necessarily include information within the full scope of what it would consider relevant to possible FCA claims, the disclosures by definition will position the government to start investigating potential misconduct far closer in time to its occurrence than in other situations—even ones, such as the healthcare overpayment context, in which reporting to the government is required. The proposed FAR rule’s early reporting requirement could create additional incentives for federal contractors to quickly investigate and disclose potential FCA violations to DOJ, lest DOJ learn of the underlying cyber breaches too quickly for self-disclosure credit to be available. At the same time, it is possible DOJ will deem self-disclosure of potential FCA violations to carry less weight given that disclosure of the fact of a cyber incident would already be required by law. If the eight-hour disclosure provision remains in the FAR rule when it becomes final, it will be instructive to track the extent to which DOJ calibrates its application of the cooperation credit policy in the cyber context to focus on cooperation and remediation, as opposed to disclosure.
3. Other Federal Policy Developments
HHS-OIG Compliance Program Guidance
On November 6, 2023, HHS‑OIG released its new General Compliance Program Guidance (GCPG).[60] This document is designed to serve as a non-binding guide for healthcare entities, and includes guidance about compliance with the FCA and other applicable laws. The GCPG describes how the FCA in the healthcare context encompasses billing services or items to Medicare or Medicaid “where the service is not actually rendered to the patient, is already provided under another claim, is upcoded, or is not supported by the patient’s medical record.”[61] To ensure compliance with the FCA, the guidance recommends that entities take “proactive measures . . . including regular reviews to keep billing and coding practices up-to-date as well as regular internal billing and coding audits.”[62]
The guidance also outlines seven focus areas for corporate compliance programs, including policies and training, governance and reporting, risk assessments and audits, employment consequences, and responding to discoveries of misconduct.[63] In its discussion of risk assessments and auditing, the guidance makes clear that entities should put in place mechanisms for auditing the effectiveness of compliance controls, beyond simply auditing with an eye to identifying potential violations of law.[64] And the guidance emphasizes that an entity’s response to discovering misconduct should include self-disclosure to the appropriate government authority where “credible evidence of misconduct from any source is discovered and, after a reasonable inquiry, the compliance officer or counsel has reason to believe that the misconduct may violate criminal, civil, or administrative law.”[65] Notably, the guidance states that such disclosure should be made “not more than 60 days after the determination that credible evidence of a violation exists.”[66] It remains to be seen the extent to which this expectation ends up at odds with DOJ’s view of when an “obligation” to return healthcare overpayments arises under the Affordable Care Act (ACA) and the FCA, given that the ACA requires entities to return overpayments within 60 days of identifying them.[67]
HHS‑OIG has also signaled its intent to release industry segment-specific compliance program guidance in 2024 and to update the documents periodically.[68]
COVID-19 Enforcement
DOJ’s FCA enforcement efforts related to the COVID-19 pandemic are part of a broader landscape of civil and criminal enforcement initiatives to which DOJ has devoted significant resources over the last several years. In August 2023, DOJ provided an update on the efforts of its COVID-19 Fraud Enforcement Task Force.[69] According to DOJ, it had seized over $1.4 billion in COVID-19 relief funds as of that date, and had recently conducted a single coordinated enforcement effort involving 371 defendants and $836 million in relief funds, primarily from the Paycheck Protection Program, the Internal Revenue Service (IRS) Employee Retention Credit program, and Economic Injury Disaster Loans.[70]
B. STATE LEGISLATIVE DEVELOPMENTS
2023 saw states continue to expand the reach of their FCA statutes, some more aggressively than others. Most notably, as we discussed in our 2023 Mid-Year Update, New York became the first state to amend its FCA to cover persons who improperly fail to file a tax return in the state, obviating the need for the State or relators to show the person submitted an actual false “claim, record, or statement.” Connecticut also expanded the scope of its FCA statute to include claims relating to most state programs and benefits (although explicitly carving out tax-related claims), rather than only state-administered health and human services programs, as it had previously.[71]
More recently, New Jersey also amended its FCA statute. It did so specifically to qualify for the federal financial incentive that allows states to receive a ten-percentage-point increase in their shares of any amounts recovered under the FCA if the state’s laws meet certain specified criteria.[72] For a state to qualify for this incentive, HHS-OIG must determine that the state’s FCA is “at least as effective” as the federal FCA at facilitating qui tam actions.[73] With its bill, New Jersey implemented changes to bring the state’s law in line with HHS-OIG’s guidance. In addition to clarifying certain language and terminology to better align the statute with the federal FCA, the amendment expanded protections for relators by removing the bar preventing “an employee or agent of the State or a political subdivision from bringing an action based on information discovered in a civil, criminal, or administrative investigation or audit that was within the scope of the employee’s or agent’s duties or job description” and by expanding anti-retaliation protection to contractors and agents, beyond just employees.[74] With New Jersey’s amendment, there are now 23 state FCAs on HHS-OIG’s “approved” list and six on its “not approved” list.[75]
In Washington state, meanwhile, the legislature repealed a sunset provision that applied to whistleblower provisions, thus allowing qui tam actions to continue to be brought indefinitely.[76] The sunset provision was initially put in place to address the concern that the availability of qui tam actions would cause relators to indiscriminately file claims under the Washington FCA, but legislators found that this did not occur and the legislature’s Joint Legislative Audit and Review Committee unanimously recommended the bill repealing the sunset provision.[77]
IV. CASE LAW DEVELOPMENTS
A. The Third Circuit Weighs in on FCA Materiality Post-Escobar
The Supreme Court’s decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016), set forth a number of factors relevant to the potential materiality of a misrepresentation under the FCA. Among those factors are (1) whether the government has “designate[d] compliance with” the relevant “statutory, regulatory, or contractual requirement as a condition of payment”; (2) whether the alleged violation is “minor or insubstantial”; and (3) whether the government continued to pay claims “despite its actual knowledge that certain requirements were violated” or, instead, “consistently refuse[d] to pay claims in the mine run of cases based on noncompliance.” Id. at 194–95.
In late August, the Third Circuit addressed the interplay of these factors. In United States v. Care Alternatives, 81 F.4th 361 (3d Cir. 2023), the court reversed the district court’s grant of summary judgment to a defendant based on materiality. Relators in the case were former employees of Care Alternatives, a for-profit hospice provider. They alleged that Care Alternatives submitted Medicare claims even though patient records did not document hospice eligibility as required under 42 C.F.R. § 418.22(b)(2). Under that provision, for a patient to be eligible for hospice care paid by Medicare, a physician must certify that the patient is “terminally ill,” meaning that the physician has signed the certification with the knowledge that the patient’s medical record “‘support[s] the medical prognosis’ of terminal illness.” Id. at 366 (citation omitted). Relators alleged that Care Alternatives submitted claims that were accompanied by physician certifications of terminal illness, but that the patients’ records lacked sufficient clinical documentation “supporting that diagnosis.” Id. at 367.
The district court granted Care Alternatives’ first summary judgment motion based on a failure to show falsity; the Third Circuit reversed. (We covered the Circuit Court opinion in our 2020 Mid-Year Update.) Care Alternatives then filed a second motion for summary judgment. The district court again granted summary judgment to Care Alternatives, this time holding that relators had not established that the alleged misrepresentations to Medicare were material, given that the government continued to reimburse claims from Care Alternatives even after being made aware of the deficiencies in the underlying patient records.
The Third Circuit reversed and remanded, holding that the district court improperly assigned dispositive weight to a single factor under Escobar—that the government continued to reimburse despite knowing of the alleged clinical documentation deficiencies. The court concluded that a dispute of fact remained as to whether Care Alternatives’ alleged regulatory violations were “minor” or “went to the very essence of the bargain,” given that the parties contested the pervasiveness of the documentation errors, Care Alternatives’ awareness of its compliance problems, and whether the patients at issue were eligible for the Medicare hospice benefit. Id. at 370–72 (internal quotation marks omitted). And the court determined that, contrary to the district court’s opinion, a dispute of fact also remained as to whether the government ever had “actual knowledge” of the violation during the period in which it continued to reimburse Care Alternatives. Id. at 374–75. Noting that “relators are not required to conduct discovery on government officials to demonstrate materiality,” the court held that Care Alternatives had not met its burden of demonstrating an absence of dispute as to the timing of the government’s knowledge. Id. at 375.
B. The Fifth Circuit Overturns a Jury Verdict for the Government on Statute-of-Limitations Grounds
In United States v. Corporate Management, Inc., 78 F.4th 727 (5th Cir. 2023), a Medicare overbilling case, the Fifth Circuit heard an appeal following a nine-week jury trial that resulted in an approximately $10.8 million verdict for the government (roughly $32 million after trebling). Defendants appealed on a number of grounds, including that certain claims the government added when it intervened were untimely under the FCA’s statute of limitations. The relator filed the initial complaint in May 2007, alleging that Defendants had submitted false claims to Medicare, including by overbilling for supply costs. Id. at 734–35. The government did not intervene until September 2015. Id. at 735. In its complaint‑in‑intervention, the government added two claims, including a claim that Defendants “took advantage of Medicare’s 101% reimbursement rate” for critical access hospitals by setting up a sham “management fee” agreement between one such hospital and a management company owned by the hospital’s owner, which was used to improperly inflate salaries paid to the owner and his wife. Id. On appeal, Defendants argued that all claims accruing before September 2009, six years prior to the government’s complaint, were barred by the statute of limitations, and that the judgment should therefore be reduced to approximately $4.6 million. Id. at 741. The government argued that its claims related back to the relator’s original allegations that Defendants submitted fraudulent Medicare cost reports, or in the alternative, that the claims were viable in light of the FCA’s tolling period (which tolls the limitations period for up to three years “after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances”). Id.; 31 U.S.C. § 3731(b)(2).
The Fifth Circuit disagreed with the government on both arguments. It explained that to relate back, a new claim must be “tied to a common core of operative facts.” 78 F.4th 742 (internal quotation marks omitted). Whereas both the relator and the government alleged fraudulent cost reporting, the relator’s complaint contained no allegations regarding inflated salaries paid to the hospital owner and his wife. Id. at 743. Thus, rather than merely “add detail or clarify the claims on which it [was] intervening,” the government made new claims and sought to “‘fault [Appellants] for conduct different from that’ alleged by” the relator. Id. (internal quotation marks omitted). The Fifth Circuit further held that the government could not invoke the FCA’s three-year tolling provision, because there was evidence—in the form of a sealed government motion seeking an extension of the seal period—that an expert recommended in August 2011 that the government intervene in the case, and thus that by that time the government “likely did know” facts material to the case. Id. at 745 (emphasis in original). In reaching this conclusion, the court declined to decide whether DOJ or the relevant Medicare administrative contractor was the “official of the United States charged with responsibility to act in the circumstances” under the FCA’s tolling provision. Id.; 31 U.S.C. § 3731(b)(2).
C. The Ninth Circuit Imposes Limits on Calculation of Statutory Penalties and Upholds “Actual Damages” Framework
The FCA imposes a penalty for each violation of the statute, as well as “3 times the amount of damages which the Government sustains because of the act of” the defendant. 31 U.S.C. § 3729(a). In cases involving allegations that claims for payment were “tainted” by a defendant’s violation of an underlying contractual or regulatory requirement, FCA plaintiffs frequently seek penalties for every claim, and argue that the relevant goods or services were worthless to the government and that the proper measure of damages thus should be based on the full value of each claim.
In Hendrix ex rel. United States v. J-M Manufacturing Co., Inc., 76 F.4th 1164 (9th Cir. 2023), the Ninth Circuit reinforced important limitations on both of these theories. Relator and government entity plaintiffs in the case claimed that J-M violated the FCA by falsely representing that its PVC pipes were compliant with certain industry standards which measured compliance based on the material of the pipes and its performance under a series of tests, as well as the manufacturing process for the pipes. Under relevant standards, if the tested pipes are compliant, the manufacturer can claim compliance with those standards for pipes produced thereafter without additional testing, so long as the pipes are produced through “materially unchanged processes.” Id. at 1168.
During the first phase of a bifurcated trial, plaintiffs sought to prove that J-M continued to advertise its PVC pipes as compliant with industry standards after materially changing its manufacturing process from the pipes’ last compliance testing. At the end of Phase One, the jury found that J-M knowingly made materially false claims for payment because it represented in marketing materials that its pipes were uniformly compliant with industry standards. The jury made no findings regarding the physical longevity of any particular piece of pipe. During the damages phase of the trial, the district court granted judgment as a matter of law in favor of J-M on actual damages after the jury was unable to reach a verdict. The court awarded plaintiffs one statutory penalty per project at issue, and not—as the plaintiffs had sought—one penalty for each piece of pipe that had been stamped with the relevant industry standard. The court declined to impose damages, stating that the government had not established that the pipes were value-less.
The Ninth Circuit affirmed, ruling that the plaintiffs were not entitled to recover the entire PVC purchase price without a showing that the pipes had not operated as intended, and lacked all value in light of the jury’s Phase One findings. To the contrary, plaintiffs had successfully installed the pipes and used them for many years following installation without issue, and apparently without any plans to replace the pipes. To award damages in these circumstances, the Ninth Circuit held, would “impose a strict liability standard” without requiring proof of actual damages, and would “conflate[] ‘the materiality element of the FCA claim’ with ‘actual damages.’” Id. at 1174. In considering other cases in which the full contract price was awarded as damages, the court distinguished those cases as involving goods that “were either plainly unusable, not used, or returned.” Id.
The Ninth Circuit also rejected plaintiffs’ claims that statutory penalties should be awarded for each piece of PVC pipe purchased, rather than for each individual project. The court reasoned that the government entity plaintiffs “did not establish how much non-compliant pipe they received nor were they able to identify any specific piece of non-complaint pipe.” Id. at 1172.
The J-M case is an important reminder that there are limits on local, state, and federal governments’ ability to accumulate FCA damages merely because a regulatory violation preceded the provision of goods or services. Time will tell how closely other courts hew to the Ninth Circuit’s admonition that the materiality of a particular regulatory requirement does not automatically mean that goods or services provided after such a violation was committed were worthless.
D. The Tenth Circuit Clarifies a Prior Ruling on the FCA’s Retaliation Provision
In United States ex rel. Barrick v. Parker-Migliorini International, the Tenth Circuit clarified the extent to which an employer must be on notice that a relator is engaging in conduct protected by the FCA in order for the employer to be liable for retaliatory termination. 79 F.4th 1262 (10th Cir. 2023). Brandon Barrick was a senior financial analyst for PMI, who alleged FCA claims regarding two methods of beef distribution. First, according to Barrick, PMI exported beef to Costa Rica, which accepted beef subject to a lower (and therefore, cheaper) USDA testing standard, which would then be repackaged and sold to Japan, which required a higher (and more expensive) testing standard. Second, PMI was allegedly submitting beef to the USDA for testing, indicating that it was being sent to Moldova—when it was, in fact, being sent to Hong Kong, and, in turn, illegally smuggled into China. Id. at 1268–69.
Barrick alleged he had several conversations with PMI’s CFO regarding his concerns, and that the CFO confirmed that PMI was implementing these schemes and that they were illegal. Id. at 1268–69. Over the course of six months, Barrick allegedly cooperated with USDA, DOJ, and the FBI, including by recording several conversations with the CFO. See id. at 1271. Barrick alleged that one month after the FBI raided PMI’s offices, Barrick was terminated as part of a company-wide reduction in force of nine personnel. Id. at 1269. PMI claimed it did not learn of Barrick’s cooperation with the government until nearly two years later. Id.
The FCA prohibits retaliation for “lawful acts done by the employee . . . in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.” 31 U.S.C. § 3730(h)(1) (emphasis added). In 2022, the Tenth Circuit held that to show they were the victim of unlawful retaliation, a relator must show that (1) they were engaging in protected activity; (2) their employer had notice that they were engaged in protected activity; and (3) the employer terminated them because of their engagement in protected activity. Barrick, 79 F.4th at 1270 (citing U.S. ex rel. Sorenson, 48 F.4th 1146, 1158–59 (10th Cir. 2022)). In the Barrick case, PMI argued that to satisfy the notice prong of this standard, “Barrick was required to ‘convey a connection to the FCA.’” 79 F.4th at 1270. Relying on the FCA’s broad protection of “‘other efforts’ to stop [FCA] violations,” the court clarified that relators need not “say magic words, such as ‘FCA violation’ or ‘fraudulent report to the government to avoid payment,’ to put [employers] on notice.” Id. Rather, the person “must have conveyed to [the employer] that he was attempting to stop [the employer] from (1) engaging in fraudulent activity to avoid paying the government an obligation or (2) claiming unlawful payments from the government.” Id. at 1271. The employer “does not need to know the activity violates the FCA specifically.” Id. The court then upheld the jury’s findings that there was sufficient circumstantial evidence upon which the jury could have found PMI was aware that Barrick was engaging in protected conduct.
The Barrick case is significant because it means that, at least in the Tenth Circuit, the requisite nexus between an employee complaint and the FCA may be satisfied by evidence that the employee gave notice she was attempting to stop efforts to claim unlawful payments from, or efforts to unlawfully avoid making payments to, the government. That creates a tension with the text of the FCA’s anti-retaliation provision, which is specific to employee acts in furtherance of qui tam suits or of other efforts to stop a violation of the FCA in particular. Barrick seemingly left open the question of whether the employee herself must believe the conduct she is reporting violates the FCA specifically, or whether it is sufficient that the employee believe the conduct violates any of the myriad statutory, regulatory, and contractual requirements that are often used as the basis for FCA claims.
E. The Eleventh Circuit Reinforces a Strict Approach to Pleading Presentment Under Rule 9(b)
In some federal jurisdictions, including the Eleventh Circuit, to prevail on an FCA claim, “a relator must allege an actual false claim for payment that was presented to the government.” Carrel v. AIDS Healthcare Found., Inc., 898 F.3d 1267, 1277 (11th Cir. 2018) (internal quotation marks and emphasis omitted). In United States ex rel. 84Partners, LLC v. Nuflo, Inc., 79 F.4th 1353 (11th Cir. 2023), the Eleventh Circuit affirmed the district court’s dismissal of an FCA claim based on failure to allege presentment with the requisite particularity.
Relator—an entity called 84Partners, LLC, which included two former employees of a shipbuilding contractor and a pipe fitting manufacturer—brought a false-presentment FCA claim against their former employers, as well as a subcontractor and a pipe fitting distributor, based on the alleged installation of defective pipe fittings on nuclear submarines subsequently delivered to the Navy. Relator alleged that the manufacturer made defective parts and that the other defendants recklessly disregarded their obligations to inspect the parts before delivery or installation, resulting in at least 42 defective pipe fittings being installed on Navy vessels. The Navy made payments for all “allowable costs,” which included costs for parts installed on nuclear submarines, but relator failed to identify “any claim for payment submitted to the Navy that included any of the 42 [defective] parts.” Id. at 1357 (alteration added).
The district court dismissed the relator’s second amended complaint with prejudice, noting that, despite eight years of litigation and limited discovery, relator was still unable to state a claim for false presentment; the court also noted that relator had not requested leave to further amend its operative complaint. Id. at 1358. The Eleventh Circuit affirmed, concluding that although the “complaint allege[d] with particularity egregious underlying conduct,” it failed to “allege with particularity the actual submission of false claims—claims covering the 42 defective parts, or any other defective parts, that made it into submarines.” Id. at 1361. Notably, the government had filed an amicus brief in the Eleventh Circuit, in which it urged the court to eschew a requirement to plead actual false claims—arguing, among other things, that the requirement is a poor fit for cases in which the government is the “only buyer . . . and requests for payment are submitted to one potential government payer under readily-identifiable contracts.” Brief for United States as Amicus Curiae, United States ex rel. 84Partners, LLC v. Nuflo, Inc., No. 21-13673, at 23 (11th Cir. Jan. 20, 2022). The government attempted to contrast such fact patterns with healthcare cases, in which the claims submission process is more complex and involves entities beyond the government itself. See id. While the government made other arguments against the application of a strict Rule 9(b) standard, this explicit contrast between types of FCA cases—and the insinuation that a stricter Rule 9(b) standard may actually have a role to play in healthcare cases in particular—is an interesting window into how the government thinks about different FCA fact patterns.
F. The District of Massachusetts Sets the Stage for a Deepened Circuit Split over Causation in AKS-Predicated FCA Cases
Our 2023 Mid-Year False Claims Act Update discussed the deepening circuit split over the proper causation standard for AKS-predicated FCA claims. In brief, the Sixth Circuit and Eight Circuit have held that the AKS imposes a “but for” causation standard, see e.g., United States ex rel. Martin v. Hathaway, 63 F.4th 1043, 1052–53 (6th Cir. 2023); United States ex rel. Cairns v. D.S. Medical L.L.C., 42 F.4th 828 (8th Cir. 2022), whereas the Third Circuit has rejected a “but‑for” causation standard and instead determined that the FCA and AKS “require[] something less than proof that the underlying medical care would not have been provided but for a kickback.” United States ex rel. Greenfield v. Medco Health Solutions, Inc., 880 F.3d 89, 96 (3d Cir. 2018). Now, the First Circuit is also set to rule on this question after the district court granted interlocutory appeal in two cases with opposite holdings: United States v. Regeneron Pharms., Inc., No. CV 20-11217-FDS (D. Mass.) and United States v. Teva Pharms. USA, Inc., Civil Action No. 20-11548-NMG (D. Mass.).
In Teva, the government alleged that Teva caused the submission of false claims to Medicare through kickbacks it paid in the form of co-pay subsidies in connection with the sale of its multiple sclerosis drug, Copaxone. Both Teva and the United States filed motions for summary judgment on the issue of causation, among other issues. Teva argued that the government must prove “but-for” causation, citing Martin, 63 F.4th 1043 and Cairns, 42 F.4th 828. The government argued that the FCA only requires a “sufficient causal connection” between a kickback and a claim, citing Guilfoile v. Shields, 913 F.3d 178, 190 (1st Cir. 2019) and Greenfield, 880 F.3d 89. On July 14, 2023, the district court in Teva held that “[t]he government need not prove ‘but for’ causation,” and concluded that “[t]he government has established evidence of ‘a sufficient causal connection’ between Teva’s payments to CDF and ATF and the resulting Medicare Copaxone claims.” Teva, 2023 WL 4565105, at *3–4 (D. Mass. July 14, 2023). Thus, the Teva court joined the Third Circuit in rejecting the “but-for” causation standard. On August 14, 2023, the Teva court granted interlocutory appeal on the causation question, finding that the standard for causation is “a controlling question of law as to which there is substantial ground for difference of opinion and an immediate appeal may materially advance the ultimate termination of this litigation.” Teva, Order, Docket No. 235. (D. Mass. Aug. 14, 2023) (internal citations omitted).
In Regeneron, the government alleged that Regeneron improperly sent millions of dollars to an independent charitable foundation to subsidize patient co-pays for Eylea, a drug that treats neovascular (wet) age-related macular degeneration. Similar to the Teva case, both the government and the company filed motions for summary judgment on the causation standard. On September 27, 2023—months after the Teva court issued its ruling—the Regeneron court held that the appropriate standard for causation was “but for” causation and that “the factual evidence is sufficient to withstand summary judgment on the issue of causation.” Regeneron, 2023 WL 6296393, at *13 (D. Mass. Sept. 27, 2023). On October 25, 2023, the Regeneron court certified its decision for interlocutory appeal to the First Circuit on the same question as the Teva case, stating that “if both this matter and the Teva matter were to proceed to trial—and both trials are expected to be lengthy and complex—at least one of those trials would employ an incorrect causation standard, and thus waste considerable time and resources.” Regeneron, 2023 WL 7016900, at *1 (D. Mass. Oct. 25, 2023). The Regeneron court further reiterated that “the issue is one of national importance, as reflected in the split among the circuits as to the correct standard.” Id.
Both cases have been accepted by the First Circuit, but it has not yet ruled. That ruling seems likely to deepen the existing circuit split on the issue of causation. But it remains to be seen whether the addition of another Circuit-level decision will prompt the Supreme Court to weigh in where it has not done so to date. (In October the Court denied a certiorari petition in the Martin case.) This issue carries significant implications for FCA defendants, as exemplified by the $487 million jury verdict in May 2023 against a medical supply company in a case involving allegations of false claims caused by illegal kickbacks. (We covered this case in our 2023 Mid-Year Update.)
V. CONCLUSION
We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2024 False Claims Act Mid-Year Update.
__________
[1] Press Release, U.S. Dep’t of Justice, False Claims Act Settlements and Judgments Exceed $2.68 Billion in Fiscal Year 2023 (Feb. 22, 2024), https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023 [hereinafter DOJ FY 2023 Recoveries Press Release].
[2] DOJ FY 2023 Recoveries Press Release.
[3] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Tenn., Dermatologist Agrees to Pay $6.6 Million to Settle Allegations of Fraudulent Billing Practices (July 13, 2023), https://www.justice.gov/usao-edtn/pr/dermatologist-agrees-pay-66-million-settle-allegations-fraudulent-billing-practices.
[4] See Press Release, U.S. Atty’s Office for the Dist. of Vt., Electronic Health Records Vendor NextGen Healthcare, Inc. to Pay $31 Million to Settle False Claims Act Allegations (July 14, 2023), https://www.justice.gov/usao-vt/pr/electronic-health-records-vendor-nextgen-healthcare-inc-pay-31-million-settle-false; United States ex rel. Markowitz et al. v. NextGen Healthcare, Inc., Case No. 2:18-cv-195 (D. Vt.), Settlement Agreement, https://www.justice.gov/opa/file/1305766/dl?inline.
[5] See Press Release, Dep’t of Justice, Martin’s Point Health Care Inc. to Pay $22,485,000 to Resolve False Claims Act Allegations (July 31, 2023), https://www.justice.gov/opa/pr/martins-point-health-care-inc-pay-22485000-resolve-false-claims-act-allegations.
[6] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Pa., Northeast Philadelphia Pharmacies and Their Owners Agree to Pay Over $3.5 Million to Resolve False Claims Act Liability (Aug. 1, 2023), https://www.justice.gov/usao-edpa/pr/northeast-philadelphia-pharmacies-and-their-owners-agree-pay-over-35-million-resolve.
[7] See Press Release, Dep’t of Justice, Clinical Laboratory and Its Owner Agree to Pay an Additional $5.7 Million to Resolve Outstanding Judgement for Billing Medicare for Inflated Mileage-Based Lab Technician Travel Allowance Fees (Aug. 1, 2023), https://www.justice.gov/opa/pr/clinical-laboratory-and-its-owner-agree-pay-additional-57-million-resolve-outstanding.
[8] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Wash., Lincare Holdings Agrees to Pay $29 Million to Resolve Claims of Overbilling Medicare for Oxygen Equipment in Largest-Ever Health Care Fraud Settlement in Eastern Washington (Aug. 28, 2023), https://www.justice.gov/usao-edwa/pr/lincare-holdings-agrees-pay-29-million-resolve-claims-overbilling-medicare-oxygen; see also Settlement Agreement, Case No. 2:21-cv-151-TOR (E.D. Wash.), https://www.justice.gov/usao-edwa/file/1311981/dl?inline.
[9] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Mich., Michigan Doctor to Pay $6.5 million to Resolve False Claims Act Allegations (Aug. 24, 2023), https://www.justice.gov/usao-edmi/pr/michigan-doctor-pay-65-million-resolve-false-claims-act-allegations.
[10] See Press Release, U.S. Dep’t of Justice, Office of Pub. Affairs, Health Care Provider Agrees to Pay $5 Million for Alleged False Claims to California’s Medicaid Program (Aug. 30, 2023),
https://www.justice.gov/opa/pr/health-care-provider-agrees-pay-5-million-alleged-false-claims-californias-medicaid-program https://www.justice.gov/opa/pr/health-care-provider-agrees-pay-5-million-alleged-false-claims-californias-medicaid-program.
[11] See Press Release, U.S. Atty’s Office for the Northern Dist. of Tex., Dermatology Management Company to Pay $8.9 Million to Resolve Self-Reported False Claims Act Liability (Sept. 13, 2023), https://www.justice.gov/usao-ndtx/pr/dermatology-management-company-pay-89-million-resolve-self-reported-false-claims-act.
[12] See Press Release, U.S. Atty’s Office for the Southern Dist. of N.Y., U.S. Settles False Claims Act Lawsuit Against Cardiologist and His Medical Practice for Paying Millions in Kickbacks for Referrals (Sept. 18, 2023), https://www.justice.gov/usao-sdny/pr/us-settles-false-claims-act-lawsuit-against-cardiologist-and-his-medical-practice.
[13] See Press Release, U.S. Dep’t of Justice, Cigna Group to Pay $172 Million to Resolve False Claims Act Allegations (Sept. 30, 2023), https://www.justice.gov/opa/pr/cigna-group-pay-172-million-resolve-false-claims-act-allegations.
[14] See Press Release, U.S. Dep’t of Justice, United States Settles Kickback Allegations with BioTek reMEDys Inc., Chaitanya Gadde and Dr. David Tabby (Oct. 2, 2023), https://www.justice.gov/opa/pr/united-states-settles-kickback-allegations-biotek-remedys-inc-chaitanya-gadde-and-dr-david.
[15] See Press Release, U.S. Atty’s Office for the Eastern Dist. of N.Y., Genomic Health Inc. to Pay $32.5 Million to Resolve Allegations Relating to the Submission of False Claims for Genomic Diagnostic Tests (Oct. 2, 2023), https://www.justice.gov/usao-edny/pr/genomic-health-inc-pay-325-million-resolve-allegations-relating-submission-false.
[16] See Press Release, U.S. Dep’t of Justice, Mobile Cardiac PET Scan Provider and Founder to Pay $85 Million to Resolve Allegedly Unlawful Payments to Referring Doctors (Oct. 10, 2023), https://www.justice.gov/opa/pr/mobile-cardiac-pet-scan-provider-and-founder-pay-85-million-resolve-allegedly-unlawful.
[17] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Mich., Hospitalist Companies Agree to Pay Nearly $4.4 Million to Settle False Claims Act Allegations (Oct. 17, 2023), https://www.justice.gov/usao-edmi/pr/hospitalist-companies-agree-pay-nearly-44-million-settle-false-claims-act-allegations#:~:text=(defendants)%20have%20agreed%20to%20pay,one%20day%2C%20and%20billing%20for.
[18] See Press Release, U.S. Dep’t of Justice, Drugmaker Nostrum and Its CEO Agree to Pay Up to $50 Million to Settle False Claims Act Claims for Underpaying Rebates Owed Under Medicaid Drug Rebate Program (Oct. 30, 2023), https://www.justice.gov/opa/pr/drugmaker-nostrum-and-its-ceo-agree-pay-50-million-settle-false-claims-act-claims.
[19] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Ky., Eastern Kentucky Hospital System and Cardiologist Agree to Collectively Pay More Than $3 Million to Resolve Civil Liability for Improper Healthcare Billings (Nov. 28, 2023), https://www.justice.gov/usao-edky/pr/eastern-kentucky-hospital-system-and-cardiologist-agree-collectively-pay-more-3.
[20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, California Skilled Nursing Facilities, Owner and Management Company Agree to $45.6 Million Consent Judgement to Settle Allegations of Kickbacks to Referring Physicians (Nov. 15, 2023), https://www.justice.gov/opa/pr/california-skilled-nursing-facilities-owner-and-management-company-agree-456-million-consent.
[21] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, BioTelemetry and LifeWatch to Pay More than $14.7 Million to Resolve False Claims Act Allegations Relating to Remote Cardiac Monitoring Services (Dec. 18, 2023), https://www.justice.gov/opa/pr/biotelemetry-and-lifewatch-pay-more-147-million-resolve-false-claims-act-allegations.
[22] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Indiana Health Network Agrees to Pay $345 Million to Settle Alleged False Claims Act Violations (Dec. 19, 2023), https://www.justice.gov/opa/pr/indiana-health-network-agrees-pay-345-million-settle-alleged-false-claims-act-violations.
[23] See Press Release, U.S. Atty’s Office for the Southern Dist. of Tex., United Memorial Medical Center to Pay $2M Plus Additional Payments for Allegedly Causing False Claims Related to Excessive Cost Outlier Payments and Double Billing for Covid-19 tests (Dec. 20, 2023), https://www.justice.gov/usao-sdtx/pr/united-memorial-medical-center-pay-2m-plus-additional-payments-allegedly-causing-false.
[24] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Ultragenyx Agrees to Pay $6 Million for Allegedly Paying Kickbacks to Induce Claims for Its Drug Crysvita (Dec. 21, 2023), https://www.justice.gov/opa/pr/pharmaceutical-company-ultragenyx-agrees-pay-6-million-allegedly-paying-kickbacks-induce.
[25] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Mo., United States Reaches $9.1 Million Civil Settlement with Total Access Urgent Care over False Claims Allegations (Dec. 21, 2023), https://www.justice.gov/usao-edmo/pr/united-states-reaches-91-million-civil-settlement-total-access-urgent-care-over-false.
[26] See Press Release, U.S. Atty’s Office for the Southern Dist. of Cal., Phillips Respironics Pays $2.4 Million for Allegedly Giving Kickbacks (Dec. 22, 2023), https://www.justice.gov/usao-sdca/pr/phillips-respironics-pays-24-million-allegedly-giving-kickbacks.
[27] See Press Release, U.S. Atty’s Office for the Dist. of D.C., Booz Allen Agrees to Pay $377.45 Million to Settle False Claims Act Allegations (July 21, 2023), https://www.justice.gov/usao-dc/pr/booz-allen-agrees-pay-37745-million-settle-false-claims-act-allegations.
[28] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Mich., Federal Contractor Agrees to Pay $7 Million to Settle False Claims Act Allegations (July 21, 2023), https://www.justice.gov/usao-edmi/pr/federal-contractor-agrees-pay-7-million-settle-false-claims-act-allegations.
[29] See Press Release, U.S. Atty’s Office for the Northern Dist. of N.Y., Amphenol Corporation Pays $18 Million To Resolve Allegations That It Submitted False Claims for Electrical Connectors (Aug. 4, 2023), https://www.justice.gov/usao-ndny/pr/amphenol-corporation-pays-18-million-resolve-allegations-it-submitted-false-claims#_ftn1.
[30] See Press Release, U.S. Dep’t of Justice, Office of Pub. Affairs, Cooperating Federal Contractor Resolves Liability for Alleged False Claims Caused by Failure to Fully Implement Cybersecurity Controls (Sept. 5, 2023),
https://www.justice.gov/opa/pr/cooperating-federal-contractor-resolves-liability-alleged-false-claims-caused-failure-fully; Settlement Agreement, https://www.justice.gov/opa/file/1313011/dl?inline.
[31] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Pa., Navmar Applied Sciences Corporation Agrees to Pay $4.4 Million to Resolve Claims of Double-Billing and Cost-Shifting Under U.S. Navy Contracts (Sept. 15, 2023), https://www.justice.gov/usao-edpa/pr/navmar-applied-sciences-corporation-agrees-pay-44-million-resolve-claims-double.
[32] See, Press Release, U.S. Atty’s Office for the Eastern Dist. of Pa., Boeing to Pay $8.1 Million to Resolve Alleged False Claims Act Violations Arising from Manufacture of V-22 Osprey Aircraft (Sept. 28, 2023), https://www.justice.gov/usao-edpa/pr/boeing-pay-81-million-resolve-alleged-false-claims-act-violations-arising-manufacture.
[33] See Press Release, U.S. Atty’s Office for the Southern Dist. of Ohio, Virginia Tactical Gear & Equipment Company Agrees to Pay More than $2 Million to Settle Allegations Related to Buy American Act (Nov. 20, 2023), https://www.justice.gov/usao-sdoh/pr/virginia-tactical-gear-equipment-company-agrees-pay-more-2-million-settle-allegations.
[34] See Press Release, U.S. Atty’s Office for the Northern Dist. of Fl., Florida Real Estate Broker Agrees to Pay over $4 Million to Resolve False Claims Act Allegations Relating to Fraudulent Cares Act Loans (Aug. 16, 2023), https://www.justice.gov/usao-ndfl/pr/florida-real-estate-broker-agrees-pay-over-4-million-resolve-false-claims-act.
[35] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Victory Automotive Group Inc. Agrees to Pay $9 Million to Settle False Claims Act Allegations Relating to Paycheck Protection Program Loan (Oct. 11, 2023), https://www.justice.gov/opa/pr/victory-automotive-group-inc-agrees-pay-9-million-settle-false-claims-act-allegations.
[36] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, http://tinyurl.com/FCA-settlement.
[37] See Press Release, U.S. Atty’s Office for the Northern Dist. of N.Y., United States Attorney Freedman Announces First-Ever Settlement of False Claims Act Whistleblower Case Involving Grants for Restaurants and Similar Businesses Struggling During the COVID-19 Pandemic (Nov. 1, 2023), https://www.justice.gov/usao-ndny/pr/united-states-attorney-freedman-announces-first-ever-settlement-false-claims-act.
[38] See Press Release, U.S. Atty’s Office for the Northern Dist. of Tex., Dallas Importer and Two Chinese Companies to Pay $2.5 Million to Resolve Allegations of Underpaying Customs Duties (Dec. 5, 2023), https://www.justice.gov/usao-ndtx/pr/dallas-importer-and-two-chinese-companies-pay-25-million-resolve-allegations.
[39] See Press Release, U.S. Atty’s Office for the Dist. of N.J., Bergen County Public Relations Company Settles Allegations It Received Improper Paycheck Protection Program Loan (Dec. 7, 2023), https://www.justice.gov/usao-nj/pr/bergen-county-public-relations-company-settles-allegations-it-received-improper-paycheck.
[40] See Press Release, U.S. Atty’s Office for the Northern Dist. of Tex., National Roofing Company Settles PPP Fraud Allegations for $9 Million (Dec. 11, 2023), https://www.justice.gov/usao-ndtx/pr/national-roofing-company-settles-ppp-fraud-allegations-9-million.
[41] Jason Marcus, Bracker & Marcus Ties for the Largest PPP Settlement on Record (last visited Feb. 10, 2023), https://www.fcacounsel.com/blog/bracker-marcus-ties-for-the-largest-ppp-settlement-on-record/.
[42] Justice Manual 4-4.112, Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claims Act Matters (May 2019), https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.112.
[43] Id.
[44]Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual.
[45] See, e.g., Speech, U.S. Dep’t of Justice, Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime (Mar. 2, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-remarks-american-bar-association-national.
[46]U.S. Dep’t of Justice, U.S. Attorneys’ Offices Voluntary Self-Disclosure Policy (Feb. 22, 2023); see, e.g., https://www.justice.gov/d9/pages/attachments/2023/02/23/usao_voluntary_self-disclosure_policy.pdf; https://www.justice.gov/criminal-fraud/file/1562831/dl; https://www.justice.gov/d9/2023-04/NSD%20VSD%20Policy%20-3.1.23.pdf.
[47]Id. See https://www.justice.gov/corporate-crime/voluntary-self-disclosure-and-monitor-selection-policies.
[48]Speech, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Attorney General Lisa O. Monaco Announces New Safe Harbor Policy for Voluntary Self-Disclosures Made in Connection with Mergers and Acquisitions (Oct. 4, 2023), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-announces-new-safe-harbor-policy-voluntary-self.
[49]Deferred Prosecution Agreement, United States v. Freepoint Commodities, LLC, No. 3-23-cr-224-KAD (Dec. 12, 2023) https://www.justice.gov/opa/media/1329266/dl?inline, at ¶ 4.
[50] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Cooperating Federal Contractor Resolves Liability for Alleged False Claims Caused by Failure to Fully Implement Cybersecurity Controls (Sept. 5, 2023), https://www.justice.gov/opa/pr/cooperating-federal-contractor-resolves-liability-alleged-false-claims-caused-failure-fully.
[51] Id.
[52] Settlement Agreement, U.S. Dep’t of Justice and Verizon Business Network Services LLC (Sept. 5, 2023), https://www.justice.gov/opa/file/1313011/dl?inline.
[53] Press Release, U.S. Atty’s Office for Eastern Dist. of Ky., Eastern Kentucky Hospital System and Cardiologist Agree to Collectively Pay More Than $3 Million to Resolve Civil Liability for Improper Healthcare Billings (Nov. 28, 2023), https://www.justice.gov/usao-edky/pr/eastern-kentucky-hospital-system-and-cardiologist-agree-collectively-pay-more-3.
[54] Settlement Agreement, U.S. Dep’t of Justice and VitalAxis, Inc. (June 15, 2023), https://www.justice.gov/d9/press-releases/attachments/2023/06/16/settlement_agreement_-_vitalaxis_-_signed_redacted.pdf.
[55] Settlement Agreement, U.S. Dep’t of Justice and MWW Group LLC (Oct. 27, 2023), https://www.justice.gov/usao-nj/media/1327611/dl?inline.
[56] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Attorney General Lisa O. Monaco Announces New Civil Cyber-Fraud Initiative (Oct. 6, 2021), https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-new-civil-cyber-fraud-initiative?utm_medium=email&utm_source=govdelivery.
[57] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Cooperating Federal Contractor Resolves Liability for Alleged False Claims Caused by Failure to Fully Implement Cybersecurity Controls (Sept. 5, 2023), https://www.justice.gov/opa/pr/cooperating-federal-contractor-resolves-liability-alleged-false-claims-caused-failure-fully.
[58] See United States ex rel. Matthew Decker v. Pennsylvania State University, 22-cv-03895-PD (E.D. Pa. Oct. 5, 2022).
[59]See U.S. Dep’t of Defense, Gen. Servs. Admin., and Nat’l Aeronautics and Space Admin., Federal Acquisition Regulation: Cyber Threat and Incident Reporting and Information Sharing (FAR Case 2021-017) (Oct. 3, 2023), https://www.federalregister.gov/documents/2023/10/03/2023-21328/federal-acquisition-regulation-cyber-threat-and-incident-reporting-and-information-sharing.
[60] See Office of Inspector General, U.S. Dep’t of Health & Hum. Servs., General Compliance Program Guidance (Nov. 2023), https://oig.hhs.gov/compliance/general-compliance-program-guidance/.
[61] Id. at 18.
[62] Id. at 19.
[63] See id. at 32.
[64] Id. at 58.
[65] Id. at 61.
[66] Id.
[67] See 42 U.S.C. § 1320a-7k.
[68] See General Compliance Program Guidance at 7.
[69] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Announces Results of Nationwide COVID-19 Fraud Enforcement Action (Aug. 23, 2023), https://www.justice.gov/opa/pr/justice-department-announces-results-nationwide-covid-19-fraud-enforcement-action.
[70] See id.
[71] S.B. 426, 2022 Gen. Assemb. (Conn. 2022); Pub. Act 23-129—HB 6826, Office of Legislative Research Public Act Summary (https://www.cga.ct.gov/2023/SUM/PDF/2023SUM00129-R02HB-06826-SUM.PDF).
[72] See Senate Budget and Appropriations Committee Statement to Senate Bill No. 4018, State of New Jersey, June 27, 2023 (https://pub.njleg.state.nj.us/Bills/2022/S4500/4018_S1.HTM); State False Claims Act Reviews, U.S. Dep’t of Health and Human Servs, Office of Inspector General, last visited Jan. 19, 2024 (https://oig.hhs.gov/fraud/state-false-claims-act-reviews/).
[73] State False Claims Act Reviews, U.S. Dep’t of Health and Human Servs, Office of Inspector General, https://oig.hhs.gov/fraud/state-false-claims-act-reviews/ (last visited Jan. 19, 2024).
[74] Id.
[75] Senate Budget and Appropriations Committee Statement to Senate Bill No. 4018, State of New Jersey, June 27, 2023 (https://pub.njleg.state.nj.us/Bills/2022/S4500/4018_S1.HTM).
[76] 2023 Legislative Agenda on Public Health, Washington State, Office of the Attorney General, https://www.atg.wa.gov/2023-legislative-agenda (last visited Jan. 19, 2023).
[77] 2023 AG Request Legislation, Protecting Whistleblower Provision of the Medicaid False Claims Act, Attorney General of Washington, 2023 (https://agportal-s3bucket.s3.amazonaws.com/uploadedfiles/Another/Office_Initiatives/Medicaid%20FCA%20Whistleblower.pdf).
Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues and 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, the authors, or any leader or member of the firm’s False Claims Act/Qui Tam Defense practice group:
Washington, D.C.
Jonathan M. Phillips – Co-Chair (+1 202.887.3546, [email protected])
F. Joseph Warin (+1 202.887.3609, [email protected])
Gustav W. Eyler (+1 202.955.8610, [email protected])
Lindsay M. Paulin (+1 202.887.3701, [email protected])
Geoffrey M. Sigler (+1 202.887.3752, [email protected])
Joseph D. West (+1 202.955.8658, [email protected])
San Francisco
Winston Y. Chan – Co-Chair (+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])
Denver
Ryan T. Bergsieker (+1 303.298.5774, [email protected])
Robert C. Blume (+1 303.298.5758, [email protected])
Monica K. Loseman (+1 303.298.5784, [email protected])
John D.W. Partridge (+1 303.298.5931, [email protected])
Dallas
Andrew LeGrand (+1 214.698.3405, [email protected])
Los Angeles
Nicola T. Hanna (+1 213.229.7269, [email protected])
Jeremy S. Smith (+1 213.229.7973, [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])
*Nicole Waddick is an associate practicing in the firm’s San Francisco office who currently is not admitted to practice law.
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
From the Derivatives Practice Group: In a busy week for derivatives reporting, the CFTC extended the public comment period for its proposed reporting and ISDA touted its Digital Regulatory Reporting (DRR) initiative as the best approach to handling various jurisdictions’ revised reporting requirements set to go live this year.
New Developments
- CFTC Extends Public Comment Period for Proposed Rule on Real-Time Public Reporting Requirements and Swap Data Recordkeeping and Reporting Requirements. On February 26, the CFTC announced that it is extending the deadline for the public comment period on a proposed rule that makes certain modifications to the CFTC’s swap data reporting rules in Parts 43 and 45 related to the reporting of swaps in the other commodity asset class and the data element appendices to Parts 43 and 45 of the CFTC’s regulations. The deadline is being extended to April 11, 2024. The proposed rule was published in the Federal Register on December 28, 2023, with a 60-day comment period scheduled to close on February 26, 2024. [NEW]
- CFTC Staff Issues No-Action Letter Regarding Pre-Trade Mid-Market Mark for Certain Interest Rate Swaps Referencing SOFR. On February 22, the CFTC’s Market Participants Division (MPD) issued a no-action letter applicable to all registered swap entities in relation to the requirement in Regulation 23.431 that swap dealers and major swap participants (swap entities) disclose to certain counterparties the Pre-Trade Mid-Market Mark (PTMMM) of a swap. The no-action letter states that MPD will not recommend the CFTC take an enforcement action against a registered swap entity for its failure to disclose the PTMMM to a counterparty in certain interest rate swaps referencing the Secured Overnight Financing Rate that are identified in the no-action letter, provided that: (1) real-time tradeable bid and offer prices for the swap are available electronically, in the marketplace, to the counterparty; and (2) the counterparty to the swap agrees in advance, in writing, that the registered swap entity need not disclose a PTMMM for the swap. According to the CFTC, the no-action letter provides a similar no-action position as that in CFTC Staff Letter No. 12-58 for certain interest rate swaps referencing the London Interbank Offered Rate. CFTC Commissioner Christy Goldsmith Romero objected to the no-action letter, arguing that it inappropriately shifts the burden of understanding swap dealer’s conflicts and incentives back onto counterparties, upending the Dodd-Frank Act’s intent.
- CFTC Approves Three Proposed Rules and Other Commission Business. On February 20, the CFTC approved three proposed rules through its seriatim process: (1) Regulations to Address Margin Adequacy and to Account for the Treatment of Separate Accounts by Futures Commission Merchants; (2) Foreign Boards of Trade; and (3) Requirements for Designated Contract Markets and Swap Execution Facilities Regarding Governance and the Mitigation of Conflicts of Interest Impacting Market Regulation Functions. All three proposals have a comment deadline of April 22, 2024. Additionally, the CFTC issued an order of exemption from registration as a derivatives clearing organization (DCO) to Taiwan Futures Exchange Corporation and approved an amended order of registration for ICE NGX Canada, Inc., adding environmental contracts to the scope of contracts it is eligible to clear as a DCO.
- CFTC Extends Comment Period on Proposed Rules for Operational Resilience Frameworks. On February 20, the CFTC extended the comment period on its proposed rules implementing requirements for operational resilience frameworks for futures commission merchants, swap dealers and major swap participants. The new deadline is April 1, 2024.
- CFTC GMAC to Meet March 6. The CFTC’s Global Markets Advisory Committee (GMAC) will meet on Wednesday, March 6 at 10am ET. The GMAC will hear presentations from its Global Market Structure Subcommittee, Technical Issues Subcommittee and Digital Asset Markets Subcommittee, and consider their recommendations. The CFTC stated that the GMAC recently advanced eight recommendations to the Commission following its November meeting. According to the CFTC, the upcoming GMAC meeting will build upon the GMAC’s progress toward developing solutions to the most significant challenges in global markets, as set forth in its 2023-2025 work program.
New Developments Outside the U.S.
- HKMA Sets Out Expectations on Tokenized Product Offerings. On February 20, the Hong Kong Monetary Authority (HKMA) published a circular covering the sale and distribution of tokenized products. According to the HKMA, the prevailing supervisory requirements and consumer/investor protection measures for the sale and distribution of a product are also applicable to its tokenized form as it has terms, features and risks similar to those of the underlying product. The HKMA clarified that authorized institutions should conduct adequate due diligence and fully understand the tokenized products before offering them to customers and on a continuous basis at appropriate intervals. Authorized institutions are also expected to act in the best interest of their customers and make adequate disclosure of the relevant material information about a tokenized product, including its key terms, features and risks. Finally, the HKMA indicated that authorized institutions should put in place proper policies, procedures, systems and controls to identify and mitigate the risks arising from tokenized product-related activities.
- HKMA Sets Standards for Digital Asset Custodial Services. On February 20, the HKMA issued guidance for authorized institutions interested in offering custody services for digital assets. The HKMA expects authorized institutions to undertake a comprehensive risk assessment followed by the implementation of appropriate policies to manage identified risks. The entire process should be overseen by the board and senior management. The HKMA also requires authorized institutions to conduct independent systems audits, store a substantial portion of client digital assets in cold storage, ensure that private keys are secured within Hong Kong and provide all records to HKMA whenever requested. Authorized institutions should notify the HKMA and confirm that they meet the expected standards in the guidance within 6 months from the date of the guidance (i.e. February 20, 2024).
- ASIC Publishes Third Consultation Paper on OTC Derivatives Reporting. On February 15, the Australian Securities and Investments Commission (ASIC) published Consultation Paper (CP) 375: Proposed changes to the ASIC Derivatives Transaction Rules (Reporting): Third consultation. CP 375 proposes the following changes to ASIC Derivative Transaction Rules (Reporting) 2024: simplify the exclusion of exchange-traded derivatives; simplify the scope of foreign entity reporting; remove the alternative reporting provisions; clarify the exclusion of FX securities conversion transactions; and add additional allowable values for two data elements. Additionally, CP 375 proposes minor changes to ASIC Derivative Transaction Rules (Clearing) 2015: simplify and align the exclusion of exchange-traded derivatives with the 2024 reporting rules and make minor updates to re-reference certain definitions to their changed location in the Corporations Act 2001. The proposed changes would commence on October 21, 2024, except for the changes to the scope of foreign entity reporting and the removal of alternative reporting provisions, which would commence on April 1, 2025. ASIC indicated that it does not expect most reporting entities to face any material additional compliance burden upon implementation of the proposed changes. However, a small number of international reporting entities and some small-scale exempt reporting entities may be impacted, according to ASIC. The consultation period will run until March 28, 2024.
- Council of the EU Ratifies EMIR 3 Agreement at Ambassador Level. On February 14, the European Market Infrastructure Regulation 3 (EMIR 3) package (regulation and directive), as negotiated in the trilogues, was approved at ambassador level. The texts are available here. According to ISDA, the final text maintains the Council of the EU’s less punitive approach of an operational active account with representativeness. It also introduces a requirement for financial counterparties and non-financial counterparties above certain de minimis thresholds to hold an active account at an EU CCP and to clear a number of representative trades in that account. The directive amending the Capital Requirement Regulation is intended to provide more specific tools and powers under Pillar 2 in the context of excessive concentration to CCPs.
- CPMI, IOSCO Publish Paper on Streamlining VM in Centrally Cleared Markets. On February 14, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a discussion paper on streamlining variation margin (VM) in centrally cleared markets. The discussion paper follows the review of margining practices, published in 2022 by the Basel Committee on Banking Supervision, the CPMI and IOSCO. The discussion paper sets out eight effective practices, covering intraday VM call scheduling and frequency, treatment of excess collateral, the pass-through of VM by CCPs and transparency between CCPs, clearing members and their clients. The deadline for comment is April 14.
- ESMA Withdraws Euronext Authorization as a Data Reporting Service Provider Under MIFIR Upon the Entity’s Request. On February 13, ESMA withdrew the authorization of Euronext Paris SA (Euronext) as a Data Reporting Service Provider (DRSP) under the Markets in Financial Instruments Regulation (MiFIR). Euronext was authorized as both an Approved Reporting Mechanism and an Approved Publication Arrangement under MiFIR since January 3, 2018. MiFIR provides that ESMA shall withdraw the authorization of a DRSP where the DRSP expressly renounces its authorization. ESMA’s withdrawal decision follows the notification by Euronext of its intention to renounce its authorization under the conditions set out in Article 27e(a) of MIFIR.
- ESMA Publishes Latest Edition of its Newsletter. On February 13, ESMA published its latest edition of the Spotlight on Markets Newsletter. The newsletter focused on the last ESMA consultation package related to the Markets in Crypto Assets Regulation (MiCA). ESMA invited stakeholders to send their feedback on reverse solicitation and classification of crypto assets as financial instruments by April 29, 2024. The newsletter also launched a call for candidates for ESMA’s Securities Markets Stakeholder Group and called interested parties who can give a strong voice to consumers, industry, users of financial services, employees in the financial sector, SMEs as well as academics to apply by March 18.
New Industry-Led Developments
- ISDA Updates Updated OTC Derivatives Compliance Calendar. On February 29, ISDA announced that it has updated its global calendar of compliance deadlines and regulatory dates for the over-the-counter (OTC) derivatives space. [NEW]
- ISDA Extends Digital Regulatory Reporting InitiativeDRR: The Answer to Reporting Rule Rush. On February 26, ISDA reported that it has worked to extend its Digital Regulatory Reporting (DRR) initiative to cover the rush of reporting rules, which starts with Japan on April 1, followed by the EU on April 29, the UK on September 30 and Australia and Singapore on October 21. ISDA stated that iIn each case, regulators are revising their rules to incorporate globally agreed data standards in an effort to improve the cross-border consistency of what is reported and the format in which it is submitted – a process that started in December 2022 with the rollout of the first phase of the US Commodity Futures Trading Committee’s revised swap data reporting rules. [NEW]
- ISDA Publishes Clearing Model Comparison. On February 1, ISDA published a comparison of US Treasury clearing models at the Fixed Income Clearing Corporation, as well as models for clearing repos at other central counterparties globally and models for clearing derivatives. ISDA explained that Tthis comparison is intended to help market participants understand existing and potential new clearing models for UST cash and repo transactions as they implement the US SEC’s recent rules requiring clearing of such transactions. [NEW]
- ISDA Responds to FCA on Commodity Derivatives. On February 15, ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint response to the UK Financial Conduct Authority (FCA) consultation on the reform of the UK commodity derivatives regulatory framework. The consultation sought to remove unnecessary burdens on firms and strengthen the supervision of the UK’s commodity derivatives markets. The associations indicated that they strong support the FCA’s proposal to apply a narrower position limits regime that it views as more proportionate to the risks associated with certain commodity derivatives contracts. However, the associations expressed concern over the proposed approaches for setting position limits and adding additional reporting obligations. They noted that the complex and burdensome frameworks proposed can, in their view, discourage participation in UK trading venues by non-UK participants and may have a negative impact on the competitiveness of UK markets. The response also recommends a longer implementation period of at least 24 months, based on the association’s perception of the scale of the operational and technical changes required.
The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.
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, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:
Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])
Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])
Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])
Darius Mehraban, New York (212.351.2428, [email protected])
Jason J. Cabral, New York (212.351.6267, [email protected])
Adam Lapidus – New York (+1 212.351.3869, [email protected])
Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])
Roscoe Jones Jr., Washington, D.C. (202.887.3530, [email protected])
William R. Hallatt, Hong Kong (+852 2214 3836, [email protected])
David P. Burns, Washington, D.C. (202.887.3786, [email protected])
Marc Aaron Takagaki, New York (212.351.4028, [email protected])
Hayden K. McGovern, Dallas (214.698.3142, [email protected])
Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
The Office of Information and Communications Technology and Services of the U.S. Department of Commerce is poised to dramatically expand compliance requirements in key technology sectors with new leadership and proposed new regulations targeting Infrastructure as a Service providers and large AI model training.
Since coming into office, the Biden administration has largely continued and expanded efforts to regulate AI and other emerging technologies begun under the Trump administration, and recent actions by the U.S. Department of Commerce (“Commerce”) signal that U.S. Infrastructure as a Service (“IaaS”)providers and their resellers will soon face a host of new compliance requirements concerning their customers and ultimate end-users.
Commerce recently announced the appointment of Elizabeth Cannon as the first Executive Director of the Office of Information and Communications Technology and Services (“OICTS”), signaling a renewed focus on the information and communications technology and services (“ICTS”) sector. For several years, Commerce has worked to stand up OICTS to implement a series of executive orders (“EOs”) issued by the Trump and Biden administrations aimed at securing the telecommunications supply chain,[1] addressing malicious cyber-enabled activity,[2] protecting the sensitive data of U.S. citizens,[3] and providing guardrails on the use and development of AI.[4]
Finalizing regulations implementing these varied EOs has proven a difficult task, as Commerce, along with partner government agencies, continue to develop measures designed to address pressing national security concerns while simultaneously avoiding stifling the innovation necessary to develop emerging technologies. Early in this effort, Commerce developed regulations permitting the Secretary of Commerce (“Secretary”) to block certain information and communications technology or service transactions involving “foreign adversaries.” These regulations became effective in March 2021, implementing Trump era EO 13,873. The Biden administration quickly followed suit after taking office, issuing a pair of EOs aimed at protecting the sensitive data of U.S. citizens (EO 14,034) and providing guardrails for the development and use of AI (EO 14,110), in addition to regulations expanding the Secretary’s discretion to block transactions involving “connected software application” and foreign adversaries. More recently, Commerce announced an advance notice of proposed rulemaking to solicit public comment on similar restrictions targeting transactions involving “connected vehicles,” a term whose definition has yet to be defined but would include automotive vehicles incorporating ICTS. Despite these regulatory developments, OICTS has until recently remained a nascent office with relatively little enforcement activity. However, that is likely to change in the near term, and companies may soon be faced with a new set of compliance and reporting obligations, along with steep penalties for inaction.
On January 29, 2024, Commerce’s Bureau of Industry and Security (“BIS”) issued a proposed rule aimed at the activities of U.S. IaaS providers, including the training of large AI models. These new rules would require all U.S. IaaS providers and their foreign resellers to establish written Customer Identification Programs (“CIPs”) to collect, verify, and maintain identifying information about their foreign customers. Additionally, U.S. IaaS providers would be required to file reports with Commerce whenever they have “knowledge” (defined to cover actual knowledge and an awareness of a high probability, which can be inferred from acts constituting willful blindness) of any transaction between the provider and a foreign person “which results or could result in the training of a large AI model with potential capabilities that could be used in malicious cyber-enabled activity.”[5] The proposed new rule implements specific provisions of two separate EOs—EO 13,984 issued in the final days of the Trump administration and the aforementioned EO 14,110—and is aimed at addressing threats to U.S. IaaS products and services by foreign malicious cyber actors.
Compliances professionals already familiar with Know Your Customer (“KYC”) requirements under such existing trade controls regimes as the U.S. Export Administration Regulations (“EAR”) administered by BIS and various sanctions programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) will recognize much of the language in the proposed compliance requirements. However, the proposed ICTS regulations also contain many unique facets such as customer identification and recordkeeping requirements that require additional consideration. Ultimately, companies that operate in the IaaS and AI fields, as well as related industries, will likely be obliged to implement additional compliance and reporting measures before transacting with certain foreign persons once the proposed regulations come into effect.
At present, there is no effective date for the proposed rule, though Commerce has requested public comment on several aspects of the proposed regulations—including whether Commerce should receive and approve all CIPs—by April 29, 2024. Once the comment process concludes, Commerce will then move forward with a “final rule,” though additional comments may be requested at Commerce’s discretion. However, given the details already included in the proposed rule, a final rule and effective date in the coming months are likely.
Key Terms and Definitions
The definitions in the new regulations clearly articulate the potentially expansive impact the proposed rule is likely to have. For example, the new CIP requirements (discussed in detail below) apply to all U.S. providers of “IaaS products,” defined broadly as a product or service offered to a consumer “that provides processing, storage, networks, or other fundamental computing resources, and with which the consumer is able to deploy and run software that is not predefined, including operating systems and applications.”[6]
A “U.S. IaaS provider” is defined to include any U.S. person that offers any “IaaS product,” while the term “U.S. person” is broadly defined to include U.S. citizens and permanent resident aliens, entities organized under U.S. law, and persons present in the United States, similar to the definition of “U.S. person” under EAR.[7] The term “foreign reseller of U.S. [IaaS] products,” is similarly broadly defined to include non-U.S. persons who have “established an [IaaS] account to provide [IaaS] products subsequently, in whole or in part, to a third party.”[8] Importantly, and as discussed in detail below, such foreign resellers are also subject to certain compliance and reporting requirements under the new regulations.
Likely in an attempt to standardize the definition across various government agencies, “AI” is defined by reference to 15 U.S.C. 9401(3), which defines the term as “a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations or decisions influencing real or virtual environments. Artificial intelligence systems use machine and human-based inputs to (A) perceive real and virtual environments; (B) abstract such perceptions into models through analysis in an automated manner; and (C) use model inference to formulate options for information or action.”[9]
While the AI reporting requirements are tied specifically to “large AI model[s] with potential capabilities that could be used in malicious cyber-enabled activity,” the technical parameters of this term are not yet wholly defined.[10] Rather, Commerce notes that it will publish applicable technical conditions in a forthcoming Federal Register notice, though it remains unclear if these parameters will be published as a proposed or final rule. Where the lines defining the types of “AI” caught under the proposed regulations are ultimately drawn will have a significant impact on many industries, and Commerce appears highly interested in receiving additional input and guidance from members of potentially-impacted industries through the public comment process.
Customer Identification Program Requirement: Collect, Identify, Maintain
The proposed CIP requirement consists of three main components: (1) information collection; (2) customer verification; and (3) recordkeeping. These requirements apply to both U.S. IaaS providers and their foreign resellers.
Customer information. The proposed rule provides that all U.S. IaaS providers and their foreign resellers must collect, at minimum, the following information from any potential foreign customer prior to opening an account with that customer:
- Name or business name;
- Address (for an entity, the principal place of business and the location(s) from which the IaaS product will be used; for an individual, the street address and the location(s) from which the IaaS product will be used);
- Jurisdiction under whose laws the person is organized (for a person other than an individual);
- Name(s) of beneficial owner(s) of an IaaS account in which a foreign person has an interest (if not held by an individual);
- Means and source of payment for the account (including credit number, account number, and customer identifier);
- Email address;
- Telephonic contact information; and
- IP addresses used for access or administration and the date and time of each such access or administrative action.[11]
Customer verification. The proposed rule also requires the CIP to contain procedures for verifying the identity of potential foreign customers through (i) a “documentary verification method,” (ii) a “non-documentary verification method,” or (iii) in some cases, a combination of both.[12] The CIP must also address situations where the IaaS provider will obtain further information to verify a customer’s identity when other documentary and non-documentary methods fail, or when the attempted verification leads the IaaS provider to doubt the true identity of the potential customer.[13] Finally, the proposed rule requires the CIP to include procedures for situations in which the U.S. IaaS provider cannot reasonably ascertain the identity of a potential customer, including procedures describing (i) when the provider should not open an account for the potential customer, (ii) the terms under which a customer may use an account while the provider attempts to verify the customer’s identity (such as restricted permission or enhanced monitoring of the account), (iii) when the IaaS provider should close an account after verification attempts have failed, and (iv) other measures for account management or redress for customers whose identification could not be verified or whose information may have been compromised.[14]
Recordkeeping. The proposed recordkeeping requirements are relatively straightforward. Under the proposed rule, the CIP must include procedures for maintaining a record of the identifying information collected by the provider; retain the required record for at least two years after the date the account is closed (or was last accessed); and include methods to ensure the record will not be shared with any third party. With respect to the content of the record, the proposed rule requires the record to include:
- All identifying customer information listed above;
- A copy or description of any document relied on to verify a customer’s identity;
- A description of any methods and the results of any measures used to verify the identity of the customer and the account’s beneficial owner(s); and
- A description of the resolution of any substantive discrepancy discovered when verifying identifying information.[15]
While trade compliance professionals have deep familiarity with conducting customer due diligence to satisfy long-standing regulatory requirments, the explicit level of detail that CIPs must address extends beyond the KYC requirements currently outlined by OFAC[16] and BIS.[17] As stated above, the proposed CIP rule applies to both U.S. IaaS providers and their foreign resellers. Indeed, under the proposed rule, U.S. providers are responsible for ensuring their foreign resellers maintain compliant CIPs and for furnishing those CIPs to Commerce within 10 days upon request.[18] In addition, U.S. providers must take appropriate action in response to their foreign resellers’ non-compliance with the rule. Specifically, the proposed rule provides that a U.S. IaaS provider must, upon receiving evidence that a foreign reseller has failed to maintain a CIP or to undertake good-faith efforts to prevent the use of U.S. IaaS products for malicious cyber-enabled activities, take steps to (1) terminate the foreign reseller account within 30 days absent remediation by the reseller, and (2) if relevant, report the malicious cyber-enabled activity.[19] According to the proposed rule, Commerce anticipates that compliance with any new CIP regulations would be required within one year of the date of publication of a final rule, which as noted above could be published in the upcoming months. In light of these forthcoming requirements, compliance professionals should revisit and revise, as appropriate, the requirements and procedural guidance associated with their customer due diligence programs.
CIP Certification
Commerce proposes to monitor compliance with the CIP requirement in part by requiring U.S. IaaS providers to certify their CIPs (and the CIPs of their foreign resellers) on an annual basis. Under the proposed rule, each U.S. IaaS provider is required to submit a “CIP certification form” that must include, among other items:
- A description of the systems or tools the IaaS provider uses to verify the identity of foreign customers;
- The procedures the IaaS provider uses to require a customer to notify the provider of any changes to the customer’s ownership (including the addition or removal of beneficial owners);
- The systems or tools used by the IaaS provider to detect malicious cyber activity;
- The procedures for requiring each foreign reseller to maintain a CIP;
- The procedures for identifying when a foreign person transacts to train a large AI model with potential capabilities that could be used in malicious cyber-enabled activities;
- The name, title, email, and phone number of the primary contact responsible for managing the CIP;
- A description of the IaaS provider’s service offerings and customer bases in foreign jurisdictions;
- The number of employees in IaaS provision and related services;
- The process the IaaS provider uses to report any malicious cyber activity;
- The number of IaaS customers;
- The number and locations of the IaaS provider’s foreign beneficial owners;
- A list of all foreign resellers of IaaS products; and
- The number of IaaS customer accounts held by foreign customers whose identity has not been verified, including a description and timeline of actions the IaaS provider will take to verify the identity of each customer, among other information.[20]
The annual certification must include various attestations, including attestations that the provider has (i) reviewed its CIP since the date of its last certification; (ii) updated its CIP to account for any changes in its service offerings, the threat landscape, and changes to the applicable regulations since its last certification; (iii) tracked the number of times it was unable to verify the identity of any customer since its last certification; and (iv) recorded the resolution of each situation described in (iii).[21] The proposed rule also requires IaaS providers to notify Commerce outside of the annual reporting cycle in various situations, including when the provider undergoes a significant change in business operations or corporate structure, or if the provider implements a material change to its CIP, such as a material change in its customer verification methods.[22] Importantly, newly established IaaS providers will be required to submit a CIP certification prior to furnishing any foreign customer with an IaaS account.[23]
Compliance Assessments
Commerce plans to use compliance assessments to enforce the proposed CIP requirement. Under the proposed rule, Commerce will, after reviewing CIP certification forms, and “at its sole discretion as to time and manner,” conduct compliance assessments of certain U.S. IaaS providers based on the risks associated with a given CIP, U.S. IaaS provider, or any of the provider’s foreign resellers.[24] Commerce similarly has the power to request an audit of any U.S. IaaS provider’s CIP processes and procedures. The evaluation of potential risks by Commerce will consider, among other criteria, whether the services or products of the U.S. provider or foreign reseller are likely to be used by foreign malicious cyber actors, or by a foreign person to train a large AI model with potential capabilities that could be used in malicious cyber-enabled activity.[25]
The proposed rule outlines two general actions Commerce may take based on the results of a compliance assessment. First, Commerce may require a U.S. IaaS provider to take remedial measures, including (i) general measures to address any risk of U.S. IaaS products being used in support of malicious cyber activity, and (ii) “special measures”—including prohibitions or conditions on maintaining accounts with certain foreign persons—to counter malicious cyber-enabled activity. Second, Commerce may decide to review a particular transaction or class of transactions of an IaaS provider. Nothing in the proposed rule limits Commerce to recommending (or requiring) only one specific remedial measure, and it is possible Commerce could impose multiple remedial obligations in response to a compliance assessment.[26]
Exemptions from the CIP Requirement
Although the proposed CIP requirement generally applies to all U.S. IaaS providers and their foreign resellers, the proposed rule allows the Secretary to exempt any provider, any specific type of account or lessee, or reseller from the CIP requirement if the party “implements security best practices to otherwise deter abuse of IaaS products.”[27] To satisfy this criterion, a party must establish an Abuse of IaaS Products Deterrence Program (“ADP”) that is designed to detect, prevent, and mitigate malicious cyber-enabled activities in connection with their accounts. The ADP must include policies and procedures to (i) identify relevant “Red Flags” (that is, activities that indicate possible malicious cyber-enabled activities) for the relevant accounts; (ii) detect those Red Flags, including by implementing privacy-preserving data sharing and analytics methods as feasible; and (iii) respond appropriately to any Red Flags detected.[28] The ADP (including the relevant Red Flags) must also be updated regularly to reflect changes in risks and must be continuously administered by the U.S. IaaS provider.
Establishing an ADP is a necessary, but not sufficient, condition to obtain an exemption from the CIP requirement. Specifically, the proposed rule explains that the Secretary will decide whether to grant an exemption by considering:
- Whether the size and complexity of the ADP is commensurate with the nature of the provider’s product offerings;
- Whether the ADP’s ability to detect and respond to Red Flags is sufficiently robust;
- Whether oversight of reseller arrangements is effective;
- The extent to which the provider cooperates with law enforcement to provide forensic information for investigations of identified malicious cyber-enabled activities; and
- Whether the provider participates in public-private collaborative efforts, such as consortia to develop improved methods to detect and mitigate cyber-enabled activities.[29]
Even after an ADP is deemed sufficient by the Secretary, the proposed regulations are clear that the exemption may be revoked at any time, including to impose special measures as described below.
Special Measures
The overarching purpose of the CIP requirement is to prevent foreign persons from using U.S. IaaS products to conduct malicious cyber-enabled activities. Consistent with that purpose, the proposed rule permits the Secretary to require providers to take “special measures” if the Secretary determines that “reasonable grounds exist for concluding that a foreign jurisdiction or foreign person is conducting malicious cyber-enabled activities using U.S. IaaS products.”[30] These “special measures” include (1) prohibitions or conditions on opening or maintaining accounts within a foreign jurisdiction that has a significant number of foreign persons offering or obtaining U.S. IaaS products used for malicious cyber activity; and (2) prohibitions or conditions on maintaining an account with a foreign person who has a pattern of conduct of obtaining or offering U.S. IaaS products for use in malicious cyber activities.[31]
In selecting which special measure to take, the Secretary will consider:
- Whether the imposition of any special measure would create a “significant competitive disadvantage” for U.S. IaaS providers, including due to any undue burden associated with compliance;
- The extent to which the timing of any special measure would have a “significant adverse effect on legitimate business activities” involving the particular foreign jurisdiction or foreign person; and
- The effect of any special measure on U.S. national security or foreign policy, law enforcement investigations, U.S. supply chains, or public health.[32]
Any special measure imposed under the proposed rule may not remain in effect for more than 365 calendar days (absent publication of a notice of extension), and a U.S. IaaS provider has 180 days following the Secretary’s determination that a special measure is required before it must implement the measure.[33]
Reporting of Large AI Model Training
The second key piece of the proposed rule requires U.S. IaaS providers to submit a report to Commerce whenever they have “knowledge” (as defined above) of any transaction between the provider and a foreign person “which results or could result in the training of a large AI model with potential capabilities that could be used in malicious cyber-enabled activity.”[34] The proposed rule defines “large AI model” as any AI model with the technical conditions of a “dual-use foundation model” or that “otherwise has technical parameters of concern” that enable the AI model to “aid or automate aspects of malicious cyber-enabled activity,” though as noted previously, the technical parameters defining what exactly constitutes a large AI model are forthcoming.[35]
For covered transactions involving such AI models, the proposed rule requires U.S. IaaS providers to report to Commerce, within 15 calendar days of a covered transaction occurring (or the provider or reseller having knowledge that a covered transaction has occurred) (i) certain identifying information about the foreign customer (such as name, address, means and source of payment, and the location from which the training request originates) and (ii) information about the training run itself, including the estimated number of computational operations used in the training run, the model of the primary AI used in the training run accelerators, and information on cybersecurity practices, among others.[36] U.S. IaaS providers must also require their foreign resellers to submit similar reports to the provider within 15 calendar days whenever the reseller has knowledge of a covered transaction, after which the provider must file the report with Commerce within 30 calendar days of the covered transaction.[37] Following such reports, Commerce may initiate follow-up requests to which the U.S. IaaS provider must respond within 15 calendar days.[38] Finally, under the proposed rule, no U.S. IaaS provider may provide IaaS products to a foreign reseller unless the provider has made all reasonable efforts to ensure the reseller has complied with the large AI model training reporting requirement.[39]
Penalties and Enforcement
Even though related ICTS regulations already permit penalties, Commerce has proposed new enforcement provisions specifically tied to non-compliance with the proposed rule. Violations can result in civil monetary fines of up to $364,992 per violation (an amount adjusted annually for inflation) or twice the value of the transaction, whichever is greater. Criminal penalties involving fines up to $1,000,000, imprisonment for up to 20 years, or both are also available in cases involving willful violations.[40] Under the proposed rule, violations would include the following:
- Engaging in, or conspiring to engage in, any conduct prohibited by the proposed regulations;
- Failing to submit reports, certifications, or recertifications, as appropriate, or failing to comply with terms of notices or orders from Commerce;
- Failing to implement or maintain CIPs as required, or continuing to transact with a foreign reseller that fails to implement or maintain a CIP as set forth in the regulations;
- Providing IaaS products to a foreign person while failing to comply with any direction, determination, or condition issued under the regulations;
- Aiding, abetting, counseling, commanding, inducing, procuring, permitting, approving, or otherwise supporting any act prohibited by any direction, determination, or condition issued under the regulations;
- Attempting or soliciting a violation of any direction, determination, or condition issued under the regulations;
- Failing to implement any required prohibition or suspension related to large AI model training; and
- Making a false or misleading representation, statement, notification, or certification, whether directly or indirectly through any other person, or falsifying or concealing any material fact to Commerce related to compliance with the regulations.[41]
Looking Forward
The proposed rule has significant implications for U.S. IaaS providers and their resellers, requiring the implementation of robust CIPs, certification of those programs on an annual basis, and, under some circumstances, the imposition of “special measures” against a foreign jurisdiction or foreign person when that jurisdiction or person obtains products for use in malicious cyber activities. As discussed previously, the proposed rule also requires IaaS providers and their foreign resellers to report transactions with foreign persons that involve training large AI models with potential capabilities for malicious cyber-enabled activity. Although a final rule is likely still several months away, IaaS providers can take several steps now to prepare for the new regulations and ease the transition to the new reporting regime:
- Provide Written Comments: Commerce is soliciting public comment on various aspects of the proposed rule, including on whether it should receive and approve all CIPs, and whether there currently exist best practices for customer identification and verification that IaaS providers can use as a model for their CIPs. Companies must provide comments by email ([email protected]) or at regulations.gov by April 29, 2024.
- Review and Enhance Current Practices: IaaS providers can perform an internal review of their current customer identification and verification practices to assess how those practices align with the proposed CIP requirements and identify areas that fall short of those requirements. Such a review would allow providers to jumpstart their compliance efforts and prepare for any required reports.
- Take Stock of Foreign Resellers and Foreign Customers: Because the reporting obligations apply to U.S. IaaS providers and their foreign resellers, providers may find it beneficial to evaluate their existing reseller relationships and the extent to which their resellers take steps to verify the identity of their customers and operate using cybersecurity best practices. U.S. IaaS providers may also consider reviewing the compliance obligations in their contracts with foreign resellers to ensure that the requirements under the proposed rule are sufficiently covered.
- Identify AI Training-Related Accounts: IaaS providers should review current and potential future accounts that may fall within the proposed rule’s definition of transactions involving “large AI model training.” The turnaround time for reporting such transactions is relatively short (15 calendar days), so providers may be well-served by conducting a preliminary assessment of their obligations under this part of the proposed rule before the final rule goes into effect. Providers may also wish to proactively develop or enhance procedures for responding to instances of suspected training of large AI models for use in malicious cyber-enabled activities to ensure all appropriate deadlines are met.
Gibson Dunn attorneys remain ready to assist companies with these preparatory steps or to address any questions about the potential role that OICTS may play in the near future.
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[1] Exec. Order No. 13,873, 84 Fed. Reg. 22,689 (May 17, 2019).
[2] Exec. Order No. 13,984, 86 Fed. Reg. 6,837 (Jan. 25, 2021).
[3] Exec. Order No. 14,034, 86 Fed. Reg. 31,423 (June 11, 2021).
[4] Exec. Order No. 14,110, 88 Fed. Reg. 75,191 (Nov. 1, 2023).
[5] Taking Additional Steps To Address the National Emergency With Respect to Significant Malicious Cyber-Enabled Activities, 89 Fed. Reg. 5,698, 5,733 (Jan. 29, 2024) [hereinafter NPRM].
[6] Id. at 5,726.
[7] Id. at 5,727.
[8] Id. at 5,726.
[9] 15 U.S.C. 9401(3).
[10] NPRM, supra note 5, at 5,727.
[11] Id. at 5,727-28.
[12] Id. at 5,728.
[13] Id.
[14] Id.
[15] Id.
[16] See OFAC, A Framework for OFAC Compliance Commitments 4 (May 2, 2019), https://ofac.treasury.gov/media/16331/download?inline.
[17] See 15 C.F.R. Part 732, Supplement No. 3.
[18] NPRM, supra note 5, at 5,729-30.
[19] Id. at 5,729.
[20] Id.
[21] Id.
[22] Id.
[23] Id. at 5,730.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id. at 5,730-31.
[29] Id. at 5,731-32.
[30] Id. at 5,732.
[31] Id.
[32] Id. at 5,733.
[33] Id. at 5,732.
[34] Id. at 5,733 (emphasis added).
[35] Id. at 5,727.
[36] Id. at 5,734.
[37] Id.
[38] Id.
[39] Id.
[40] Id. at 5,735.
[41] Id. at 5,734.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade or Privacy, Cybersecurity & Data Innovation practice groups:
International Trade:
Adam M. Smith – Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
Marcus Curtis – Orange County (+1 949.451.3985, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Privacy, Cybersecurity and Data Innovation:
S. Ashlie Beringer – Palo Alto (+1 650.849.5327, [email protected])
Jane C. Horvath – Washington, D.C. (+1 202.955.8505, [email protected])
Vivek Mohan – Palo Alto (+1 650.849.5345, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
The decision raises questions as to the validity of certain stockholder consent and designation-related rights found in many public and private company stockholder agreements.
On February 23, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued a long-awaited opinion[1] ruling on the validity of pre-approval requirements and board- and committee-related designation rights included in the stockholder agreement between a public company and its founder that was entered into before the company went public.
The decision calls into question the enforceability of certain stockholder consent and designation-related rights that have long been considered market-standard and are found in many stockholder agreements for both public and private companies. This alert summarizes the provisions that were challenged in the case and the Court’s decision. The decision left many questions unanswered, and we encourage you to reach out to any of your Gibson Dunn contacts to discuss the implications of this decision and any next steps.
I. Challenged Provisions
The challenged provisions in the case fall into two primary categories: (i) pre-approval requirements (commonly referred to as “consent” or “veto” rights[2]) and (ii) board and committee composition provisions (so-called “designation” provisions). The plaintiff challenged the facial validity of these provisions in the company’s stockholder agreement on the basis that they violate Section 141(a) of the Delaware General Corporation Law (DGCL), which provides that “the business and affairs of every corporation organized … [in Delaware] shall be managed by or under the direction of a board of directors, except as may be otherwise provided … [under the DGCL] or in its certificate of incorporation.” The plaintiff also argued that the committee composition-related rights further violate Section 141(c) of the DGCL, which provides that company boards are tasked with forming committees.[3] Specifically, the plaintiff challenged[4] the following provisions (the Challenged Provisions) in the company’s stockholder agreement that give the founder certain rights for as long as a specified condition[5] is satisfied:
- Pre-Approval Requirements: Require the founder’s[6] advance approval of 18 different categories of actions that encompass, in the words of the Court, “virtually everything the [b]oard can do.”[7]
- Board Composition Provisions: Include six provisions that give the founder the right to determine the size of the company’s board and select a majority of the directors who serve on it.
- Size Requirement: The company’s board is obligated to maintain its size at no more than 11 seats.
- Designation Right: The founder is entitled to name a number of designees equal to a majority of those seats.
- Nomination Requirement: The company’s board must nominate the founder’s designees as candidates for election.
- Recommendation Requirement: The company’s board must recommend that stockholders vote in favor of the founder’s designees.
- Efforts Requirement: The company must use reasonable efforts to enable the founder’s designees to be elected and continue to serve.
- Vacancy Requirement: The company’s board must fill any vacancy in a seat occupied by a founder designee with a new founder designee.
- Committee Composition Provision: Requires the company’s board to populate any committee with a number of founder designees proportionate to the number of founder designees on the full board.
II. Decision
The Court first determined that Section 141 of the DGCL applies because the company’s stockholder agreement was an “internal corporate governance arrangement.” The Court stated that “[i]nternal corporate governance arrangements that do not appear in the charter and deprive boards of a significant portion of their authority contravene Section 141(a).”[8] The Court emphasized that “Section 141(a) is the source of Delaware’s board-centric model of corporate governance,”[9] and that “[t]he presence of a stockholder who controls the corporation does not alter the board-centric framework.”[10] Further, the Court was unsympathetic to arguments that the arrangements reflect widely accepted “market practice,” noting that “[w]hen market practice meets a statute, the statute prevails.”[11]
The Court then held that the Pre-Approval Requirements, as well as three of the six Board Composition Provisions (the Recommendation Requirement, the Vacancy Requirement and the Size Requirement), all violate Section 141(a) of the DGCL. In the Court’s view:
- The Recommendation Requirement: improperly compels the company’s board to recommend the founder’s designees for election.
- The Vacancy Requirement: improperly compels the company’s board to fill a vacancy created by a departing founder designee with another founder designee.
- The Size Requirement: improperly enables the founder to prevent the Board from increasing the number of board seats beyond 11.[12]
The Court also determined that the Committee Composition Provision violates both Section 141(a) and Section 141(c) of the DGCL because “[d]etermining the composition of committees falls within the [b]oard’s authority” and cannot be determined by stockholders.[13]
The Court upheld the Designation Right, the Nomination Requirement and the Efforts Requirement noting that these provisions simply allowed the founder to identify director candidates, aligned with his stockholder right to nominate candidates, and provided for the facilitation of certain processes without binding the board to any particular course of action.[14] The Court noted that challenges could, however, be brought to these provisions as applied.
III. Next Steps
Both public and private companies should keep their boards abreast of these developments, particularly if they are subject to stockholder agreements that may need to be reviewed or revisited in light of the Court’s decision. Equally, stockholders relying on similar provisions in stockholder agreements as the founder in this case should consider implementing alternative strategies before such protections are challenged. Gibson Dunn is here to help.
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[1] See West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, case number 2023-0309, in the Court of Chancery of the State of Delaware (the “Opinion”).
[2] Although one could argue that “consent” and “veto” rights may imply a different sequence of events, the Delaware Court of Chancery deemed the distinction to be meaningless.
[3] Specifically, Section 141(c)(2) of the DGCL provides that “[t]he board of directors may designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.”
[4] In addition to the company’s arguments on the merits, the company sought summary judgment on both laches (contending that the plaintiff waited too long to sue) and ripeness (contending that the plaintiff sued too early). The Delaware Court of Chancery issued a separate decision rejecting those defenses. W. Palm Beach Firefighters Pension Fund v. Moelis & Co. (Timing Decision), 2024 WL 550750 (Del. Ch. Feb. 12, 2024).
[5] Under the company’s stockholder agreement, the specified condition was deemed to be satisfied for so long as the founder (i) maintains direct or indirect ownership of an aggregate of at least 4,458,445 shares of Class A shares and equivalent Class A shares … ; (ii) maintains directly or indirectly beneficial ownership of at least five percent (5%) of the issued and outstanding Class A shares … ; (iii) has not been convicted of a criminal violation of a material U.S. federal or state securities law that constitutes a felony or a felony involving moral turpitude; (iv) is not deceased; and (v) has not had his employment agreement terminated in accordance with its terms because of a breach of his covenant to devote his primary business time and effort to the business and affairs of the company and its subsidiaries or because he suffered an “incapacity” (as defined in the company’s stockholder agreement). In addition, the founder is entitled to fewer rights once the ownership threshold falls below a certain level. However, the Court did not address those provisions as they are not currently in effect.
[6] Technically, the company’s stockholder agreement granted rights to an entity owned by the founder but because the founder controls such entity, the Court determined that he controls how the rights are exercised as well.
[7] Opinion at 4.
[8] Opinion at 2.
[9] Opinion at 1.
[10] Opinion at 2.
[11] Opinion at 132.
[12] Opinion at 11.
[13] Id.
[14] Opinion at 12.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Capital Markets, Emerging Companies, Mergers and Acquisitions, Private Equity, Securities Litigation or Securities Regulation and Corporate Governance practice groups:
Capital Markets:
Andrew L. Fabens – New York (+1 212.351.4034, [email protected])
Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415.393.8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213.229.7242, [email protected])
Emerging Companies:
Chris W. Trester – Palo Alto (+1 650.849.5212, [email protected])
Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, [email protected])
Saee Muzumdar – New York (+1 212.351.3966, [email protected])
Private Equity:
Richard J. Birns – New York (+1 212.351.4032, [email protected])
Ari Lanin – Los Angeles (+1 310.552.8581, [email protected])
Michael Piazza – Houston (+1 346.718.6670, [email protected])
John M. Pollack – New York (+1 212.351.3903, [email protected])
Steven R. Shoemate – New York (+1 212.351.3879, [email protected])
Securities Litigation:
Colin B. Davis – Orange County (+1 949.451.3993, [email protected])
Monica K. Loseman – Denver (+1 303.298.5784, [email protected])
Brian M. Lutz – San Francisco (+1 415.393.8379, [email protected])
Craig Varnen – Los Angeles (+1 213.229.7922, [email protected])
Securities Regulation and Corporate Governance:
Aaron Briggs – San Francisco (+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])
Brian J. Lane – Washington, D.C. (+1 202.887.3646, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
James J. Moloney – Orange County (+1 949.451.4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Mike Titera – Orange County (+1 949.451.4365, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
Multilateral Development Banks (“MDBs”), such as The World Bank, the Inter-American Development Bank, and Asian Development Bank, have robust enforcement processes to police fraud, corruption, and related sanctionable practices in MDB-funded projects. MDBs have powerful investigative, auditing, and sanctioning tools at their disposal, which can result in significant penalties against individuals and companies. These penalties can be financially devastating for companies—including being debarred from working on any MDB-funded projects anywhere in the world for a single violation on a single MDB-funded project. This webinar explores recent trends in MDB enforcement, and provides tips on how to manage MDB enforcement risk.
PANELISTS:
Michael Diamant is a partner in the Washington, D.C. office of Gibson Dunn. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. Mr. Diamant has broad white collar defense experience representing corporations and corporate executives facing criminal and regulatory charges. He has represented clients in an array of matters, including accounting and securities fraud, antitrust violations, and environmental crimes, before law enforcement and regulators, including the U.S. Department of Justice and the Securities and Exchange Commission. Mr. Diamant also has managed numerous internal investigations for publicly traded corporations and conducted fieldwork in nineteen different countries on five continents. In addition to his U.S. government-facing work, Mr. Diamant has extensive World Bank Group enforcement experience, working on behalf of clients under investigation by the World Bank Integrity Vice Presidency and assisting companies already subject to World Bank sanction.
Christopher R. Kim is a senior managing director in the Washington, DC, office of Guidepost Solutions, focusing on investigations, due diligence, monitorships, and compliance. He brings over 25 years of investigative and/or legal experience in U.S. criminal cases, multilateral development banks sanctions cases, and internal corporate cases. Mr. Kim’s practice is focused on engagements involving investigations including internal investigations, defense investigations for federal, state and/or multilateral development bank sanctions cases and compliance matters involving regulatory actions. Prior to his private practice, Mr. Kim was a Senior Investigator at the World Bank Group, where he planned, managed, and directed multi-disciplinary teams in the audits of multi-national corporations alleged to have been involved in fraud, corruption and/or collusion in various regions, i.e., Asia, Southeast Asia, Europe and Africa. He also led due diligence efforts involved with the World Bank International Finance Corporation.
Pedro G. Soto is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations group, and his practice focuses primarily on anti-corruption and fraud matters. He has more than 12 years of experience representing corporations and individuals under investigation by government authorities. He has successfully represented companies under investigation by the integrity units at the World Bank and the Asian Development Bank, including by obtaining declinations of enforcement actions. Mr. Soto has particularly deep experience in Latin America, where he has worked on matters in more than 15 different countries. He also represents foreign governments and private claimants in significant litigation and arbitration matters.
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© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).
Key Developments:
On February 25, 2024, the parties in American Alliance for Equal Rights v. Hidden Star filed a joint stipulation of dismissal of all claims, and the court closed the case the next day. Hidden Star is an Austin-based nonprofit organization that provides grants with the goal of helping “female, minority, and low-income entrepreneurs” through its Galaxy Grant program. Plaintiff American Alliance for Equal Rights (AAER) had claimed that the program violated Section 1981 based on alleged race- and gender-based eligibility restrictions, and had moved for a preliminary injunction, preventing Hidden Star from proceeding with the next grant contest. While Hidden Star’s mission is to help women- and minority-owned business and low-income entrepreneurs, its Galaxy Grant program never limited program eligibility to female and minority candidates. AAER agreed to dismiss the suit in exchange for clarification of grant eligibility-related language on Hidden Star’s website. Gibson Dunn represented Hidden Star in this matter.
On February 22, 2024, AAER filed a complaint and motion for a preliminary injunction against Jorge Zamanillo in his official capacity as the Director of the National Museum of the American Latino, part of the Smithsonian Institution. AAER v. Zamanillo, No. 1:24-cv-509 (D.D.C. Feb. 22, 2024). The complaint targets the Museum’s internship program, which aims to provide Latino, Latina, and Latinx undergraduates with training in non-curatorial art museum careers. AAER claims that the program constitutes race discrimination in violation of the Fifth Amendment because the Museum considers the race of applicants in choosing interns and allegedly refuses to hire non-Latino applicants. AAER has asked for an injunction to prevent the Museum from closing the application window on April 1, or selecting interns for the program (currently scheduled to begin in late April).
The EEOC filed an amicus curiae brief in Roberts & Freedom Truck Dispatch v. Progressive Preferred Ins. Co., et al. on February 22, 2024. The case concerns a challenge to Progressive’s grant program for Black entrepreneurs under Section 1981. (See case update below.) The EEOC explained that courts model Section 1981 standards governing private-sector voluntary affirmative action plans after the Title VII standards for such plans, which the EEOC is charged with enforcing. Accordingly, the EEOC argued, as Title VII permits voluntary affirmative-action plans in private employment, so too does Section 1981. The EEOC argued for evaluating Section 1981 challenges to affirmative action plans under a reasonableness standard, as the EEOC does under Title VII, not the strict scrutiny standard applied to post-secondary education affirmative action programs in the SFFA decision.
The Supreme Court denied certiorari in Coalition for TJ v. Fairfax County School Board on February 20, 2024. In 2020, Thomas Jefferson High School for Science and Technology (TJ), a public magnet school in Virginia, implemented a new policy of making admissions decisions based on a holistic review of students’ grades, written essays, and “Experience Factors,” which included family income and attendance at an underrepresented middle school. A coalition of parents and alumni challenged TJ’s policy under the Equal Protection Clause, arguing it was adopted to reduce the number of Asian American students admitted to the school. The district court granted the Coalition’s requested injunction against the admissions policy, but a month prior to the SFFA v. Harvard decision, a Fourth Circuit panel upheld the policy, reasoning that it does not require admissions officers to make race-based distinctions or cause an intentional or disparate impact. The Coalition petitioned the Supreme Court for review, but the Court declined to hear the case. Justice Alito dissented from the denial, criticizing the Fourth Circuit’s reasoning as an “indefensible . . . flagrantly wrong . . . virus that may spread if not promptly eliminated.” Justice Alito, joined by Justice Thomas, cautioned that the Fourth Circuit’s decision is a “grave injustice” to hardworking students and provides a model for flouting the Court’s SFFA decision.
On February 15, 2024, America First Legal (AFL) filed a lawsuit against the Department of Education (DOE) to enforce three separate Freedom of Information (FOIA) requests. In August 2023, AFL sent a FOIA request to DOE for records and communications related to its “National Summit on Equal Opportunity in Higher Education,” a strategy session intended to identify ways to help colleges and universities continue promoting diversity after the Supreme Court’s ruling in SFFA v. Harvard. AFL alleges in its lawsuit that DOE failed to respond to this and two other FOIA requests and that DOE’s “unlawful delays” are evidence that “DOE is covering up an impermissible federal DEI takeover of America’s education system.”
AFL sent a letter to the EEOC on February 14, 2024, alleging that statements on the Walt Disney Company’s “Reimagine Tomorrow” webpage, where the company expresses its goals of “amplifying underrepresented voices and untold stories as well as championing the importance of accurate representation in media and entertainment,” show that the company is violating Title VII. AFL claims that Disney uses unlawful quotas to ensure the inclusion of traditionally underrepresented groups—like women and minorities—in the filmmaking industry. In the letter, AFL also takes issue with Disney’s “Underrepresented Director” program, which grants recipients $25,000 to support their business endeavors. AFL asserts that this program is unlawful because it is only available to “women, AAPI, Black, Indigenous/Native, Latinx, LGBTQIA+, disability-identifying, and religiously marginalized individuals.” The letter asks that the EEOC initiate an investigation into Disney’s alleged “unlawful racial discrimination.”
On February 14, 2024, the Legal Defense Fund (LDF) launched its Equal Protection Initiative, an “interdisciplinary project to protect and advance public and private sector efforts to remove barriers to equal opportunity for Black people.” As part of the Initiative, LDF has issued a guidance report that aims to assist businesses in advancing their diversity goals following the Supreme Court’s SFFA decision. LDF says that its guidance—developed in partnership with the Lawyers’ Committee for Civil Rights Under Law, Asian Americans Advancing Justice, Latino Justice, the ACLU, and the Asian American Legal Defense and Education Fund—offers employers a comprehensive approach to communicating diversity goals to employees and job candidates, developing deep job candidate pools, and creating an inclusive work environment, while maintaining compliance with anti-discrimination laws.
On February 13, 2024, AAER filed a complaint against Alabama Governor Kay Ivey, challenging a state law that requires Governor Ivey to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board (AREAB). The AREAB consists of nine seats, with eight currently filled. The remaining seat is reserved for a member of the public at large with no real estate background. Because there is only one minority member among the current Board, AAER asserts that state law will require that the open seat go to a minority. AAER states that one of its members applied for this final seat, but was denied purely on the basis of race. The complaint argues that the state law violates the Equal Protection Clause and asks the court to invalidate the state law entirely and allow for any member of the public to qualify for the open seat.
The Congressional Asian Pacific American Caucus (CAPAC) sent a letter to the leaders of Fortune 100 companies on February 12, 2024, calling for an increase in representation of Asian Americans, Native Hawaiians, and Pacific Islanders (AANHPIs) in executive roles. A study conducted by Los Angeles nonprofit Leadership Education for Asian Pacifics found that members of AANHPI communities are significantly underrepresented in senior corporate positions and “hold only 2.7 percent of the total number of corporate board seats.” CAPAC—composed of 75 Members of Congress—asked letter recipients to provide the caucus with data on current AANHPI representation among senior and government relations staff, as well as the percentages of philanthropic funding and contract dollars awarded to AANHPI recipients and AANHPI-owned businesses. In a press statement, CAPAC Chair Rep. Judy Chu (D-Cal.) explained the caucus’s goal: “[W]ith this letter to Fortune 100 companies, we will determine whether the largest businesses in America have followed through on their promises and encourage them to continue this crucial work—even in the face of assaults on diversity, equity, and inclusion from Republican officeholders.”
Media Coverage and Commentary:
Below is a selection of recent media coverage and commentary on these issues:
- Inside Higher Ed, “Waiting for a ‘Last Word’ on Affirmative Action” (February 22): Inside Higher Ed’s Liam Knox reported on the Supreme Court’s February 22 decision to deny the petition for certiorari filed by a group of parents challenging the diversity-driven admissions policy at Thomas Jefferson High School for Science and Technology, Virginia’s highly competitive magnet school (case update above). Glenn Roper of the Pacific Legal Foundation (PLF)—counsel for the parents’ group and for plaintiffs in a number of other pending lawsuits challenging diversity-based initiatives in publicly-funded institutions—told Knox that his clients were “devastated” by the Supreme Court’s decision, but that PLF was undeterred. He remarked that “[i]f anything, this multiplies our efforts,” and concluded that “[t]here are multiple unanswered questions from the [SFFA] ruling that the court is going to have to address eventually.” Knox reported that Richard Kahlenberg, a lecturer at George Washington University’s School of Public Policy, interpreted the Court’s decision as an answer in itself: “Typically if SCOTUS is upset about the direction of the lower courts, they don’t hesitate to intervene. That they didn’t is, to me, a green light for authentic, race-neutral strategies to increase diversity.” But University of Chicago professor Sonja Starr told Knox that the decision could also be a sign that the Court was willing to “let[] the issue percolate among the lower courts” and to wait for a future “opportunit[y] to take a bite from this particular apple.”
- Law.com, “GC of Texas University Taking Heat Over Cancellation of Pride Week” (February 22): Greg Andrews of Law.com reports that the University of North Texas has cancelled its annual Pride Week, which had been planned for March, based on the recommendation of the school’s Office of General Counsel. The recommendation follows the January 1, 2024 implementation of Texas Senate Bill 17, a sweeping anti-DEI measure affecting all state universities. Andrews says that the University’s OGC interpreted the law to prohibit schools from hosting programs tied to race, color, ethnicity, gender identity, or sexual orientation, but many faculty disagree and consider the OGC’s interpretation to be overly broad. At a meeting of the Faculty Senate on February 14, 2024, librarian Coby Condrey reportedly argued that the law’s exceptions for academic freedom in the classroom should apply, as “the library, for librarians, is our classroom.” Other faculty speculated that concerns for funding have motivated the cancellation.
- Inc. Magazine, “‘It All Fell Apart’: Fearless Fund Founder on Impact of DEI Lawsuits” (February 21): Inc. Magazine’s Brit Morse reports on the operational difficulties faced by Fearless Fund and Hello Alice, which are each facing lawsuits, alleging that their grant programs violate Section 1981. In an interview with Morse, Fearless Fund CEO Arian Simone shared that her organization has had to reduce its team of 19 people to only 6, and Hello Alice co-founder Elizabeth Gore reported that the company recently laid off 69% of its team. Both organizations have also struggled with funding, despite their upward trajectories prior to the suits, according to Morse. Simone reported to Morse that only two of Fearless Fund’s corporate partners, Costco and JP Morgan, have remained onboard, and Gore shared that Hello Alice has not raised any funds since the lawsuit was filed. Morse notes that anti-DEI groups’ litigation and advocacy campaign has been successful, as large companies have pulled back on DEI initiatives established in 2020. But Morse says that neither Fearless Fund nor Hello Alice plans to shutter anytime soon, and she shares Simone’s commitment to her mission: “So I have the current industry, the macro-economic climate, the affirmative action ruling in June, the attack on DEI, and now, on top of that, my company is in litigation . . . I have five things, a whole hand, but guess what: A hand is powerful because it creates a fist and I’m going to continue to fight.”
- Washington Post, “As DEI gets more divisive, companies are ditching their teams” (February 18): The Post’s Taylor Telford reports on new data from workforce intelligence provider Revelio Labs, indicating that DEI jobs decreased by 5 percent in 2023 and have fallen by 8 percent so far in 2024. According to Revelio, this is twice the rate of non-DEI jobs. Telford notes that Revelio’s data is consistent with media reporting in recent weeks about large-scale DEI layoffs at Zoom and Snap; other large companies—including Tesla, DoorDash, Lyft, Home Depot, and X—made similar cuts in 2023. But Lisa Simon, Revelio’s senior economist, told Telford that although the “overall number of DEI officers has decreased . . . it’s not enough to destroy all the strides that happened after 2020.” And Revelio’s data indicates that other companies continue to build their DEI teams: in 2023, several corporations (including J.M. Smucker, Victoria’s Secret, Michaels, Moderna, Prudential, ConocoPhillips, and Conagra Brands) expanded their DEI teams by 50 percent or more.
- SSRN, “The First Amendment Right to Affirmative Action” (February 15, 2024): Alexander Volokh, Associate Professor at Emory University School of Law, explores the relationship between the First Amendment and federal civil right laws, and proposes that universities—in their role as “speaking associations”—may pursue arguments under the First Amendment to protect their right to promote diversity in their institutions. Professor Volokh asserts that a university’s affirmative action programs are part of that institution’s “message,” thus qualifying for protections under the First Amendment. He argues that universities, as speaking associations, have the right to choose both who speaks on their behalf and who receives the message they wish to communicate. Under that presumption, he posits that the First Amendment will prove crucial to future litigation over the prominence and survival of affirmative action programs in the wake of SFFA v. Harvard. He explains that “[u]sing an antidiscrimination law like Title VI or 42 U.S.C. § 1981 to force the university to speak through people not of its choosing . . . could impede the university’s ability to speak.” Professor Volokh also suggests that the First Amendment may protect charitable donations (like those at issue in Fearless Fund) as expressive speech, depending on “how donations are socially perceived.”
- Bloomberg Law, “Alphabet, Microsoft Pivot From Nasdaq Diversity Reporting Format” (February 14): Bloomberg’s Andrew Ramonas reports on the different ways that public companies are complying with new Nasdaq board diversity reporting requirements. Although most companies produce tables of numbers—the format suggested in Nasdaq’s template—others use dots, checkmarks, or other visual chart formats. According to Ramonas, this variety in reporting makes it more difficult for investors to make side-by-side comparisons between companies. But in an interview with Ramonas, Amy Augustine, director of environmental, social, and governance investing at BostonTrust Walden Co., emphasized the overall benefits of the reporting requirement: “It’s so far from where we were when there was no listing standard that it really does feel like progress.” The SEC is crafting its own proposal to require public companies to disclose board diversity, with a tentative release date of April 2024.
- Harvard Business Review, “Building a Supplier Diversity Program? Learn from the U.S. Government” (February 9): Chris Parker and Dwaipayan Roy, professors at the University of Virginia’s Darden School of Business, provide guidance for corporate leaders seeking to diversify their supply chains. Parker and Roy sought advice from procurement leaders at four federal agencies: the Department of Health and Human Services (HHS), the Department of Veteran Affairs, the National Aeronautics and Space Administration, and the Department of Housing and Urban Development. These leaders advise that companies’ first step should be to identify capable small, diverse-owned businesses (SDBs). This may involve creating partnerships with minority business associations, or pooling information on SDBs with other companies or government entities (HHS, for example, maintains a public SDB database). The second step, according to these procurement leaders, involves communicating directly with SDBs, who “often lack awareness about a company’s specific procurement needs.” Companies can accomplish this goal through different channels, from outreach events to regular email updates sent to SDB procurement managers.
Case Updates:
Below is a list of updates in new and pending cases:
1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:
- Alexandre v. Amazon.com, Inc., No. 3:22-cv-1459 (S.D. Cal. 2022): White, Asian, and Native Hawaiian entrepreneur plaintiffs, on behalf of a putative class of past and future Amazon “delivery service partner” (DSP) program applicants, challenged a DEI program that provides $10,000 grants to qualifying delivery service providers who are “Black, Latinx, and Native American entrepreneurs.” Plaintiffs allege violations of California state civil rights laws prohibiting discrimination. On December 6, 2023, Amazon moved to dismiss.
- Latest update: On February 16, 2024, the plaintiffs filed their opposition to Amazon’s motion to dismiss, arguing that they have standing because they visited Amazon’s website with the intent to become an Amazon DSP, only to be confronted by Amazon’s DEI program, and therefore did not apply. The plaintiffs also assert that Amazon’s public policy arguments should fail because the program is designed as “virtue-signaling in order to curry favor with certain races.”
- Bradley, et al. v. Gannett Co. Inc., No. 1:23-cv-01100-RDA-WEF (E.D.Va. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming that Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On November 24, Gannett moved to dismiss and to strike the plaintiffs’ class action allegations. On February 8, 2024, the plaintiffs moved for a preliminary injunction and for class certification. On February 9, 2024, Gannett filed a motion to stay briefing on the plaintiffs’ motions pending a ruling on Gannett’s motion to dismiss, arguing that it may moot any need for class certification or a preliminary injunction.
- Latest update: The plaintiffs filed their opposition to Gannett’s motion on February 13, 2024, urging the court to consider the motion to dismiss, motion for preliminary injunction, and motion for class certification together given their significant legal and factual overlap. The plaintiffs further argued that the stay sought by Gannett required a showing of a “high likelihood of prevailing” on the pending motion to dismiss, which Gannett had not shown, especially given the “rarity with which a claim for § 1981 racial discrimination meets the requirements to be dismissed on a 12(b)(6) motion.” Gannett’s reply, filed on February 14, 2024, renewed its call for efficiency, noting that resolving the pending motions for class certification and preliminary injunction would require significant, potentially unnecessary, factual development. On February 21, 2024, the court granted Gannett’s motion to stay briefing on the plaintiff’s pending motions.
- Mid-America Milling Company v. U.S. Dep’t of Transportation, No. 3:23-cv-00072-GFVT (E.D. Ky. 2023): Two plaintiff construction companies sued the Department of Transportation, asking the court to enjoin the DOT’s Disadvantaged Business Enterprise Program (DBE), an affirmative action program that awards contracts to minority-owned and women‑owned small businesses in DOT-funded construction projects with the statutory aim of granting 10% of certain DOT-funded contracts to these businesses nationally. The plaintiffs alleged that the program constitutes unconstitutional race discrimination in violation of the Fifth Amendment.
- Latest Update: On February 6, 2024, the plaintiffs filed their opposition to DOT’s motion to dismiss, arguing that they stated a plausible claim for relief based on allegations that most contracts in Kentucky and Indiana contain DBE goals; that the plaintiffs regularly bid on and compete for those contracts; and that it is highly improbable that the plaintiffs’ losses are not due, at least in part, to the DBE program. The plaintiffs underscored that regardless of whether they lost specific contracts due to their race and/or gender, they had sufficiently alleged that they were injured by the unequal opportunity to compete for those contracts. DOT replied on February 20, 2024, reiterating that the plaintiffs had failed to identify “what contract they allegedly lost, to whom, where or when this contract was let or by what state agency.” DOT also argued that the plaintiffs’ failure to allege specific contracts lost undermines their standing argument, indicating that plaintiffs had not suffered an injury-in-fact.
- Roberts & Freedom Truck Dispatch v. Progressive Preferred Ins. Co., et al., No. 23-cv-1597 (N.D. Oh. 2023): On August 16, 2023, plaintiffs represented by AFL sued defendants Progressive Insurance, Hello Alice, and Circular Board, Inc., alleging that the defendants’ grant program that awarded funding specifically to Black entrepreneurs to support their small businesses violated Section 1981.
- Latest update: On February 7, 2024, defendant Progressive filed a motion to dismiss for lack of jurisdiction and failure to state a claim and defendant Circular Board filed a motion to dismiss for failure to state a claim. The defendants argue that the plaintiffs lack Article III standing because they did not plead causation. The defendants also assert that the plaintiffs’ claims do not involve a “contract” under Section 1981 but that, if they do, the court should compel arbitration or transfer the case to federal court in California. The defendants argue that applying Section 1981 to a program “with the express purpose of combatting sociopolitical inequalities” violates the First Amendment, and that the grant program is a “voluntary, private affirmative action program” under Johnson v. Transportation Agency, Santa Clara County, 480 U.S. 616 (1987). On February 16, 2024, the court granted leave to file an amicus curiae brief to the Southern Poverty Law Center, the Lawyers’ Committee for Civil Rights Under the Law, the National Hispanic Bar Association, and Asian Americans Advancing Justice, and on February 23, 2024, the court granted leave to file an amicus curiae brief to the EEOC (see update above).
2. Employment discrimination and related claims:
- Gerber v. Ohio Northern University, No. 2023-1107-CVH (Ohio. Ct. Common Pleas Hardin Cnty. 2023): On June 30, 2023, a law professor sued his former employer, Ohio Northern University, for terminating his employment after an internal investigation determined that he bullied and harassed other faculty members. On January 23, 2024, the plaintiff, now represented by AFL, filed an amended complaint. The plaintiff claims that his firing was actually in retaliation for his vocal and public opposition to the university’s stated DEI principles and race-conscious hiring, which he believed were illegal. The plaintiff alleged that the investigation and his termination breached his employment contract, violated Ohio civil rights statutes, and constituted various torts, including defamation, false light, conversion, infliction of emotional distress, and wrongful termination in violation of public policy.
- Latest update: On February 20, 2024, the defendants filed answers and a joint motion for partial dismissal of the plaintiff’s second amended complaint. The defendants argued for dismissal of the wrongful termination claims because such claims only apply to at-will employees, and the plaintiff was a contract employee. The defendants also argued for dismissal of all claims against the defendants in their individual capacities, including the “conclusory” tort claims.
- Haltigan v. Drake, No. 5:23-cv-02437-EJD (N.D. Cal. 2023): A white male psychologist sued the University of California Santa Cruz, arguing that a requirement that prospective faculty candidates submit and be evaluated in part on the basis of statements explaining their views and understanding of DEI principles functioned as a loyalty oath that violated his First Amendment freedoms. The plaintiff claimed that because he is “committed to colorblindness and viewpoint diversity”––which he alleged was contrary to UC Santa Cruz’s position on DEI––he would be compelled to alter his political views to be a viable candidate for the position. The plaintiff sought a declaration that the University’s DEI statement requirement violated the First Amendment and a permanent injunction against the enforcement of the requirement. On January 12, 2024, the district court granted UC Santa Cruz’s motion to dismiss with leave to amend.
- Latest update: On February 2, 2024, the plaintiff filed a second amended complaint, adding additional allegations regarding his job search, his DEI statement, and why his application would have been futile. The plaintiff brought the same claims and requested the same relief as in his first complaint.
3. Challenges to agency rules, laws, and regulatory decisions:
- Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir. 2021): On October 18, 2023, a unanimous Fifth Circuit panel rejected petitioners’ constitutional and statutory challenges to Nasdaq’s Board Diversity Rules and the SEC’s approval of those rules. Gibson Dunn represents Nasdaq, which intervened to defend its rules. Petitioners sought a rehearing en banc.
- Latest update: On February 19, 2024, the Fifth Circuit granted petitioners’ motion for rehearing en banc and vacated the October 18, 2023 panel opinion. Oral argument is tentatively scheduled for the week of May 13, 2024.
- Valencia AG, LLC v. New York State Off. of Cannabis Mgmt., et al., No. 5:24-cv-00116-GTS-TWD (N.D.N.Y. 2024): On January 24, 2024, Valencia AG, a cannabis company owned by white men, sued the New York State Office of Cannabis Management for discrimination, alleging that New York’s Cannabis Law and implementing regulations favored minority-owned and women-owned businesses. The regulations include goals to promote “social & economic equity” (“SEE”) applicants, which the plaintiff claims violates the Equal Protection Clause and Section 1983. On February 7, 2024, the plaintiff filed a motion for a temporary restraining order and preliminary injunction, seeking to prohibit the defendants from implementing the regulations, charging SEE applicants reduced fees, or preferentially granting SEE applicants’ applications.
- Latest update: On February 8, 2024, the court denied the plaintiff’s motion for a temporary restraining order because Valencia had not made a sufficient showing that it would experience irreparable harm without it, characterizing the motion as “plagued by a lack of personal knowledge.” The court will be scheduling a hearing on the plaintiff’s motion for preliminary injunction “in the coming days.”
4. Actions against educational institutions:
- Palsgaard v. Christian, et al., No. 1:23-cv-01228-SAB (E.D. Cal. 2023): In August 2023, California community college professors filed suit and moved for a preliminary injunction against the state’s new DEI-related evaluation competencies and corresponding language in their faculty contract, which they alleged require them to endorse the state’s views on DEI concepts. The plaintiffs challenged the DEI rules and contract language as compelled speech in violation of the First and Fourteenth Amendments. On December 15, 2023, the defendants filed their motions to dismiss. In response, on January 19, 2024, the plaintiffs filed a joint opposition.
- Latest update: On February 9, 2024, the state and district defendants filed replies in support of their motions to dismiss. In both replies, the defendants argued that the plaintiffs did not meet the injury element of standing because the implementation guidelines did not proscribe speech, punish speech, or otherwise bind the plaintiffs. The defendants also argued that the plaintiffs failed to state a viable claim because the regulations do not prohibit speech, compel speech, or discriminate against the viewpoint of certain speech. Finally, the defendants argued that the plaintiffs’ overbreadth and vagueness challenges were meritless.
- Brooke Henderson, et al. v. Springfield R-12 School District, et al., No. 23-01374 (8th Cir. 2023): On August 18, 2021, two educators sued a Springfield, Missouri school district alleging that the district’s mandatory equity training violated their First Amendment rights. The educators claimed that the equity training constituted compelled speech, content and viewpoint discrimination, and an unconstitutional condition of employment. The at-issue Fall 2020 equity training included sessions on anti-bias, anti-racism, and white supremacy. On January 12, 2023, the district court granted the defendants’ motion for summary judgment.
- Latest update: The plaintiffs appealed the decision to the U.S. Court of Appeals for the Eighth Circuit. Oral argument was held on February 15, 2024 before Judges James B. Loken, Steven M. Colloton, and Jane L. Kelly. Counsel for the plaintiffs argued that the training compelled educators to engage in political speech, while counsel for the defendants argued that the educators were not compelled because they did not face punishment. The judges questioned the attorneys on several First Amendment issues, including the public forum doctrine, the test applied to public employee trainings, and the standard for compelled speech.
- Doe v. New York University, No. 1:23-cv-09187 (S.D.N.Y. 2023): On December 1, 2023, a white male first-year law student at NYU who intends to apply for the NYU Law Review sued the university, alleging the NYU Law Review’s use of race and sex or gender preferences in selecting its members violates Title VI, Title IX, and Section 1981.
- Latest update: On January 29, 2024, NYU filed a motion to dismiss, arguing that the plaintiff lacks standing because his hypothetical injury is too attenuated and that the claim is not yet ripe because the Law Review’s policy has not yet been implemented. On February 20, 2024, the plaintiff filed his opposition, arguing that he faces an imminent and severe injury in the coming months due to the university’s knowing discrimination.
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, any member of the firm’s Labor and Employment practice group, or the following practice leaders and authors:
Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, [email protected])
Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])
Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])
Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])
Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
Join our panelists from Gibson Dunn’s Environmental Litigation and Mass Tort practice group and Environmental, Social, and Governance (ESG) practice area as they discuss significant developments in federal and California environmental law and forecast what to expect for 2024. This webcast covers a range of topics of significant interest to regulated industries, including ongoing and anticipated rulemakings, federal enforcement targets and initiatives, and the evolving ESG landscape.
PANELISTS:
David Fotouhi is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He practices in the firm’s Litigation Department and is a member of the firm’s Environmental Litigation and Mass Tort practice group. David previously served as Acting General Counsel and Principal Deputy General Counsel at the U.S. Environmental Protection Agency (EPA). David has been recognized as a leading environmental lawyer in the District of Columbia by Chambers USA, a “Trailblazer” in environmental and energy law by National Law Journal, and a “Rising Star” in environmental law by Law360 for his work “on game-changing regulations and litigation.” Prior to entering private practice, David served as a law clerk to the Honorable Raymond W. Gruender of the United States Court of Appeals for the Eighth Circuit.
Stacie B. Fletcher is a litigation partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and is co-chair of the Environmental Litigation and Mass Tort Practice Group. Stacie has handled a wide variety of cases under federal and state environmental statutes, including serving as lead counsel on numerous high-profile enforcement defense matters with U.S. EPA and state agencies. Stacie has been recognized by Chambers USA as a leading environmental lawyer in the District of Columbia each year since 2021 and was named as a Law360 2023 “Environmental MVP.”
Rachel Levick is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. She practices in the firm’s Litigation Department and is a member of the Environmental Litigation and Mass Tort and Environmental, Social and Governance (ESG) Practice Groups. Rachel represents clients in a wide range of federal and state litigation, agency enforcement actions, cost recovery cases, and administrative rulemaking proceedings. She was named by Law360 as a 2023 Environmental “Rising Star,” which recognizes “attorneys under 40 whose legal accomplishments belie their age.” Rachel was also named by Best Lawyers as “One to Watch” in Environmental Litigation in 2022 and 2023.
Abbey Hudson is a partner in Gibson, Dunn & Crutcher’s Los Angeles office. Her practice focuses on environmental matters and complex trial litigation. She devotes a significant portion of her time to helping clients navigate environmental and emerging regulations and related governmental investigations. She has provided counseling and advice on environmental and regulatory compliance to clients on a wide range of issues, including supply chain transparency requirements, comments on pending regulatory developments, and enforcement counseling. The Legal 500 United States named Abbey a Next Generation Lawyer in the category of Industry Focus – Environment – Litigation.
Michael Murphy is a partner in Gibson, Dunn & Crutcher’s Washington, D.C. office. He is a leader of the firm’s Environmental, Social and Governance (ESG) practice area, and is a member of the firm’s Environmental Litigation and Mass Tort, and Administrative Law and Regulatory Practice Groups. Michael counsels clients on environmental and ESG issues related to corporate transactions and compliance. He also represents clients in a wide variety of investigation and litigation matters. Michael has been recognized as a Law360 Rising Star and, most recently, by Lawdragon as one of the Green 500: Leaders in Environmental Law for 2023.
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© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
FAQs about Government Shutdowns
The U.S. Government is rapidly approaching a partial shutdown this week, which can be averted only if Congress passes funding legislation by Friday, March 1. If it fails to pass funding legislation by March 8, the government will go into a full shutdown. After a meeting between congressional leadership and the President today, House Speaker Mike Johnson (R-LA) said he was committed to avoiding a shutdown, but no details have emerged as to how Congress will accomplish that. Gibson Dunn’s Public Policy Practice Group is closely monitoring the funding negotiations and their potential effects on our clients. Here, we address the questions our clients have been asking us most frequently.
- Which agencies would be affected by a shutdown and when?
In January, Congress passed a “laddered” continuing resolution (“CR”), which broke apart the 12 government funding divisions into two units. Congress provided funding for one unit until March 1, and the other until March 8. Pub. Law No. 118-35.
On March 1, funding will expire for the Departments of Agriculture, Energy, Veterans Affairs, Transportation, and Housing & Urban Development; the Food & Drug Administration; the Commodity Futures Trading Commission; and military construction. Id.
On March 8, all of the other agencies’ funding will expire, including the Departments of Justice, Treasury, Commerce, Labor, Defense, Homeland Security, State, Education, Interior, and Health & Human Services; the Environmental Protection Agency; the Social Security Administration; many independent agencies (e.g., the Securities and Exchange Commission, Federal Election Commission, Federal Trade Commission); and the judicial and legislative branches. Id.
- What will happen if there is a shutdown?
Each agency has different procedures in the event of a shutdown, but generally, all non-essential government functions will cease. Essential functions will continue—but the personnel performing them will be working without pay, which can cause morale to suffer and employees to skip work. All federal government employees will receive backpay once Congress breaks its impasse, but federal contractors likely will not.
Essential functions—many of which relate to safety—include:
- Air traffic control and inspections
- Note that during previous shutdowns, air travel became challenging because some TSA workers and air traffic controllers did not report to work: plan for long lines.
- Food safety inspections
- Veterans’ health care workers
- Functions related to nuclear reactors
- Law enforcement
- Power grid maintenance
- Essential IRS operations
- During a previous shutdown, 14,000 IRS workers did not show up when they were recalled to work; this could present a challenge for the ongoing U.S. tax season should this scenario repeat itself. Refund delays would be likely.
Mandatory spending for Social Security, Medicare, and Medicaid also will continue.
Non-essential functions that will cease include things like:
- Agency rulemaking
- Consideration of applications for various permits or approvals
- This includes everything from Committee on Foreign Investment in the United States (“CFIUS”) reviews to passport renewals.
- Many judicial processes
- Civil cases may be postponed, but criminal case likely will proceed.
- If a government attorney who has been furloughed is involved in the case, however, hearing and filing dates may be postponed.
- Issuing new loans or grants
- Distribution of funds under major programs like the CHIPS and Science for America Act will be impeded.
- The running of national parks
Many government subsidy programs will run out of funds (although some, such as SNAP food stamp benefits, have enough funding to continue through March).
- What are the chances of a shutdown?
This is the fourth time in four months that we have come close to a federal government shutdown. Congress has averted the previous ones by passing short-term CRs, which keep funding levels the same as the previous year (as opposed to passing the 12 individual appropriations bills that would change funding levels).
Today, President Biden, House Speaker Mike Johnson (R-LA), Senate Majority Leader Chuck Schumer (D-NY), House Minority Leader Hakeem Jeffries (D-NY), and Senate Minority Leader Mitch McConnell (R-KY) met. Speaker Johnson said he was committed to avoiding a shutdown, but the challenge will be finding a path forward that appeases both Democrats and the far right members of the Republican caucus.
The options for keeping the government open now include passing a short-term CR to allow for further negotiations, a long-term CR to finish out the fiscal year, or a combination of some portion of the 12 spending bills for some agencies, and a CR for the remainder. The current political dynamics, however, are making it increasingly difficult for Congress to pass any funding legislation. Republicans are willing to consider a long-term CR because if there is no new budget by April 30, it will trigger a government-wide 1% spending cut negotiated in last year’s debt-ceiling agreement. That makes Democrats equally unwilling to consider a long-term CR. But Speaker Johnson working with the Democrats to pass a short-term CR that would allow additional time for negotiations is anathema to House Republicans, who have already proven themselves willing to jettison a speaker over a spending deal they don’t like.
Although today’s meeting signals hope that congressional leaders are committed to avoiding a shutdown, until a specific deal emerges, the near-term future of government funding will be uncertain.
On March 13, at 12:00PM EDT, the Public Policy Practice Group will present a webcast on the federal legislative and policy outlook for 2024. Register here.
Gibson Dunn’s Public Policy Practice Group is available to assist clients as they navigate the uncertain and rapidly changing dynamics of a potential partial or full government shutdown. Our practice group members provide strategic counseling; real-time intelligence gathering; development and enhancement of policy positions; legislative text drafting; and lobbying services. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Public Policy practice group, or the following:
Michael D. Bopp – Co-Chair, Washington, D.C. (+1 202.955.8256, [email protected])
Mylan L. Denerstein – Co-Chair, New York (+1 212.351.3850, [email protected])
Roscoe Jones, Jr. – Co-Chair, Washington, D.C. (+1 202.887.3530, [email protected])
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, [email protected])
Daniel P. Smith – Washington, D.C. (+1 202.777.9549, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
This update highlights steps taken by the Food and Drug Administration to implement the Modernization of Cosmetics Regulation Act since its enactment in 2022 as well as actions expected in the cosmetics space this year.
In December 2022, Congress passed the Modernization of Cosmetics Regulation Act of 2022 (MoCRA), which overhauled the Food and Drug Administration (FDA) framework for the regulation of cosmetics. MoCRA granted FDA new authorities and imposed a series of new requirements on the cosmetics industry, including with respect to adverse event recordkeeping and reporting, facility registration and product listing, good manufacturing practices (GMPs), safety substantiation, fragrance allergen labeling, facility suspension, records access, and mandatory recall authority.
FDA is required to develop multiple regulations and guidances to implement the new law, a number of which issued in 2023 and are expected to issue in 2024, with opportunities for stakeholder comment and feedback.
This client alert highlights three steps FDA has taken to implement MoCRA since its enactment and eight actions to expect from FDA on cosmetics in 2024.
In 2023, FDA took several measures to implement its new authorities under MoCRA, most notably:
- Moving the regulation of cosmetics out of the Center for Food Science and Nutrition (CFSAN) and into the Office of Chief Scientist (OCS). This shift out of CFSAN and into OCS, with the Chief Scientist publicly leading MoCRA’s implementation, signals that, post-enactment of MoCRA, the regulation of cosmetics is now a higher priority for the agency. In addition, FDA has explained that moving cosmetics regulation to the Office of the Commissioner will leverage FDA’s areas of expertise across the agency as it works to implement its new authorities.
- Holding a public listening session and seeking written comments on GMPs for cosmetic products. Under MoCRA, FDA is required to issue regulations establishing GMPs for facilities that manufacture cosmetic products. While, as discussed below, it is doubtful that FDA will meet its statutory deadlines for issuance of the proposed and final GMP regulations (December 2024 and December 2025, respectively), the listening session is a critical first step in their development.
- Issuing guidance on cosmetic product facility registration and cosmetic product listing. Under MoCRA, for the first time, FDA has the authority to require the registration of facilities where cosmetic products are manufactured and the submission of cosmetic product listings, including a list of ingredients used in the products. In December 2023, FDA issued guidance detailing who is responsible for making the registration and listing submissions and what, where, when, and how to submit the information. FDA also announced that it will not enforce the registration and listing requirements until July 1, 2024.
In 2024, FDA will continue to ramp up implementation of MoCRA, including by issuing guidance for industry, launching new systems for submission of information to FDA, and taking steps to enforce new requirements. Look for FDA to take the following actions in the cosmetics space in 2024:
- Focusing on microbiological contamination in cosmetic products. FDA has long expressed concerns about the risks of contamination of cosmetic products with microorganisms and has expressed a renewed focus on the issue post-enactment of MoCRA. In June 2023, FDA issued a draft guidance for industry on insanitary conditions in the preparation, packing and holding of tattoo inks and the risk of microbial contamination. Over the course of 2023, the agency also added makeup products from three firms from China to an import alert due to microbiological contamination. In addition, FDA highlighted in a new cosmetics fact sheet for small businesses the importance of conducting testing to determine the safety of each ingredient, including microbiological safety. Expect FDA to take further action, including finalizing the tattoo ink guidance and possibly issuing untitled or warning letters, to address issues of microbiological contamination in cosmetic products over the coming year.
- Enforcing registration and listing requirements. As noted above, FDA has announced that it will not take action to enforce cosmetic product facility registration and listing requirements until July 1, 2024. In advance of that date, FDA has issued guidance to industry on compliance with these requirements, as well as tools and options for making electronic submissions. FDA likely will give industry, especially smaller businesses, an additional, unofficial buffer to allow for industry (and agency) adjustment to the reporting requirements but, by the fall, will expect compliance with the new requirements. If and when FDA decides to enforce these requirements, consistent with its approach in other product areas, the agency is likely to prioritize companies whose products it believes pose a risk to the public health, such as manufacturers of contaminated, unsafe, or otherwise adulterated cosmetic products.
- Issuing guidance for industry on records access and mandatory recalls. The Office of the Chief Scientist has announced that, by the end of 2024, FDA expects to develop, in conjunction with the Office of Regulatory Affairs, two key guidances for industry on the circumstances in which FDA can exercise new authorities granted by MoCRA: accessing and copying records relating to a cosmetic product and ordering a person to cease the distribution of and recall a cosmetic product. Industry will be particularly interested FDA’s interpretation of its records access authority under the new statute, given the potential scope of the authority and FDA’s previous lack of access to cosmetic product records. Interested stakeholders should consider participating in FDA’s guidance development process by submitting comments on key concerns and issues.
- Standing up a system for the electronic submission of serious adverse event reports. MoCRA imposes a new requirement that industry submit serious adverse event reports associated with the use of cosmetic products to FDA. As of December 2023, FDA has modified the current FDA paper form (Form MedWatch3500A) to make it easier for the cosmetics industry to complete the form. Last month, FDA announced that, over the course of the next several months, the agency will have an electronic means for submission of the reports.
- Conducting research on per- and polyfluoroalkyl substances (PFAS) in cosmetics. Under MoCRA, by December 2025, FDA is required to issue a report summarizing the results of an assessment of the use of PFAS in cosmetic products and the evidence regarding the safety of such use, including any risks associated with their use. FDA has said that there is not much published data available on PFAS in cosmetics. Last month, FDA announced that it be working to fill certain scientific gaps through its own research, which can be expected to begin this year. Of note, this work comes as a bipartisan bill to ban PFAS in cosmetics has been introduced in the House, although its chances of passage are slim, given the limited amount of time for bill passage given this year’s longer, election-year recess, Republican control of the House, and a lack of a companion bill in the Senate. In addition, on the state side, multiple state legislatures have taken, and are taking, steps to ban PFAS in cosmetic products.
- Issuing a proposed rule on testing methods for talc in cosmetics. MoCRA required that FDA issue a proposed rule on testing methods for detecting and identifying asbestos in talc-containing cosmetic products by December 29, 2023. According to the Office of Management and Budget (OMB) website, OMB received the proposed rule from FDA for review on January 2, 2024. With eight FDA rules currently under review with OMB as of February 27, 2024, there is some likelihood that the talc proposed rule will not issue this year, especially given the timing of the mandatory 60-day Congressional review period for rules under the Congressional Review Act, combined with the longer, election-year recess starting in August. Nonetheless, because the proposed rule is being issued pursuant to a statutory mandate, there is a chance that OMB will complete its review in time for it to publish at some point this spring.
- Developing implementation and strategic workforce plans for MoCRA implementation. In December 2023, the Government Accountability Office (GAO) issued a report entitled Cosmetic Safety: Better Planning Would Enhance FDA Efforts to Implement New Law. The report’s recommendations centered around FDA’s lack of organizational changes necessary to implement MoCRA. Within the next few months, FDA likely will respond to the recommendations in that report by developing implementation and strategic workforce plans, as called for by GAO.
- Hiring a new MoCRA lead? Last, but not least, over the course of 2023, Dr. Namandje Bumpus, as FDA’s Chief Scientist, made several public appearances and statements about her work and priorities as the agency lead on MoCRA’s implementation. Earlier this month, Dr. Bumpus moved to her new role as Principal Deputy Commissioner. FDA is now looking for a new Chief Scientist to take Dr. Bumpus’s place. She is continuing to hold the cosmetics portfolio for the moment, but, once hired, the new Chief Scientist is expected to take over the implementation of MoCRA. It remains to be seen whether her replacement will be hired within this calendar year and, if so, what priorities the new hire will have in the area of cosmetics regulation.
Finally, this year, there are several regulations that FDA is required to issue under MoCRA, or has indicated it is seeking to issue, that likely will not publish before the end of the year. In 2024, do not expect to see FDA regulations on:
- Cosmetics GMPs and fragrance allergen labeling. MoCRA requires FDA to issue proposed rules regarding GMPs for cosmetics and fragrance allergen labeling by December 29, 2024, and June 29, 2024, respectively. Neither of these proposed rules appeared in the most recent editions of the Unified Agenda, the compilation of information about regulations under development by federal agencies, which means there is little chance they will issue in 2024, especially given competing priorities for the agency.
- Use of formaldehyde as an ingredient in certain hair products. In 2023, FDA announced its intention to publish a proposed rule on the use of formaldehyde and formaldehyde-releasing chemicals as an ingredient in hair smoothing or hair straightening products. Dr. Bumpus emphasized the importance of the proposed rule to the agency in multiple postings to her official Twitter feed. Although FDA has given a target date of July 2024 for issuance of the rule, given the number of high priority regulations FDA has said it will issue by this spring, most if not all of which require review by OMB, as well as the 60-day review period mandated by the Congressional Review Act, it is unlikely that the formaldehyde proposed rule will publish this year.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s FDA and Health Care practice group:
Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, [email protected])
Katlin McKelvie – Washington, D.C. (+1 202.955.8526, [email protected])
John D. W. Partridge – Denver (+1 303.298.5931, [email protected])
Jonathan M. Phillips – Washington, D.C. (+1 202.887.3546, [email protected])
Carlo Felizardo – Washington, D.C. (+1 202.955.8278, [email protected])
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.
In re Illinois Nat’l Ins. Co., No. 22-0872 – Decided February 23, 2024
On February 23, the Texas Supreme Court unanimously held that an insured suffers a “loss”—and a claimant can sue the insurers directly—when the claimant and the insured settle, and the claimant agrees to look solely to the liability insurance policy for any recovery. But, because the insured doesn’t face liability beyond the insurance proceeds, the insurer isn’t bound by the settlement agreement during the subsequent coverage litigation.
“Because the settlement agreement establishes that [the insured] is legally obligated to pay and is ‘in fact liable’ to [the claimant] for any recoverable insurance benefits, [the claimant] has suffered a ‘loss’ under the policies and the no-direct-action rule does not prevent [the claimant] from suing the Insurers directly.”
Justice Boyd, writing for the Court
Background:
A group of investors (GAMCO) brought a securities class action against Cobalt International Energy—an oil-and-gas exploration company—after the SEC announced an investigation into Cobalt. Cobalt’s insurers denied coverage and defense costs. After Cobalt filed for bankruptcy, it settled with GAMCO for $220 million—which the parties believed to be the maximum coverage available under Cobalt’s liability insurance policies. GAMCO agreed to look solely to Cobalt’s insurers to recover the $220 million; Cobalt agreed to allow GAMCO to control the coverage litigation but didn’t assign its policies or coverage claims. Both parties denied any fault or liability. The bankruptcy court and U.S. district court presiding over the GAMCO-Cobalt suit approved the settlement.
GAMCO then intervened in Cobalt’s ongoing contract suit against its insurers. The trial court denied the insurers’ jurisdictional pleas and summary judgment motions, holding that (1) Cobalt’s defense costs and the settlement amount are covered “losses” under the policies; (2) GAMCO can sue the insurers directly; and (3) the settlement agreement is admissible in the coverage litigation, not subject to collateral attack, and could be used to establish the amount of Cobalt’s loss. The Fourteenth Court denied mandamus relief.
Issues:
(1) Does an insured suffer a “loss” under a liability policy when its settlement agreement with the claimant doesn’t require the insured to pay money and limits the claimant’s recovery to any liability coverage available under the policy?
(2) Can a claimant that agrees in a settlement agreement to look only to the insured’s insurance policies for recovery sue the insurers directly for insurance benefits?
(3) Is the insured-claimant settlement agreement binding on the insurer or admissible as evidence to establish coverage or the amount of loss?
Court’s Holdings:
(1) Yes. The insured suffered a covered “loss” because the settlement agreement legally obligated the insured to pay the claimant any insurance benefits it receives in its coverage dispute with the insurers. The insurance policies are assets that belong to the insured, and liability policies like those at issue here require the insurers to pay benefits on behalf of the insured regardless of whether the insured actually pays. In so holding, the Texas Supreme Court rejected the notion that the claimant’s covenant not to execute on the judgment prevents the insured from having a legal obligation to pay under the settlement agreement.
(2) Yes. Because the settlement agreement established that the insured had a legal obligation to pay its insurance benefits to the claimant, the claimant can sue the insurers directly to recover under the policies. Although the “no direct action” rule generally bars claimants from suing a defendant’s insurer directly, it doesn’t apply once the insured’s legal obligation to pay the claimant is established by judgment or settlement.
(3) No. Because the settlement agreement didn’t result from a “fully adversarial proceeding,” it isn’t binding against the insurers or admissible to establish coverage or the amount of the insured’s loss.
What It Means:
- The Court confirmed that, in the subsequent coverage litigation against the insurer, a settlement agreement between the insured and the claimant—which protects the insured “against any ‘actual risk of liability’ beyond its obligation to pay insurance benefits it may or may not receive”—would be neither binding nor admissible because it didn’t “result from a fully adversarial proceeding.”
- Although mandamus is generally “unavailable when a trial court denies summary judgment, no matter how meritorious the motion,” the Court held that the insurers had no adequate remedy by appeal because the trial—at which the insurers wouldn’t be able to challenge their liability for the full amount of the settlement agreement—would’ve been “a complete waste of the courts’ and parties’ resources.”
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 Texas 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] |
| Brad G. Hubbard +1 214.698.3326 [email protected] |
Insurance and Reinsurance
| Geoffrey Sigler +1 202.887.3752 [email protected] |
Deborah L. Stein +1 213.229.7164 [email protected] |
Related Practice: Texas Litigation
| Trey Cox +1 214.698.3256 [email protected] |
Collin Cox +1 346.718.6604 [email protected] |
Andrew LeGrand +1 214.698.3405 [email protected] |
| Russ Falconer +1 346.718.3170 [email protected] |
This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, and Bryston Gallegos.
© 2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact and other information, please visit us at www.gibsondunn.com.
Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.