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On October 31, 2022, Nathan Nephi Zito pleaded guilty in the US District Court for the District of Montana for his attempt to monopolize the markets for highway crack-sealing services in Montana and Wyoming. This marks the first win for the US Department of Justice (DOJ) in a criminal monopolization case in more than 40 years. In a statement made on October 31, Assistant Attorney General Jonathan Kanter of the DOJ’s Antitrust Division emphasized the DOJ’s continued focus on prosecuting “blatant and illegitimate monopoly behavior that subjects the American public to harm.” 

DOJ began signaling its interest in criminally prosecuting monopolization cases under Section 2 of the Sherman Act earlier this year. In a January 2022 speech, Assistant Attorney General Kanter noted the “dearth of Section 2 case law addressing modern markets.” The criminal prosecution of monopolization cases opens a new area of focus for DOJ and is a major departure from longstanding DOJ policy that has generally shied away from Section 2 criminal prosecutions. In the last decades, the majority of criminal cases brought by the Antitrust Division involved Section 1 of the Sherman Act (which prohibits anticompetitive agreements that restrain trade or commerce, deeming them per se illegal because they have been found to produce little to no procompetitive outcomes.)  The last criminal prosecution under Section 2 was brought in the late 1970s against two airlines for conspiring to exclude a competing airline.

Later, in March 2022, DOJ formally announced that it intended to investigate and pursue alleged Section 2 monopolization violations by individuals and companies. Speaking at the ABA’s White-Collar Conference in San Francisco, Former Deputy Assistant Attorney General Richard Powers announced that the Antitrust Division would shift towards Section 2 enforcement and that the Antitrust Division intended to investigate and pursue alleged Section 2 violations by individuals and companies.

Despite speculation that the rebirth of Section 2 criminal prosecutions would involve allegations of product bundling, predatory pricing, or exclusionary dealing arrangements, the prosecution and plea of Mr. Zito, alas, offers nothing nearly as interesting, and appears to cover conduct that, but for the absence of success in reaching an “agreement” with a competitor, would normally fall within the scope of Section 1. If Mr. Zito had not pleaded guilty to a violation of Section 2, DOJ could have alternatively sought to prosecute him on wire fraud charges where he could have faced a significantly longer prison sentence (10 years under the Sherman Act versus 20 years for wire fraud). This disparity may have incentivized Mr. Zito to become the first individual in decades to plead guilty to a Section 2 offense.

Zito is the owner and president of a Billings, Montana-based paving and asphalt construction company. On September 19, he was charged with one count of knowingly engaging in anticompetitive conduct with the intent to gain monopoly power. According to the charge, Zito approached a competitor as early as January 2020 and proposed that the competitor stop competing with Zito’s company for highway crack-selling projects in Montana and Wyoming. In exchange, Zito would leave the South Dakota and Nebraska markets to the competitor. To incentivize this “strategic partnership,” Zito also offered to pay the competitor $100,000 as additional compensation for lost business in Montana and Wyoming. According to the plea agreement, this scheme is directly in violation of Section 2 of the Sherman Act, which makes it a felony to “monopolize any part of the trade or commerce among the several States, or with foreign nations.” Notably, this also includes attempts to monopolize, and does not require evidence of any agreement, as Zito found out the hard way, when the prospective co-conspirator contacted the government. This is different than Section 1 cases where an agreement or “meeting of the minds” is required.

Zito faces a maximum sentence of 10 years’ imprisonment and a maximum fine of $1 million. His sentencing is scheduled for February 23, 2023. The plea is a result of an investigation conducted by the DOJ Antitrust Division’s San Francisco office, the US Attorney’s Office for the District of Montana, and the Department of Transportation Office of Inspector General. This effort was a part of the DOJ’s Procurement Collusion Strike Force (PCSF), a joint law enforcement group created in November 2019 to combat antitrust crimes and related fraudulent schemes in the government procurement, grant, and funding areas. The PCSF has been responsible for many of the Antitrust Division’s recent investigations.

This charge and corresponding guilty plea illustrate that the DOJ officials’ statements regarding the focus on heightened enforcement of Section 2 were not empty threats. However, it is unclear whether the Antitrust Division will use Section 2 to criminally prosecute more traditional monopolistic behavior (i.e., exclusive dealing arrangements, predatory pricing, product-bundling), or whether Section 2 will be used merely as a means to seek criminal sanctions for unsuccessful attempts to reach agreements proscribed under Section 1.

It is also important to keep in mind that the Antitrust Division’s leniency program does not apply to Section 2 of the Sherman Act; it applies only to Sections 1 and 3(a) of the Act. Therefore, when a company finds evidence of employees seeking to reach an agreement with competitors to fix prices, rig bids or allocate markets, it should, prior to availing itself of the leniency program, assess whether there is sufficient evidence that an agreement had ultimately been reached. Otherwise, they could end up disclosing conduct to the Antitrust Division that it may choose not to, and may not even be authorized to, grant leniency for.

Finally, it is worth noting that Section 2 criminal prosecutions based on more traditional monopolistic behavior will be much more difficult to bring and prove than those based solely on attempted Section 1 violations, because Section 2 requires proof of both the defendant’s market power and that his/her conduct had anticompetitive effects. Given the Antitrust Division’s string of recent trial losses based on previously untested theories of criminal liability (read: no-poach), we suspect that the Division may take its time and act deliberately in finding and developing a strong first criminal case under Section 2 that is based on more traditional monopolistic behavior.

In this issue:

  • A settlement involving a construction company that improperly claimed credit for using disadvantaged business entities on federally-funded New Jersey construction contracts that did not actually perform the work.
  • An Anti-Kickback Statute case where the district court denied defendant’s motion to compel certain Medicare claims data and rejected the “benefit of the bargain” approach to damages for AKS-tainted Medicare claims.
  • An FCA case involving a motion to stay discovery during the pendency of a dispositive motion.

NJ Construction Co. Settles Out of Turnpike FCA Suit

Industry: Construction

Topics: Subcontractor liability, Disadvantaged Business Entities Program

A New Jersey construction company, C. Abbonizio Contractors (C. Abbonizio), settled a False Claims Act lawsuit alleging that the company misrepresented the amount of subcontract work performed by socially and economically disadvantaged business entities (DBEs) in connection with a federally-funded New Jersey Turnpike project.[1]

C. Abbonizio received a $39 million subcontract from PKF Mark II (PKF) to perform earthwork and pipe installation in support of PKF’s prime construction project. PKF’s prime contract required PKF to make a good faith effort to subcontract 15% of the total contract value to DBE subcontractors. As a result, as part of its subcontract, C. Abbonizio agreed to use DBEs to complete 15% of its work. According to the Government, C. Abbonizio, however, circumvented this requirement and paid DBEs to serve as “middlemen” and purchase materials from other businesses while creating invoices that made it appear as though the DBEs were actually performing the work. The government alleged that one of the companies that C. Abbonizio used as an intermediary put magnetic signs with its own logo on another company’s truck. C. Abbonizio transmitted information to PKF asserting that these pass-through entities were performing work in order for PKF to claim DBE participation credit. In turn, PKF included this information in reports to New Jersey Department of Transportation claiming DBE credit.[2]

Takeaway: This settlement serves as a reminder that subcontractors are also subject to FCA liability where they mislead prime contractors and cause false claims to be passed on to the government.

 

United States v. Teva Pharms. USA, Inc., No. 20-CV-11548 (NMG), 2022 WL 6820648 (D. Mass. Oct. 11, 2022)

Industry: Healthcare

Topics: Anti-Kickback Statute, Discovery Issues

In one of the numerous ongoing enforcement efforts out of the US Attorney’s Office in Boston relating to the pharma industry’s funding of patient assistance foundations, the District of Massachusetts last week overruled defendant Teva Pharmaceuticals’ (Teva) objection to a magistrate judge’s denial of Teva’s motion to compel the production of Medicare claims data to assess and rebut the Government’s allegations that Teva’s program, which donated $328 million to two third-party foundations to cover patients’ copays for Copaxone, a multiple sclerosis drug manufactured by Teva, violated the FCA as violations of the Anti-Kickback Statute (AKS).

Prior to Teva’s filing of the motion to compel, the government produced “all data concerning Medicare Part D Copaxone claims from January 1, 2006 to December 31, 2017.” In its motion to compel, however, Teva sought additional data, including all claims for drugs and medical services submitted by Medicare patients with multiple sclerosis, and all records describing the timeframes during which Medicare beneficiaries diagnosed with multiple sclerosis had Medicare coverage, as well as the types of coverage.

The magistrate judge denied Teva’s motion, finding that the requested data was irrelevant to (1) Teva’s price increases for Copaxone, (2) Teva’s intent to induce purchases, (3) the government’s conspiracy claim, (4) additional penalties, and (5) calculation of damages. Teva objected to the magistrate judge’s ruling, asserting that framing the denial on relevance grounds rather than Federal Rule of Civil Procedure 26(b)(1) proportionality standards was erroneous. Teva asserted that the requested data was proportional and relevant to damages and liability. Teva also objected to the magistrate judge’s order, claiming that the requested claims data would allow Teva to develop evidence of the government’s true loss, and the data was necessary to show which patients received assistance from the two foundations for non-Copaxone drugs that were reimbursed.

Applying the “clearly erroneous” standard of deference to the magistrate judge’s ruling, the court overruled Teva’s objections.

First, the court held that the parties briefed the Rule 26(b)(1) factors and that it was not clearly erroneous for the magistrate to conclude that producing this data would be a significant burden to the government, and the application of a relevance rather than proportionality standard was not clearly erroneous.

Second, the court rejected Teva’s contention that it required data showing which patients received assistance from the two foundations, because, to be liable under the FCA’s AKS provision, it is only relevant that Teva intended to induce patients to purchase Copaxone through its donations.

Third, relatedly, the court found that the data also was not relevant to Teva’s argument that price increases were due to market forces and not Teva’s donations because Teva’s drug pricing could not be based on the requested Medicare data that Teva never had access to.

Fourth, the court agreed with the magistrate that the evidence related to the reimbursement of non-Copaxone claims was irrelevant to the government’s conspiracy allegation because that data “is not indicative of the existence of a conspiracy.”

Fifth, the court only briefly addressed Teva’s allegation that the requested data was relevant to FCA penalties. The court, however, held the order was not clearly erroneous because Teva did not adequately demonstrate the relevancy of the data.

Finally, the court rejected Teva’s argument that it required sales cost data to respond to the government’s calculation of damages and determine damages under a “benefit of the bargain” approach. The court, however, explained that there was no authority to support the “benefit of the bargain” approach to calculating damages for AKS-tainted Medicare claims. Rather, the damages are equal to the full value of the AKS-tainted Medicare claim – an approach not yet adopted by the First Circuit but adopted by other circuits.[3]

Takeaways: This case reiterates that any requests for production in civil False Claims Act cases must request information directly relevant to an element of the alleged violation. Teva failed because the overly-expansive document request could not relate to the elements of the claim. This decision also is significant in its rejection of a “benefit of the bargain” theory of damages, opting instead to treat claims tainted by kickbacks as having zero value for damages purposes, adding further to the disagreement among courts as to the appropriate measure of damages for AKS-tainted claims.

 

United States v. Physician Surgical Network, Inc., No. 6:20-cv-1582 (WWB-EJK), 2022 WL 6163122 (M.D. Fla. Oct. 7, 2022):

Topic: Discovery Issues

The District Court for the Middle District of Florida recently issued a decision denying a defendant’s motion to stay discovery in an FCA lawsuit, despite a pending motion to dismiss. The court reasoned that a pending dispositive motion alone does not justify staying discovery. Rather, the court explained that the movant must show good cause and reasonableness, and the court must look to the merits of the pending dispositive motion to see if its meritorious and truly case dispositive.

The defendant argued that the plaintiff’s complaint was defective and that the plaintiff sought “overbroad and expansive” discovery that would be unduly burdensome and, if the motion to dismiss was granted, result in unnecessary costs to the litigants and the court. In reviewing the defendant’s motion, the court weighed the harm of delay against the possibility that the pending motion to dismiss would be granted, obviating the need for discovery.

Ultimately, while acknowledging that discovery can be costly and time-consuming, the court rejected the defendant’s argument. First, the court concluded that the motion to dismiss could not be considered “likely meritorious,”— meaning that there was not a likelihood that the motion to dismiss would be granted based on a preliminary review of the motion’s merits. Second, the court held that with the discovery deadline of February 2, 2023, a stay would cause management issues by “condensing the time to engage in discovery and to resolve any resulting motions.” The court, however, noted that the defendant could prepare a separate motion to address any unduly burdensome discovery requests.

Takeaways: If a court deems a dispositive motion not likely to be meritorious, then the court is unlikely to stay discovery during the pendency of the dispositive motion even though discovery might be costly to a party and ultimately obviated if the motion.

 

[1] The government included C. Abbonizio’s president in the initial suit, but the court ultimately dismissed the president from the case in March 2021 finding that the government failed to show a direct connection between the president and the company’s scheme.

[2] The terms of the settlement have not been made public.

[3] See, e.g., United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015) (noting in an illegal referral case that the “the government has suffered injury equivalent to the full amount of the payments”); United States v. Rogan, 517 F.3d 449, 453 (7th Cir. 2008) (stating in a case involving kickback-tainted Medicare claims that the damages constituted the entire amount of the claims at issue).

Time for another update…

The United States Asserts Its Position on Rule 9(b) Before Supreme Court in Response to Owsley Cert Petition

The Solicitor General’s office has once again expressed its view that the Supreme Court should deny a petition for a writ of certiorari requesting that the Court clarify the pleading standard – specifically the level of particularity required under Federal Rule of Civil Procedure 9(b) – to plead a claim under the False Claims Act (FCA). On September 9, 2022, the Solicitor General submitted an amicus brief in United States ex rel. Owsley v. Fazzi Associates, Inc., 21-936, expressing that it was the view of the United States that the Supreme Court should deny the petition for writ of certiorari. In May 2022, the Solicitor General urged the Supreme Court to deny a petition for writ of certiorari in another Rule 9(b) FCA case – Johnson et al. v. Bethany Hospice and Palliative Care LLC, 21-462.

Background

The writ for petition of certiorari in Owsley requests review of a Sixth Circuit decision affirming dismissal of a relator’s FCA complaint for failure to meet Rule 9(b)’s particularity standard.[1] In Owsley, the relator, a quality assurance nurse, alleged that her employer, a home health agency, and the other respondents consisting of other home health agencies and healthcare organizations, altered patient data to make patients appear sicker in order to submit upcoded or inflated claims for Medicare reimbursement.

The Sixth Circuit affirmed the district court’s dismissal of the relator’s complaint, reasoning that although the complaint “describe[d] in detail, a fraudulent scheme,” and alleged “personal knowledge of the billing practices employed in the fraudulent scheme,” the relator had “ma[de] little effort . . . to identify any specific claims that [the Appellee] submitted pursuant to the scheme.”[2] The Sixth Circuit explained that “the touchstone is whether the complaint provides the defendant with notice of a specific representative claim that the plaintiff thinks was fraudulent.”[3]  The relator had failed to meet this burden.

Solicitor General’s Amicus Brief

Although there has been much discussion in recent years surrounding the application of Rule 9(b) by federal courts, the Solicitor General’s brief asserts that courts “have largely converged” on an approach that provides relators with two paths to satisfy the requirements of Rule 9(b): Relators can either “identify specific false claims,” or “plead other sufficiently reliable indicia supporting a strong inference that false claims were submitted to the government.”[4]

Contrary to Petitioner’s assertions that circuit courts were divided on the requirements of the 9(b) pleading standard, the Solicitor General’s brief argued that “[t]he divergent outcomes in the courts of appeals . . . simply reflect courts’ application of a fact intensive standard to a range of different types of allegations.”[5] As a result, the Solicitor General argued, the Supreme Court’s further review would be unlikely to produce greater uniformity or clarify the Rule 9(b) pleading standard. The Solicitor General also noted that in an invited amicus curiae brief in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., 572 US 1033 (2014) (No. 12-1349), the United States opposed adoption of a “per se rule that a relator must plead the details of particular false claims – that is, the dates and contents of bills or other demands for payment – to overcome a motion to dismiss.”[6] According to the United States, such a rule would undermine the FCA’s effectiveness. Rather, a relator’s complaint satisfies Rule 9(b) if it “alleges particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”[7] The Solicitor General’s brief asserts that the circuit courts have consistently applied this standard.

Takeaways: There are three pending petitions for writ of certiorari before the Supreme Court requesting that the Court resolve the purported Circuit split as to the FCA pleading standard. For two of those petitions – Owsley and Johnson v. Bethany Hospice and Palliative Care LLC, Case No. 21-462 – the Court invited the Solicitor General to submit briefs expressing the views of the United States. In both instances, the Solicitor General urged the Court to decline review. It remains to be seen whether the Court will take up any of the three cases. While the Solicitor General has indicated that the Supreme Court’s review is not necessary, greater clarity regarding the heightened pleading standard for FCA complaints could discourage the filing of baseless FCA qui tam complaints or encourage the resolution of such complaints at the motion to dismiss stage.

DOJ Announces First Ever FCA Settlement Involving PPP Lender

Industry: Banking

Topic(s): PPP

Summary: The Department of Justice (DOJ) recently announced its “first ever” False Claims Act settlement received from a Paycheck Protection Program (PPP) Lender. According to DOJ, Prosperity Bank, a regional bank, approved and processed a PPP loan in the amount of $213,400 for Woodlands Pain Institute PLLC, a primary care institute, even though bank employees knew that Dr. Emad Bishai – the sole owner of Woodland Pain Institute – had falsely certified that no one with more than 20% equity in the applicant entity was subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction. Contrary to Dr. Bishai’s response of “no,” Dr. Bishai was facing criminal charges related to the prescribing of opioid medicines. Bank employees were apparently aware of these criminal charges and processed the loan anyway. Prosperity Bank received a 5% processing fee ($10,670). Prosperity has agreed to pay the government $18,000 as part of its settlement.

Dr. Bishai entered into a separate settlement for $523,331 in November 2021 to resolve his liability arising from fraudulent medical billing and his submission of the PPP loan application. According to DOJ’s press release, Dr. Bishai repaid the PPP loan in full in 2022.

Akorn Operating Company, LLC Settlement

Industry: Healthcare

Topics: Medicare Part D; Federal Food, Drug, and Cosmetic Act

DOJ recently announced that it had reached a settlement with pharmaceutical firm Akorn Operating Company LLC (hereinafter Pharmaceutical Company), which agreed to pay $7.9 million to resolve allegations that it had violated the FCA by causing the submission of false claims to Medicare Part D for three generic drugs that were no longer eligible for Medicare coverage.

Medicare Part D provides coverage for drugs that may be dispensed only upon a prescription, and excludes coverage for “over the counter” (OTC) drugs. The Food and Drug Administration (FDA) approved three generic pharmaceutical products manufactured and sold by Pharmaceutical Company as “prescription use only” (Rx-only) drugs based on the approval given for the equivalent “Reference Listed Drug” (RLD) for each product.

In certain circumstances, drug manufacturers may initiate a change in marketing status for their products from Rx-only to OTC through a process referred to as an “Rx-to-OTC switch.” However, both Rx-only and OTC versions of the same drug may not be marketed at the same time pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Therefore, when the RLD for a generic drug is approved for a switch to OTC use, the manufacturer of a generic equivalent must either seek FDA approval for its own product to switch to OTC status or withdraw its generic’s Rx-only status and stop marketing it.

The FDA approved full Rx-to-OTC conversions of the brand names of three generic drugs manufactured and sold by Pharmaceutical Company in February 2020 and June 2021. This meant that each of these RLDs could be marketed by the relevant application holders for OTC use, could no longer be marked as an Rx-only drug, and were no longer approved to state “Rx-only” on its label or packaging.

The United States alleged that Pharmaceutical Company submitted or caused to be submitted false claims to Medicare Part D, in violation of the FCA, by continuing to sell three generic drugs under Rx-only labeling after the RLDs were converted to OTC drugs. As part of the settlement, Pharmaceutical Company admitted, acknowledged, and accepted responsibility for delaying seeking the required OTC conversions for its three generic drugs, even after learning that their RLDs had been converted to OTC status. In particular, Pharmaceutical Company delayed these conversions because it believed that selling them as Rx-only would be profitable for the company. Pharmaceutical Company also caused the submission of false claims to Medicare Part D by continuing to sell each product under its Rx-only labeling because Medicare does not cover non-prescription drugs and no meaningful difference existed between these products and their now-OTC RLDs.

The settlement resolves a lawsuit brought under the qui tam or whistleblower provisions of the FCA.

Takeaway: Pharmaceutical Company’s settlement demonstrates that the FCA is a powerful tool for combatting misbranding violations under the FDCA.

Other Noteworthy Decisions:

United States ex rel. Clarissa Zafirov v. Fla. Med. Assocs. LLC, 2022 WL 4134611 (M.D. Fla. Sept. 12, 2022)

Industry: Healthcare

Topics: Medicare Advantage, Public-Disclosure Bar, Rule 9(b)

Summary: Relator Clarissa Zafirov, a family care physician, brought suit against Florida Medical Associates doing business as VIPcare, Physician Partners, LLC, and Anion Technologies, LLC (collectively, the Provider Defendants) as well as Medicare Advantage (MA) insurers Freedom Health, Inc, and Optimum Healthcare, Inc. (the MA Defendants), alleging that the Provider Defendants acted in concert with the MA Defendants to artificially increase the risk adjustment scores of their MA enrollees, which in turn fraudulently increased their capitated payments from the government. The Provider Defendants were alleged to have pressured physicians through various means to falsely select only “risk-adjusting diagnosis codes” for patients and submitted unsupported codes if physicians did not comply; “risk-adjusting diagnosis codes” are codes which are predicted to require more expensive treatments and lead to increased Medicare reimbursements. The MA Defendants were alleged to have in turn submitted these incorrect diagnosis codes to Centers for Medicare and Medicaid Services (CMS) in order to increase the capitated payments; the MA Defendants allegedly failed to conduct the oversight of the Provider Defendants required by Medicare, and to take an active role in the Provider Defendants’ operations.

Zafirov’s first FCA complaint was dismissed without prejudice for: (1) failure to allege the FCA violations with the particularity required by Rule 9(b); (2) failure to clear the public-disclosure bar; and (3) because the initial complaint was a “shotgun pleading.” Zafirov filed an Amended Complaint and the Defendants again moved to dismiss the Amended Complaint (1) for failure to plead the FCA claims with particularity; and (2) based on the government action bar.

Regarding Defendants’ Rule 9(b) argument, the Court previously dismissed the initial complaint because it failed to “provide the dates these codes were submitted, the name of the individual or individuals that submitted the codes, how these codes impacted the amount of money that the defendants received from the federal government (materiality), or copies of a single bill or payment,” and because the relator did not allege any personal knowledge of the MA Defendants’ conduct.[8] The Court held that these defects were now cured in the Amended Complaint. Indeed, the Amended Complaint added nearly 100 pages of detailed allegations, including more than twenty examples of specific patients and claims. The Amended Complaint also newly alleged that Zafirov had access to the MA Defendants’ online portal and access to the records of the diagnosis codes submitted to the government. The Court held that Zafirov’s statements in the Amended Complaint alleging personal knowledge of the Provider Defendants’ medical records and access to the MA Defendants’ online portal provided the requisite indicia of reliability and, therefore, satisfied the Rule 9(b) standard. Defendants also alleged that Zafirov failed to sufficiently allege Defendants’ knowledge of falsity, the materiality of the alleged false statements, and causation, all of which the Court rejected.

The government-action bar prevents relators from bringing FCA suits “based upon allegations or transactions which are subject to a civil suit or an administrative civil money penalty proceeding in which the [g]overnment is already a party.” 31 USC. § 3730(e)(3). In deciding whether the government-action bar applies, courts look to whether the qui tam case brought by the relator receives support or advantage from the case in which the government is a party without giving anything useful or proper in return to the government.[9] Here, Defendants asserted that the Amended Complaint tracks the allegations set forth in United States ex rel. Sewell v. Freedom Health, et al., Civil Action No. 8:09-CV-01625 (M.D. Fla.), an FCA suit in which the MA Defendants had already agreed to pay $31,695,593 to settle similar allegations of submitting “unsupported diagnosis codes to CMS, which resulted in inflated reimbursements from 2008 to 2013 in connection with two of their Medicare Advantage plans operating in Florida.”[10] The Court determined that the Defendants’ arguments were inapplicable for two reasons. First, the Amended Complaint did not rely upon Sewell with respect to the Provider Defendants because the Provider Defendants were “neither named nor specifically identified in Sewell and none of the allegations against them were ever raised in that case.”[11] Second, the Court found material differences between the allegations against the MA Defendants in the Amended Complaint and Sewell such that if Zafirov succeeded, the government would receive a financial recovery beyond what was recovered in Sewell. The Court further noted that courts have considered the government’s views as a factor in applying the government-action bar and here, the government opposed dismissal and indicated a belief that Zafirov’s theory of the case is sound (even though it had decided not to intervene).

Takeaways: This decision highlights that allegations providing multiple specific examples of conduct alleged to violate the False Claims Act supported by a relator’s personal knowledge possess indicia of reliability sufficient to meet the Rule 9(b) particularity requirement. In addition, it is noteworthy that the Court placed significant weight on the government’s perception of the relator’s allegations and their lack of overlap with related proceedings in evaluating whether the government-action bar applies.

 Endnotes

[1] United States ex rel. Owsley v. Fazzi Associates, Inc., 16 F.4th 192 (6th Cir. 2021)

[2] Id. at 196-97 (internal citations and quotation marks omitted).

[3] Id. at 197.

[4] Brief for the United States as Amicus Curiae at 8, United States ex rel. Owsley v. Fazzi Associates Inc., No. 21-936 (US Sept. 9, 2022).

[5] Id.

[6] Id. at 9 (internal quotation marks omitted).

[7] Id.

[8] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *4 (M.D. Fla. Sept. 12, 2022).

[9] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *8 (M.D. Fla. Sept. 12, 2022).

[10] DOJ Press Release, Medicare Advantage Organization and Former Chief Operating Officer to Pay $32.5 Million to Settle False Claims Act Allegations (May 30, 2017),  https://www.justice.gov/opa/pr/medicare-advantage-organization-and-former-chief-operating-officer-pay-325-million-settle.

[11] United States v. Fla. Med. Assocs. LLC, 2022 WL 4134611, at *8 (M.D. Fla. Sept. 12, 2022)

Judicial Decisions

United States ex rel. Mackillop v. Grand Canyon Education, Inc., et al., 2022 WL 4084444 (D. Mass.)

Industry: Higher Education

Topics: Materiality, Scienter

In Mackillop, the relator, a university counselor, brought suit against Grand Canyon Education, Inc., an educational service company that provides support services to colleges and universities, and Grand Canyon University (collectively Grand Canyon), alleging that Grand Canyon violated the FCA by applying for and receiving federal grants and financial aid while failing to disclose its violations of the “Incentive Compensation Ban” (Compensation Ban) – a statute and set of Department of Education regulations that prohibit schools from compensating counselors and recruiters on the basis of how many students they enroll.

After the close of discovery, Grand Canyon moved for summary judgment on three grounds: (1) there was no evidence of any violation of the Compensation Ban; (2) there was no triable evidence that representations regarding Grand Canyon’s compliance with the Compensation Ban were material; and (3) there was no triable evidence that Grand Canyon’s misrepresentations were made with knowledge of their falsity.

The court denied Grand Canyon’s summary judgment motion. Regarding Grand Canyon’s argument that there was no evidence of a Compensation Ban violation because its compensation plans were based on tenure, the court found a dispute of material fact as to whether there were such violations given evidence that Grand Canyon’s compensation plans were based on both tenure and sales volume.

Grand Canyon also argued that any such misrepresentation was not material, because the government knew of its alleged violations, including by virtue of the filing of the instant case, and took no action in response. The Court rejected this argument for three reasons. First, the relator’s complaint was merely a set of allegations, and courts should not rely on the government’s response to mere allegations in assessing materiality. Second, the government disputed that it had actual knowledge of Grand Canyon’s alleged violations. Although Grand Canyon asserted that it submitted the compensation plans at issue to the Department of Education, there was a factual dispute as to whether such submissions occurred given the Department of Education’s denials of ever having received them. Third, the court held that even if the government had knowledge, there was evidence that there were legitimate reasons why the government might not withdraw funding even after learning of the non-compliance, such that the government’s knowledge of the wrongdoing was not by itself dispositive on the issue of materiality.

Lastly, Grand Canyon urged the Court to apply the Safeco standard in analyzing scienter and argued that the undisputed facts demonstrated that Grand Canyon intended for the school to comply with the Compensation Ban, as shown by (1) Grand Canyon’s dedication of significant resources towards designing policies for compliance, and (2) that Grand Canyon did not knowingly or recklessly violate the Compensation Ban.

The Safeco standard provides a framework to analyze scienter for legally false claims. Under the standard, a defendant who acted under an incorrect interpretation of the relevant underlying statute or regulation did not act with reckless disregard if, regardless of the defendant’s subjective intent, “(1) the interpretation was objectively reasonable and (2) no authoritative guidance existed that might have warned defendant away from its interpretation.” [1] The court recognized that while some courts have applied the Safeco standard to evaluate scienter, others applied a similar, but distinguishable “gross-negligence” – plus standard, defining recklessness as a “state of mind in which one ‘knows or has reason to know of facts that would lead a reasonable person’ to ascertain that harm is likely.”[2] While recognizing this split, the Court nonetheless did not decide the issue of what standard should apply because it determined that there was a disputed factual issue under either standard, given evidence of Grand Canyon’s ignoring explicit instructions by its attorneys not to engage in the conduct alleged to have violated the Compensation Ban.

Accordingly, the court denied Grand Canyon’s motion for summary judgment in its entirety.

Takeaways: As this decision notes, the circuit split on the applicability of Safeco to the FCA’s “knowledge” element is not a binary one, with the Fourth Circuit having staked out its own position on Safeco in United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 347–48 (4th Cir. 2022).

This decision also highlights the limitations of arguing the government’s knowledge of the falsity of the claim as a defense against materiality. The court viewed materiality as a disputed issue where even if the government knew of the false claims, there were legitimate reasons for the government not to seek recoupment of the allegedly false claims.

Continue Reading First to File: Issue 2 (The week of Sept. 5-9, 2022)

This year, we have witnessed an extraordinary set of coordinated economic sanctions and export control regulatory actions against Russia after its invasion of Ukraine. In contrast to the fast and furious pace of regulatory action, enforcement actions did not keep pace.

This year’s enforcement actions by the US Treasury Department’s Office of Foreign Assets Control (OFAC) are notable for their jurisdictional reach and expansion of liability theories that aren’t necessarily supported by the plain language of their regulatory authority. The Commerce Department’s Bureau of Industry & Security (BIS) enforcement actions have targeted the aerospace industry, especially in relation to Russia and Belarus. The Department of Justice (DOJ) expended much of its resources on seizing and forfeiting assets linked to Russian oligarchs, galvanizing its multilateral networks.

Interestingly, OFAC continued to target the Iranian petroleum and petrochemical sector despite news reports of intensive negotiations to revive the Joint Comprehensive Plan of Action (JCPOA).

Below we discuss some representative enforcement actions to date.

Continue Reading What to Expect Next? US Economic Sanctions and Export Controls Enforcement Actions Thus Far in 2022

On June 15, 2022, the District Court for the Southern District of New York dealt a blow to former Citigroup Inc. (Citi) trader Rohan Ramchandani in his malicious prosecution lawsuit against his former employer.[1] Magistrate Judge Stewart D. Aaron denied Ramchandani’s motion to compel Citi to produce attorney notes of DOJ meetings and other privileged and protected documents because Ramchandani failed to show that he could not obtain the substantial equivalent of the protected documents from sources other than attorney memoranda without undue hardship.

Background

Ramchandani’s lawsuit originates from 2013 investigations by the DOJ and the United Kingdom’s Financial Conduct Authority (FCA) into the alleged manipulation of foreign exchange rates in the foreign exchange spot market. Ramchandani was the former European head of Citibank’s foreign exchange spot market trading desk during the relevant time period.

Citi initiated its own internal investigation soon after, represented by outside counsel from Cleary Gottlieb Steen & Hamilton LLP (Cleary). As part of the investigation, counsel interviewed Ramchandani in early 2014 about his trading activities and Bloomberg chat communications. A few weeks after the interview, Citi suspended, and eventually terminated, Ramchandani.

In 2017, Ramchandani was indicted alongside two traders from other financial institutions for using a Bloomberg chatroom to fix foreign exchange rates. A federal jury acquitted Ramchandani in 2018.

Ramchandani then filed a malicious prosecution suit against Citi, alleging that his former employer cooperated with regulators as part of a scheme to deflect the blame for any wrongdoing onto him. According to the complaint, Citi’s outside counsel assisted DOJ by identifying incriminating Bloomberg chats and misrepresenting the meaning of the chatroom communications, which were often written in complex trading parlance, leading Ramchandani to be indicted, and ultimately acquitted, of colluding to affect daily benchmark rates.

The court ordered Citi to provide a document-by-document privilege log, including Cleary’s notes and memoranda of discussions with the DOJ. Ramchandani identified 50 documents to the court for in camera review that were withheld on the basis of attorney-client privilege and work product doctrine. He subsequently filed a motion to compel those documents.

Legal Standard

New York Law provides a statutory protection for attorney-client communications. The privilege applies if the communication was made “for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship.”[2] Disclosure to a non-counsel third party can waive the privilege.

Under federal law,[3] the work product doctrine is broader than the attorney-client privilege. It protects fact work product, which covers factual material, and opinion work product, which covers “mental impressions, conclusions, opinions, or legal theories.”[4] To assert the doctrine, a party must show that the material was prepared in anticipation of litigation. An exception exists where the opposing party shows (i) a substantial need for the materials and (ii) cannot without undue hardship obtain a substantial equivalent by other means. However, a showing of substantial need and undue hardship may not be enough to set aside the presumptive immunity of opinion work product from disclosure.[5]

The Court’s Analysis and Holding

The court analyzed four categories of documents that Ramchandani sought to compel: (1) attorney memoranda and emails of Citi’s meetings with DOJ; (2) communications between legal counsel and Citi’s public relations personnel; (3) documents concerning Ramchandani’s suspension and termination; and (4) annotated copies of Ramchandani’s chatroom communications.

Memoranda and Emails

The court determined that the memoranda and emails of Citi’s meetings with DOJ were prepared in anticipation of litigation and were protected work product.[6] Although Ramchandani demonstrated a substantial need for the documents—given that the case turned on what information Citi provided to the DOJ—the court found that Ramchandani failed to show that he could not obtain substantially equivalent information without undue hardship.[7]

The court relied on five reasons for finding a lack of undue hardship.[8] First, Ramchandani already received DOJ’s notes of its meetings with Cleary. Second, he had an opportunity to ask a DOJ witness about the DOJ meetings with Cleary at a deposition and failed to do so. Third, Ramchandani still had the opportunity to depose someone at Cleary as to what occurred at the meeting. Fourth, Cleary offered Ramchandani’s counsel an oral proffer about the DOJ meetings in a related OCC action. And fifth, Ramchandani’s counsel had a written OCC stipulation about the DOJ meetings; he is also permitted to ask questions about the stipulation at the Cleary deposition. Because Ramchandani either already had substantially equivalent information or has and had opportunities to acquire that information, the work product doctrine exception was unavailable to him and the memoranda and emails remain protected from disclosure.

Communications with Citi’s Public Relations Personnel

Counsel’s communications with Citi’s public relations personnel were held to be protected by the attorney-client privilege.[9] Ramchandani alleged that the public relations communications were not legal advice, but rather intended to “facilitate the scapegoating scheme.”[10] The court recognized that public relations advice was still legal advice where the legal ramifications of the communications were material factors in developing them. Thus, the majority of the communications were held to be protected from disclosure because they reflected communications made for the purpose of providing legal advice.[11]

Documents Concerning Suspension and Termination

Documents that discussed Ramchandani’s suspension and termination were similarly held to be protected by the attorney-client privilege.[12] Ramchandani claimed that Citi was attempting to shield documents related to the suspension and termination “under a cloak of privilege.”[13] Regardless of motivation, the district court found that the majority of the documents were privileged because the emails reflected communications made for the purpose of rendering legal advice.

Annotated Bloomberg Chats

The court held that Cleary’s annotations of Ramchandani’s Bloomberg chatroom history were also protected under the work product doctrine. During it’s in camera review, the court noted that Cleary discussed and “walked through” these annotations of the Bloomberg chats with DOJ.[14] The court subsequently issued an order to show cause why any privilege or work product protection associated with the chats had not been waived. In briefing, Citi asserted that the chats were (i) mental impressions made in preparation for the DOJ meeting; (ii) the attorneys did not use each annotation verbatim; and (iii) the attorneys also used internal annotations with longer analyses and mental impressions to guide the discussions with DOJ. Persuaded by Citi’s reasoning, the court found that the annotated chats were opinion work product and entitled to heightened protection.[15] Central to its holding was the court’s observation that the chats were not actually shown during the meeting, but rather, used to guide Cleary’s presentations.

 

Endnotes

[1] Ramchandani v. Citibank Nat’l Ass’n., No. 1:19-cv-09124, 2022 WL 2156225 (S.D.N.Y. June 15, 2022)

[2] Id. at *4 (citing Rossi v. Blue Cross & Blue Shield of Greater N.Y., 73 N.Y.2d 588, 593 (1989)).

[3] For all actions in federal courts, federal law generally governs the applicability of the work-product doctrine. Id. at *5.

[4] Id. at *5 (citing In re Grand Jury Subpoena Dated July 6, 2005, 510 F.3d 180, 183 (2d Cir. 2007).

[5] Id. at *5.

[6] Id. at *6, 7.

[7] Id.

[8] Id.

[9] Id. at *7.

[10] Id. at *7.

[11] However, a few documents were ordered to be produced because the documents either transmitted newspapers articles, or inadvertently copied Ramchandani via email, triggering the “third party” waiver of attorney-client privilege. Id. at *8.

[12] Id.                                             

[13] Id.

[14] Id. at *9.

[15] Id.

On Monday, Assistant Attorney General Jonathan Kanter announced significant updates to the DOJ Antitrust Division’s (“the Division”) Leniency Program. While speaking at the joint Federal Trade Commission / Division Enforcers Summit, AAG Kanter explained that with these changes the Division aimed to make the Leniency Program more accessible and straightforward, so that it can be understood by lawyers and laypersons alike, and to encourage more companies of all sizes to avail itself of the Leniency Program. Some of these changes, however, are more than just “reader-friendlier,” and represent notable changes from the prior regime.

The new Guidance is reflected in the updated FAQs for the Leniency Program that was released Monday as well as in the Justice Manual section on Antitrust Enforcement. (Justice Manual, 7-3.000). The FAQs are intended to serve as a key resource to understand how the Division plans to implement the Leniency Program going forward. This most recent update features an additional 50 questions and answers updating the prior release in 2017. Many of these new FAQs provide additional context and information to topics that were covered in the previous version of the FAQs, but there are some key new additions reflecting significant changes in policy.

In his remarks, AAG Kanter highlighted that one of the changes made to the Program guidance documents was to require as a precondition to leniency that the applying company report the anti-competitive conduct to the Division promptly after discovering the violation. Companies cannot wait to report in the hope that the conduct will not be detected. The Division will assess “the facts and circumstances of the illegal activity and the size and complexity of operations of the corporate applicant” to determine whether a company has met this new “promptness” requirement. The updated guidance also allows for companies to conduct a timely preliminary internal investigation to confirm the violation occurred before reporting the violation to the Division. (See FAQ No. 22).

The updated FAQs appear to increase the categories of people who are responsible for reporting violations. While the previous version of the FAQs stated that a company became aware of a violation when either the board of directors or counsel for the company learned of the conduct, the updated FAQs now describe this category of people as any “authoritative representative of the applicant for legal matters,” and specifically note that this category includes the company’s board of directors, any counsel, or any compliance officer. It remains to be seen what other individuals the Division would consider to fall into the category of “authoritative representative for legal matters,” but this factor could cause concerns for a company if allegations or evidence of potential misconduct are not properly reported within a company. (See FAQ No. 21).

The updated FAQs also impose another new precondition to obtaining leniency: remediating the problem and addressing the compliance shortcomings that contributed to the reported misconduct. While the previous FAQs did not touch on this topic, the updated FAQs clearly highlight the need for companies to improve their compliance programs before leniency is granted. The importance of this requirement is also noted in the Justice Manual, which now expressly includes the need for companies to improve compliance programs after detecting conduct as one of the factors necessary for receiving Leniency. (Justice Manual, 7-3.410). This focus on enhanced compliance efforts follows on the heels of the DOJ’s strong push for compliance over the last few years. Most notably, in July 2019, the Antitrust Division adopted a new approach to compliance that instructed Division prosecutors to consider the strength of a Company’s Compliance programs at both the charging and sentencing stages. (See Steptoe Alert, July 15, 2019). In addition, to avoid concerns of recidivism, leniency applicants will need to conduct a root cause analysis and undertake remedial efforts meant to resolve the problems uncovered by this analysis.

The updated FAQs also now provide guidance on restitution and how companies can qualify for the benefits that inure to leniency recipients under the Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA). The new FAQs appear to strengthen the requirement for leniency applicants to pay restitution. While the previous version of the FAQs required companies to make restitution “where possible,” the revised FAQs require companies to make “best efforts” to pay restitution. And with regard to ACPERA specifically, the previous version of the FAQs only noted that restitution is resolved in civil litigation with private plaintiffs and that ACPERA may limit the amount of restitution owed by companies who receive leniency. The new guidance includes nine questions and answers on ACPERA, and includes information on how a leniency applicant may seek the benefits of ACPERA, what qualifies as “satisfactory cooperation” with civil plaintiffs – explaining that leniency applicants should not be denied the benefit of ACEPRA if a plaintiff makes unreasonable requests, and how leniency applicants can navigate continuing obligations to the Division and discovery requests in civil litigation. Although the ultimate ACPERA determination is made by courts, these additional FAQs will provide companies with greater clarity as to the civil litigation benefits that seeking leniency confers beyond immunity from criminal prosecution.

In addition, the updated FAQs now include a question regarding the Criminal Antitrust Anti-Retaliation Act of 2019 (CAARA). CAARA prohibits retaliation against employees who report potential violations of the antitrust laws or participate in government investigations into these violations. The new FAQ explains that whistleblower protections exist for individuals and that although an individual may not qualify or need the protections of individual leniency, they may be able to qualify under CAARA for whistleblower protection. (See FAQ No. 18). The implementation of CAARA also adds to the necessity for companies seeking leniency to promptly report any potential criminal conduct before a whistleblower reports that conduct to the government.

The Division also notes the document production concerns that arise when foreign companies seek leniency. Many foreign countries have restrictive data protections laws that often come into conflict with the Division’s cooperation obligations requiring companies to produce all relevant data regardless of where it is located. The revised FAQs note this concern and explain that in the Division’s experience companies can “comply with privacy laws and regulations in other jurisdictions while fully cooperating with the Division’s investigation.” (FAQ No. 30).

In addition to updating the FAQs, the Division also released new model corporate and individual leniency letters. These revised letters aim to meet the Division’s new goal to issue more straightforward and clear guidance to applicants regarding the requirements of and benefits conferred under the Program. While many of the changes in the letter were created to clarify and streamline the letters, one specific change to note is that the updated Corporate Leniency Letter has added a section on “Public Statements by Applicant.” This new section requires that leniency applicants do not “make any public statement, in litigation or otherwise, contradicting Applicant’s acceptance of responsibility.” This new language could become the subject of disputes between civil litigation plaintiffs and leniency applicant defendants who do not contest a violation of the Sherman Act but who dispute issues relating to causation and damages, which plaintiffs may assert runs counter to an acceptance of responsibility. Leniency applicants defending against civil litigation could therefore face significant risk of losing the Program’s benefits by challenging elements of a Sherman Act claim beyond the violative conduct itself. In this respect, this change will likely provide civil plaintiffs with more leverage in settlement negotiations with leniency applicants.

Beyond the updates to the Leniency Program, AAG Kanter also noted some other Division priorities moving forward. First, he made clear that the Division is prepared to litigate matters when necessary. He noted that the Division has brought on two Acting Deputy Assistant Attorneys General to oversee litigation efforts and that these individuals will focus on bringing more cases to trial rather than settling on less onerous terms for fear of losing at trial. Second, as he has highlighted in other recent public statements, he explained that the Division will now seek to enforce violations of Section 2 of the Sherman Act – i.e., monopolistic conduct – as criminal felonies when appropriate. He explained that while the Division already has this power, they will now seek to use this remedy when the situation warrants. AAG Kanter, however, did not provide examples of the kind of monopolistic conduct would warrant criminal prosecution.

In total, AAG Kanter’s statements earlier this week make clear that the Division will seek to be more active by both trying to make the Leniency Program more enticing to companies and by seeking to litigate where necessary – both in areas where it has traditionally brought cases to trial and through seeking potential new avenues of prosecution when appropriate.

Following a wait of almost five years and expedited due to the UK sanctions announced against Russia, on March 1, 2022, the Economic Crime (Transparency and Enforcement) Bill (the Economic Crime Bill) was laid before the UK Parliament.

The provisions of the Economic Crime Bill will need to be debated in Parliament but, if passed into law, will amongst other things:

  • enhance existing powers in relation to unexplained wealth orders (UWOs);
  • increase the transparency over ownership of companies and property in the UK by introducing a Register of Overseas Entities (ROE) to require foreign owners of UK property to reveal their full identities;
  • impose a strict civil liability test for monetary penalties, meaning the UK Office for Financial Sanctions Implementation (OFSI) would no longer be required to evidence that organizations had knowledge or a “reasonable cause to suspect” sanctions are being breached before being liable for fines; and
  • give new powers to OFSI to publicly identify organizations that breach financial sanctions irrespective of whether or not they are the subject of a penalty.

Continue Reading A New ‘Economic Crime Bill’ in the United Kingdom to Strengthen Existing Economic Crime Laws

On February 17, the Securities and Exchange Commission (SEC) announced a settlement with KT Corporation (KT Corp.), South Korea’s largest comprehensive telecommunications operator, for alleged violations (neither admitted nor denied by the company) of the books and records and internal accounting control provisions of the Foreign Corrupt Practices Act (FCPA).[1]

This matter, the first FCPA corporate settlement in 2022, is of interest for several reasons:

Continue Reading In First FCPA Corporate Matter for 2022, SEC Ties Important Aspects of the Resolution to the Company’s Cooperation – and Other Key Takeaways

As previously reported, on November 26, 2021, the Organisation for Economic Co-operation and Development (OECD) Council issued a Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions (the “2021 Recommendation”).[1]  Our blog post earlier this week reviewed key aspects of the 2021 Recommendation that are directed towards government action. This alert focuses on those aspects of the 2021 Recommendation relating to corporate compliance programs, in particular the updated Good Practice Guidance on Internal Controls, Ethics and Compliance found in Annex II to the 2021 Recommendation. Historically, the OECD’s guidance regarding corporate compliance has been highly influential with OECD member countries. Given that history, and the ever-increasing convergence of compliance standards around the globe, the 2021 Recommendation similarly could have a significant impact and influence, particularly on countries other than the US.

Important Compliance-Related Aspects of the 2021 Recommendation

The 2021 Recommendation contains several provisions that are of importance to corporate compliance efforts, as our earlier alert noted.

  • First, it calls for member countries to incentivize the development of compliance programs, both in the enforcement context, and when companies seek to participate in government procurement or receive other public advantages.
  • Second, it calls for leveling the playing field between state-owned enterprises and private firms, by making the former subject to the same compliance expectations and standards as the latter.
  • Third, it calls for countries to remove obstacles to effective due diligence and other compliance practices presented by data protection regimes.
  • Fourth, it emphasizes accounting standards and internal audit.
  • Fifth, it seeks to encourage whistleblower protection and reporting.
  • Sixth and finally, it enhances and updates the OECD’s guidance on internal controls, ethics and compliance, guidance that influences the standards imposed by the United States and other enforcement authorities in countries that participate in the OECD, and are party to the Anti-Bribery Convention.

Below we review Annex II, containing the updated guidance,[2] in detail, comparing it to the compliance requirements typically imposed by the US Department of Justice (DOJ) on companies in the context of negotiated resolutions. Annex II is not legally binding; rather, it is a guidance document. Nonetheless, the earlier guidance was highly influential and has contributed to the increasing global convergence of anti-corruption compliance standards.

Annex II: Good Practice Guidance on Internal Controls, Ethics, and Compliance

Annex II, Good Practice Guidance on Internal Controls, Ethics and Compliance, is directed both to companies (Section A) and their business organizations and professional associations (Section B), which the 2021 Recommendation notes “play an essential role” in compliance efforts.

Updates in Annex II include completely new elements as well as progressive developments. Elements of an anti-bribery compliance program set forth in Annex II, as updated, share more similarities than differences with the FCPA enforcement authorities’ requirements for an effective anti-corruption compliance program, e.g., those set forth in the DOJ’s standard compliance annex in DPAs. The chart, below, summarizes the notable developments in Annex II to the 2021 Recommendation, along with a comparison to the DOJ’s standard compliance annex in DPAs.

Elements Notable Developments in Annex II Comparison with DOJ’s Standard Compliance Annex
Commitment to Compliance A.1: clarifies that there should be support and commitment from the board of directors or equivalent governing body (in addition to senior management), with a view to implementing a culture of ethics and compliance.

 

A.16: creates a new expectation of “external communication” of the company’s commitment to compliance (separate from communication to business partners).

 The DOJ’s standard compliance annex also requires commitment by middle management, to ensure that “middle management reinforce those [compliance] standards and encourage employees to abide by them.”

 

The DOJ’s standard compliance annex does not have the external communication requirement separate from communication to business partners.
Policies and Procedures A.2: clarifies that companies’ anti-bribery policies should be “easily accessible” to all employees, relevant third parties, foreign subsidiaries, and should be “translated” if necessary.

 

A.5: expands the list of areas that compliance policies and procedures need to address to also include: conflicts of interest; hiring processes; risks associated with the use of intermediaries; and, where relevant, processes for response to public calls for tender.

 The DOJ’s standard compliance annex requires policies and procedures to be visible. The DOJ’s guidance on the Evaluation of Corporate Compliance Programs, updated in June 2020 (the “2020 Guidance), makes it clear that accessibility is one of the factors that prosecutors consider when evaluating policies and procedures.

 

The DOJ’s standard compliance annex contains a similar but shorter list of areas to address, without those added in A.5 of Annex II, but it requires policies and procedures to be risk-based to address the individual circumstances facing a company.
Proper Oversight and Autonomy A.4: clarifies that compliance officers responsible for the oversight of compliance programs need to have an adequate level of experience and qualification, as well as “access to relevant sources of data.” The DOJ’s standard compliance annex contains a similar requirement that compliance and control personnel have “sufficient direct or indirect access to relevant sources of data,” and the 2020 Guidance makes it clear that compliance personnel’s experience and qualifications are among the factors that prosecutors consider when evaluating compliance personnel’s autonomy and resources.
Third-Party Relationships A.6: (1) emphasizes “continued” oversight of business partners throughout the business relationship; (2) adds a new element regarding mechanisms to ensure that the contract terms, where appropriate, specifically describe the services to be performed, that the payment terms are appropriate, that the described contractual work is performed, and that compensation is commensurate with the services performed; (3) adds a new element regarding, where appropriate, ensuring the company’s audit rights and exercising those rights; and (4) adds a new element regarding providing for adequate mechanisms to address incidents of foreign bribery by business partners (e.g., contractual termination rights). None of these are new to the DOJ’s standard compliance annex. Regarding mechanisms to address incidents of foreign bribery by business partners, the DOJ’s standard compliance annex also specifies that agreements with third parties should include, where necessary and appropriate, anti-corruption representations and undertakings relating to compliance with anti-corruption laws.
Internal Reporting, Investigation, and Remediation A.13: clarifies that internal reporting mechanisms should be confidential, and where appropriate, anonymous, and provide “visible, accessible, and diversified channels” for reporting.

 

A.8: adds a new element regarding using internal controls to “identify patterns indicative of foreign bribery,” including, as appropriate, by “applying innovative technologies.”

 

A.11: clarifies that measures to address cases of suspected foreign bribery should also include: (1) processes for identifying, investigating, and reporting misconduct and “genuinely and proactively” engaging with law enforcement, and (2) remediation (root cause analysis and addressing identified weaknesses).

 Similar points exist in the DOJ’s standard compliance annex and/or the 2020 Guidance.
Training and Guidance A.9: adds a new element regarding, where appropriate, measures to ensure effective periodic and documented training for business partners on the company’s anti-bribery compliance program.

 

A.12, 13: adds expectation of measures against retaliation.

 Similar points exist in the DOJ’s standard compliance annex and/or the 2020 Guidance.
Incentives and Discipline A.10: encourages appropriate incentives for compliance, including by integrating ethics and compliance in human resources processes.

 

A.11: clarifies that disciplinary measures should be consistent as well as appropriate, and appropriately communicated to ensure awareness of those disciplinary measures and consistent application of disciplinary procedures across the company.

 Similar points exist in the DOJ’s standard compliance annex and/or the 2020 Guidance.
Periodic Reviews, Monitoring, and Testing A.14: clarifies that periodic reviews and testing should be conducted “both on regular basis and upon specific developments,” which also include (in addition to relevant developments in the field, and evolving international and industry standards): operational and structural changes; results of monitoring and auditing; and “lessons learned” from the company’s own possible misconduct as well as from “other companies facing similar risks.” The DOJ’s standard compliance annex requires periodic review to be conducted “no less than annually” and policies and procedures updated “as appropriate.”  The 2020 Guidance directs prosecutors to consider a compliance program’s capacity to improve and evolve as a hallmark of an effective compliance program, and to ask questions such as what steps the company has taken to ensure its compliance program makes sense for particular business segments and subsidiaries, and whether the company reviews and updates its compliance program based on “lessons learned from its own misconduct and/or that of other companies facing similar risks.”
Mergers and Acquisitions A.15: adds a new element regarding mergers and acquisitions, expecting comprehensive risk-based due diligence of acquisition targets, “prompt” incorporation of the acquired business into its internal controls and compliance program, training of new employees, and post-acquisition audits. Similar points exist in the DOJ’s standard compliance annex.

 

Conclusion

All of the measures in this 2021 Recommendation will be part of the monitoring program conducted by the OECD Working Group on Bribery.

For companies, the 2021 Recommendation will have both direct and indirect effects. The indirect effects come from the continued evolution of the enforcement environment and international cooperation, including the reality of today’s multijurisdictional world. The direct effects come principally from the provisions focused on whistleblowing and compliance programs. While the updated OECD Guidance is unlikely to have a material impact on the compliance expectations of US enforcement authorities, they may well have an impact on foreign enforcers.

[1] OECD Council, Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions (Nov. 26, 2021), https://legalinstruments.oecd.org/en/instruments/OECD_LEGAL-0378.

[2] The previous guidance was adopted and included in the 2009 Recommendation on February 18, 2010.