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Our lawyers provide sophisticated analysis, practical guidance and thought leadership on a wide range of topics. We encourage our readers to review this collection of client alerts, articles and white papers and benefit from the authors’ exceptional experience, market knowledge, practiced judgment and singular insights.

July 13, 2018

The Impact on MNCs

London partner Sandy Bhogal is the author of "The Impact on MNCs" [PDF] published in Tax Journal on July 13, 2018.
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July 12, 2018

California Consumer Privacy Act of 2018

Click for PDF On June 28, 2018, Governor Jerry Brown signed the California Consumer Privacy Act of 2018 ("CCPA"), which has been described as a landmark privacy bill that aims to give California consumers increased transparency and control over how companies use and share their personal information.  The law will be enacted as several new sections of the California Civil Code (sections 1798.100 to 1798.198).  While lawmakers and others are already discussing amending the law prior to its January 1, 2020 effective date, as passed the law would require businesses collecting information about California consumers to: disclose what personal information is collected about a consumer and the purposes for which that personal information is used; delete a consumer's personal information if requested to do so, unless it is necessary for the business to maintain that information for certain purposes; disclose what personal information is sold or shared for a business purpose, and to whom; stop selling a consumer's information if requested to do so (the "right to opt out"), unless the consumer is under 16 years of age, in which case the business is required to obtain affirmative authorization to sell the consumer's data (the "right to opt in"); and not discriminate against a consumer for exercising any of the aforementioned rights, including by denying goods or services, charging different prices, or providing a different level or quality of goods or services, subject to certain exceptions. The CCPA also empowers the California Attorney General to adopt regulations to further the statute's purposes, and to solicit "broad public participation" before the law goes into effect.[1]  In addition, the law permits businesses to seek the opinion of the Attorney General for guidance on how to comply with its provisions. The CCPA does not appear to create any private rights of action, with one notable exception:  the CCPA expands California's data security laws by providing, in certain cases, a private right of action to consumers "whose nonencrypted or nonredacted personal information" is subject to a breach "as a result of the business' violation of the duty to implement and maintain reasonable security procedures," which permits consumers to seek statutory damages of $100 to $750 per incident.[2]  The other rights embodied in the CCPA may be enforced only by the Attorney General—who may seek civil penalties up to $7,500 per violation. In the eighteen months ahead, businesses that collect personal information about California consumers will need to carefully assess their data privacy and disclosure practices and procedures to ensure they are in compliance when the law goes into effect on January 1, 2020.  Businesses may also want to consider whether to submit information to the Attorney General regarding the development of implementing regulations prior to the effective date. I.     Background and Context The CCPA was passed quickly in order to block a similar privacy initiative from appearing on election ballots in November.  The ballot initiative had obtained enough signatures to be presented to voters, but its backers agreed to abandon it if lawmakers passed a comparable bill.  The ballot initiative, if enacted, could not easily be amended by the legislature,[3] so legislators quickly drafted and unanimously passed AB 375 before the June 28 deadline to withdraw items from the ballot.  While not as strict as the EU's new General Data Protection Regulation (GDPR), the CCPA is more stringent than most existing privacy laws in the United States. II.     Who Must Comply With The CCPA? The CCPA applies to any "business," including any for-profit entity that collects consumers' personal information, which does business in California, and which satisfies one or more of the following thresholds: has annual gross revenues in excess of twenty-five million dollars ($25,000,000); possesses the personal information of 50,000 or more consumers, households, or devices; or earns more than half of its annual revenue from selling consumers' personal information.[4] The CCPA also applies to any entity that controls or is controlled by such a business and shares common branding with the business.[5] The definition of "Personal Information" under the CCPA is extremely broad and includes things not considered "Personal Information" under other U.S. privacy laws, like location data, purchasing or consuming histories, browsing history, and inferences drawn from any of the consumer information.[6]  As a result of the breadth of these definitions, the CCPA likely will apply to hundreds of thousands of companies, both inside and outside of California. III.     CCPA's Key Rights And Provisions The stated goal of the CCPA is to ensure the following rights of Californians: (1) to know what personal information is being collected about them; (2) to know whether their personal information is sold or disclosed and to whom; (3) to say no to the sale of personal information; (4) to access their personal information; and (5) to equal service and price, even if they exercise their privacy rights.[7]  The CCPA purports to enforce these rights by imposing several obligations on covered businesses, as discussed in more detail below.            A.     Transparency In The Collection Of Personal Information The CCPA requires disclosure of information about how a business collects and uses personal information, and also gives consumers the right to request certain additional information about what data is collected about them.[8]  Specifically, a consumer has the right to request that a business disclose: the categories of personal information it has collected about that consumer; the categories of sources from which the personal information is collected; the business or commercial purpose for collecting or selling personal information; the categories of third parties with whom the business shares personal information; and the specific pieces of personal information it has collected about that consumer.[9] While categories (1)-(4) are fairly general, category (5) requires very detailed information about a consumer, and businesses will need to develop a mechanism for providing this type of information. Under the CCPA, businesses also must affirmatively disclose certain information "at or before the point of collection," and cannot collect additional categories of personal information or use personal information collected for additional purposes without providing the consumer with notice.[10]  Specifically, businesses must disclose in their online privacy policies and in any California-specific description of a consumer's rights a list of the categories of personal information they have collected about consumers in the preceding 12 months by reference to the enumerated categories (1)-(5), above.[11] Businesses must provide consumers with at least two methods for submitting requests for information, including, at a minimum, a toll-free telephone number, and if the business maintains an Internet Web site, a Web site address.[12]            B.     Deletion Of Personal Information The CCPA also gives consumers a right to request that businesses delete personal information about them.  Upon receipt of a "verifiable request" from a consumer, a business must delete the consumer's personal information and direct any service providers to do the same.  There are exceptions to this deletion rule when "it is necessary for the business or service provider to maintain the consumer's personal information" for one of nine enumerated reasons: Complete the transaction for which the personal information was collected, provide a good or service requested by the consumer, or reasonably anticipated within the context of a business's ongoing business relationship with the consumer, or otherwise perform a contract between the business and the consumer. Detect security incidents, protect against malicious, deceptive, fraudulent, or illegal activity; or prosecute those responsible for that activity. Debug to identify and repair errors that impair existing intended functionality. Exercise free speech, ensure the right of another consumer to exercise his or her right of free speech, or exercise another right provided for by law. Comply with the California Electronic Communications Privacy Act pursuant to Chapter 3.6 (commencing with Section 1546) of Title 12 of Part 2 of the Penal Code. Engage in public or peer-reviewed scientific, historical, or statistical research in the public interest that adheres to all other applicable ethics and privacy laws, when the businesses' deletion of the information is likely to render impossible or seriously impair the achievement of such research, if the consumer has provided informed consent. To enable solely internal uses that are reasonably aligned with the expectations of the consumer based on the consumer's relationship with the business. Comply with a legal obligation. Otherwise use the consumer's personal information, internally, in a lawful manner that is compatible with the context in which the consumer provided the information.[13] Because these exceptions are so broad, especially given the catch-all provision in category (9), it is unclear whether the CCPA's right to deletion will substantially alter a business's obligations as a practical matter.            C.     Disclosure Of Personal Information Sold Or Shared For A Business Purpose The CCPA also requires businesses to disclose what personal information is sold or disclosed for a business purpose, and to whom.[14]  The disclosure of certain information is only required upon receipt of a "verifiable consumer request."[15]  Specifically, a consumer has the right to request that a business disclose: The categories of personal information that the business collected about the consumer; The categories of personal information that the business sold about the consumer and the categories of third parties to whom the personal information was sold, by category or categories of personal information for each third party to whom the personal information was sold; and The categories of personal information that the business disclosed about the consumer for a business purpose.[16] A business must also affirmatively disclose (including in its online privacy policy and in any California-specific description of consumer's rights): The category or categories of consumers' personal information it has sold, or if the business has not sold consumers' personal information, it shall disclose that fact; and The category or categories of consumers' personal information it has disclosed for a business purpose, or if the business has not disclosed the consumers' personal information for a business purpose, it shall disclose that fact.[17] This information must be disclosed in two separate lists, each listing the categories of personal information it has sold about consumers in the preceding 12 months that fall into categories (1) and (2), above.[18]            D.     Right To Opt-Out Of Sale Of Personal Information The CCPA also requires businesses to stop selling a consumer's personal information if requested to do so by the consumer ("opt-out").  In addition, consumers under the age of 16 must affirmatively opt-in to allow selling of personal information, and parental consent is required for consumers under the age of 13.[19]  Businesses must provide notice to consumers that their information may be sold and that consumers have the right to opt out of the sale.  In order to comply with the notice requirement, businesses must include a link titled "Do Not Sell My Personal Information" on their homepage and in their privacy policy.[20]            E.     Prohibition Against Discrimination For Exercising Rights The CCPA prohibits a business from discriminating against a consumer for exercising any of their rights in the CCPA, including by denying goods or services, charging different prices, or providing a different level or quality of goods or services.  There are exceptions, however, if the difference in price or level or quality of goods or services "is reasonably related to the value provided to the consumer by the consumer's data."  For example, while the language of the statute is not entirely clear, a business may be allowed to charge those users who do not allow the sale of their data while providing the service for free to users who do allow the sale of their data—as long as the amount charged is reasonably related to the value to the business of that consumer's data.  A business may also offer financial incentives for the collection of personal information, as long as the incentives are not "unjust, unreasonable, coercive, or usurious" and the business notifies the consumer of the incentives and the consumer gives prior opt-in consent.            F.     Data Breach Provisions The CCPA provides a private right of action to consumers "whose nonencrypted or nonredacted personal information" is subject to a breach "as a result of the business' violation of the duty to implement and maintain reasonable security procedures."[21]  Under the CCPA, a consumer may seek statutory damages of $100 to $750 per incident or actual damages, whichever is greater.[22]  Notably, the meaning of "personal information" under this provision is the same as it is in California's existing data breach law, rather than the broad definition used in the remainder of the CCPA.[23]  Consumers bringing a private action under this section must first provide written notice to the business of the alleged violations (and allow the business an opportunity to cure the violations), and must notify the Attorney General and give the Attorney General an opportunity to prosecute.[24]  Notice is not required for an "action solely for actual pecuniary damages suffered as a result of the alleged violations."[25] IV.     Potential Liability Section 1798.150, regarding liability for data breaches, is the only provision in the CCPA expressly allowing a private right of action.  The damages available for such a civil suit are limited to the greater of (1) between $100 and $750 per consumer per incident, or (2) actual damages.  Individual consumers' claims also can potentially be aggregated in a class action. The other rights embodied in the CCPA may be enforced only by the Attorney General—who may seek civil penalties not to exceed $2,500 for each violation, unless the violation was intentional, in which case the Attorney General can seek up to $7,500 per violation.[26] [1]   To be codified at Cal. Civ. Code § 1798.185(a) [2]      Cal. Civ. Code § 1798.150. [3]      By its own terms, the ballot initiative could be amended upon a statute passed by 70% of each house of the Legislature if the amendment furthered the purposes of the act, or by a majority for certain provisions to impose additional privacy restrictions.  See The Consumer Right to Privacy Act of 2018 No. 17-0039, Section 5. Otherwise, approved ballot initiatives in California can only be amended with voter approval. California Constitution, Article II, Section 10. [4]   Cal. Civ. Code § 1798.140(c)(1). [5]   Cal. Civ. Code § 1798.140(c)(2). [6]   Cal. Civ. Code § 1798.140(o). The definition of "personal information" does not include publicly available information, and the CCPA also does not generally restrict a business's ability to collect or use deidentified aggregate consumer information. Cal. Civ. Code § 1798.145(a)(5). [7]   Assemb. Bill 375, 2017-2018 Reg. Sess., Ch. 55, Sec. 2 (Cal. 2018) [8]   Cal. Civ. Code § 1798.100 and 1798.110. [9]   Cal. Civ. Code § 1798.110(a). [10]     Cal. Civ. Code §§ 1798.100(b); 1798.110(c). [11]     Cal. Civ. Code §§ 1798.110(c); 1798.130(a)(5)(B). [12]   Cal. Civ. Code § 1798.130(a)(1). [13]   Cal. Civ. Code § 1798.105(d). [14]   Cal. Civ. Code § 1798.115. [15]   Cal. Civ. Code § 1798.115(a)-(b). [16]   Cal. Civ. Code § 1798.115(a). [17]   Cal. Civ. Code § 1798.115(c). [18]   Cal. Civ. Code § 1798.130(a)(5)(C). [19]   Cal. Civ. Code § 1798.120(d). [20]   Cal. Civ. Code § 1798.135. [21]   Cal. Civ. Code § 1798.150. [22]   Cal. Civ. Code § 1798.150. [23]   Cal. Civ. Code § 1798.81.5(d)(1)(A) [24]   Cal. Civ. Code § 1798.150(b). [25]   Cal. Civ. Code § 1798.150 (b)(1). [26]   Cal. Civ. Code § 1798.155. The following Gibson Dunn lawyers assisted in the preparation of this client alert: Joshua A. Jessen, Benjamin B. Wagner, Christina Chandler Kogan, Abbey A. Barrera, and Alison Watkins. Gibson Dunn's lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work or the following leaders and members of the firm's Privacy, Cybersecurity and Consumer Protection practice group: United States Alexander H. Southwell - Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall - Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang - Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba - Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham - Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen - Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley - San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon - Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra - Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson - Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde - Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner - Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong - San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker - Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Europe Ahmed Baladi - Co-Chair, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com) James A. Cox - London (+44 (0)207071 4250, jacox@gibsondunn.com) Patrick Doris - London (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Bernard Grinspan - Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com) Penny Madden - London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Jean-Philippe Robé - Paris (+33 (0)1 56 43 13 00, jrobe@gibsondunn.com) Michael Walther - Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Nicolas Autet - Paris (+33 (0)1 56 43 13 00, nautet@gibsondunn.com) Kai Gesing - Munich (+49 89 189 33-180, kgesing@gibsondunn.com) Sarah Wazen - London (+44 (0)20 7071 4203, swazen@gibsondunn.com) Alejandro Guerrero Perez - Brussels (+32 2 554 7218, aguerreroperez@gibsondunn.com) Asia Kelly Austin - Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) Jai S. Pathak - Singapore (+65 6507 3683, jpathak@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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July 12, 2018

The Politics of Brexit for those Outside the UK

Click for PDF Following the widely reported Cabinet meeting at Chequers, the Prime Minister's country residence, on Friday 6 June 2018, the UK Government has now published its "White Paper" setting out its negotiating position with the EU.  A copy of the White Paper can be found here. The long-delayed White Paper centres around a free trade area for goods, based on a common rulebook.  The ancillary customs arrangement plan, in which the UK would collects tariffs on behalf of the EU, would then "enable the UK to control its own tariffs for trade with the rest of the world".  However, the Government's previous "mutual recognition plan" for financial services has been abandoned; instead the White Paper proposes a looser partnership under the framework of the EU's existing equivalence regime. The responses to the White Paper encapsulate the difficulties of this process.  Eurosceptics remain unhappy that the Government's position is far too close to a "Soft Brexit" and have threatened to rebel against the proposed customs scheme; Remainers are upset that services (which represent 79% of the UK's GDP) are excluded. The full detail of the 98-page White Paper is less important at this stage than the negotiating dynamics.  Assuming both the UK and the EU want a deal, which is likely to be the case, M&A practitioners will be familiar with the concept that the stronger party, here the EU, will want to push the weaker party, the UK, as close to the edge as possible without tipping them over.  In that sense the UK has, perhaps inadvertently, somewhat strengthened its negotiating position - albeit in a fragile way. The rules of the UK political game In the UK the principle of separation of powers is strong as far as the independence of the judiciary is concerned.  In January 2017 the UK Supreme Court decided that the Prime Minister could not trigger the Brexit process without the authority of an express Act of Parliament. However, unlike the United States and other presidential systems, there is virtually no separation of powers between legislature and executive.  Government ministers are always also members of Parliament (both upper and lower houses).  The government of the day is dependent on maintaining the confidence of the House of Commons – and will normally be drawn from the political party with the largest number of seats in the House of Commons.  The Prime Minister will be the person who is the leader of that party. The governing Conservative Party today holds the largest number of seats in the House of Commons, but does not have an overall majority.  The Conservative Government is reliant on a "confidence and supply" agreement with the Northern Ireland Democratic Unionist Party ("DUP") to give it a working majority. Maintaining an open land border between Northern Ireland and the Republic of Ireland is crucial to maintaining the Good Friday Agreement – which underpins the Irish peace process.  Maintaining an open border between Northern Ireland and the rest of the UK is of fundamental importance to the unionist parties in Northern Ireland – not least the DUP.  Thus, the management of the flow of goods and people across the Irish land border, and between Northern Ireland and the UK, have become critical issues in the Brexit debate and negotiations.  The White Paper's proposed free trade area for goods would avoid friction at the border. Parliament will have a vote on the final Brexit deal, but if the Government loses that vote then it will almost certainly fall and a General Election will follow – more on this below. In addition, if the Prime Minister does not continue to have the support of her party, she would cease to be leader and be replaced.  Providing the Conservative Party continued to maintain its effective majority in the House of Commons, there would not necessarily be a general election on a change in prime minister (as happened when Margaret Thatcher was replaced by John Major in 1990) The position of the UK Government The UK Cabinet had four prominent campaigners for Brexit: David Davis (Secretary for Exiting the EU), Boris Johnson (Foreign Secretary), Michael Gove (Environment and Agriculture Secretary) and Liam Fox (Secretary for International Trade).  David Davis and Boris Johnson have both resigned in protest after the Chequers meeting but, so far, Michael Gove and Liam Fox have stayed in the Cabinet.  To that extent, at least for the moment, the Brexit camp has been split and although the Leave activists are unhappy, they are now weaker and more divided for the reasons described below. The Prime Minister can face a personal vote of confidence if 48 Conservative MPs demand such a vote.  However, she can only be removed if at least 159 of the 316 Conservative MPs then vote against her.  It is currently unlikely that this will happen (although the balance may well change once Brexit has happened – and in the lead up to a general election).  Although more than 48 Conservative MPs would in principle be willing to call a vote of confidence, it is believed that they would not win the subsequent vote to remove her.  If by chance that did happen, then Conservative MPs would select two of their members, who would be put to a vote of Conservative activists.  It is likely that at least one of them would be a strong Leaver, and would win the activists' vote. The position in Parliament The current view on the maths is as follows: The Conservatives and DUP have 326 MPs out of a total of 650.  It is thought that somewhere between 60 and 80 Conservative MPs might vote against a "Soft Brexit" as currently proposed – and one has to assume it will become softer as negotiations with the EU continue.  The opposition Labour party is equally split.  The Labour leadership of Jeremy Corbyn and John McDonnell are likely to vote against any Brexit deal in order to bring the Government down, irrespective of whether that would lead to the UK crashing out of the EU with no deal.  However it is thought that sufficient opposition MPs would side with the Government in order to vote a "Soft Brexit" through the House of Commons. Once the final position is resolved, whether a "Soft Brexit" or no deal, it is likely that there will be a leadership challenge against Mrs May from within the Conservative Party. The position of the EU So far the EU have been relatively restrained in their public comments, on the basis that they have been waiting to see the detail of the White Paper. The EU has stated on many occasions that the UK cannot "pick and choose" between those parts of the EU Single Market that it likes, and those it does not.  For this reason, the proposals in the White Paper (which do not embrace all of the requirements of the Single Market), are unlikely to be welcomed by the EU.  It is highly likely that the EU will push back on the UK position to some degree, but it is a dangerous game for all sides to risk a "no deal" outcome.  Absent agreement on an extension the UK will leave the EU at 11 pm on 29 March 2019, but any deal will need to be agreed by late autumn 2018 so national parliaments in the EU and UK have time to vote on it. Finally Whatever happens with the EU the further political risk is the possibility that the Conservatives will be punished in any future General Election - allowing the left wing Jeremy Corbyn into power. It is very hard to quantify this risk.  In a recent poll Jeremy Corbyn edged slightly ahead of Theresa May as a preferred Prime Minister, although "Don't Knows" had a clear majority. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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July 12, 2018

Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. Top Shareholder Proposal Takeaways From the 2018 Proxy Season As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year: Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds). It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.  Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis. Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity. Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny. Click here to READ MORE. Gibson Dunn'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 practice group: Ronald O. Mueller - Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski - New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee - Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez - New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs - San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya - New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera - Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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July 12, 2018

To Disclose or Not to Disclose: Analyzing the Consequences of Voluntary Self-Disclosure for Financial Institutions

Click for PDF One of the most frequently discussed white collar issues of late has been the benefits of voluntarily self-disclosing to the U.S. Department of Justice ("DOJ") allegations of misconduct involving a corporation.  This is the beginning of periodic analyses of white collar issues unique to financial institutions, and in this issue we examine whether and to what extent a financial institution can expect a benefit from DOJ for a voluntary self-disclosure ("VSD"), especially with regard to money laundering or Bank Secrecy Act violations.  Although the public discourse regarding VSDs tends to suggest that there are benefits to be gained, a close examination of the issue specifically with respect to financial institutions shows that the benefits that will confer in this area, if any, are neither easy to anticipate nor to quantify.  A full consideration of whether to make a VSD to DOJ should include a host of factors beyond the quantifiable benefit, ranging from the likelihood of independent enforcer discovery; to the severity, duration, and evidentiary support for a potential violation; and to the expectations of prudential regulators and any associated licensing or regulatory consequences, as well as other factors. VSD decisions arise in many contexts, including in matters involving the Foreign Corrupt Practices Act ("FCPA"), sanctions enforcement, and the Bank Secrecy Act ("BSA").  In certain situations, the benefits of voluntary self-disclosure prior to a criminal enforcement action can be substantial.  Prosecutors have at times responded to a VSD by reducing charges and penalties, offering deferred prosecution and non-prosecution agreements, and entering into more favorable consent decrees and settlements.[1]  However, as Deputy Attorney General Rod Rosenstein stated in recent remarks, enforcement policies meant to encourage corporate disclosures "do[] not provide a guarantee" that disclosures will yield a favorable result in all cases.[2]  The outcome of a prosecution following a VSD is situation-specific, and, as such, the process should not be entered into without careful consideration of the costs and benefits. In the context of Bank Secrecy Act and anti-money laundering regulation ("BSA/AML"), VSDs present an uncertain set of tradeoffs.  The BSA and its implementing  regulations already require most U.S. financial institutions subject to the requirements of the BSA[3] to file suspicious activity reports ("SARs") with the U.S. government when the institution knows, suspects or has reason to suspect that a transaction by, through or to it involves money laundering, BSA violations or other illegal activity.[4]  Guidance from DOJ encourages voluntary self-disclosure, and at least one recent non-prosecution agreement entered with the Department has listed self-disclosure as a consideration in setting the terms of a settlement agreement.[5]  Over the past three years, however, no BSA/AML criminal resolution has explicitly given an institution credit for voluntarily disclosing potential misconduct.  During this same period, DOJ began messaging an expanded focus on VSDs in the context of FCPA violations, announced the FCPA Pilot Project, and ultimately made permanent in the U.S. Attorney's Manual the potential benefits of a VSD for FCPA violations. This alert addresses some of the considerations that financial institutions weigh when deciding whether to voluntarily self-disclose potential BSA/AML violations to criminal enforcement authorities.  In discussing these considerations, we review guidance provided by DOJ and the regulatory enforcement agencies, and analyze recent BSA/AML criminal resolutions, as well as FCPA violations involving similar defendants. Guidance from the Department of Justice – Conflicting Signals DOJ guidance documents describe the Department's general approach to VSDs, but, until recently, they left unanswered many questions dealing specifically with self-disclosure by financial institutions.  The Department's high-level approach to general voluntary self-disclosure is outlined in the United States Attorney Manual ("USAM").  Starting from the principle that "[c]ooperation is a mitigating factor" that can allow a corporation to avoid particularly harsh penalties, the USAM instructs prosecutors that they "may consider a corporation's timely and voluntary disclosure" when deciding whether and how to pursue corporate liability.[6] In the FCPA context, a self-disclosure is deemed to be voluntary—and thus potentially qualifying a company for mitigation credit—if (1) the company discloses the relevant evidence of misconduct prior to an imminent threat of disclosure or government investigation; (2) the company reports the conduct to DOJ and relevant regulatory agencies "within a reasonably prompt time after becoming aware of the offense"; and (3) the company discloses all relevant facts known to it, including all relevant facts about the individual wrongdoers involved.[7] DOJ has not yet offered specific instruction, however, on how prosecutors should treat voluntary self-disclosure in the BSA/AML context and, unlike other areas of enforcement, no formal self-disclosure program currently exists for financial institutions seeking to obtain mitigation credit in the money laundering context.  Indeed, the only guidance document to mention VSDs and financial institutions—issued by DOJ's National Security Division in 2016[8]—specifically exempted financial institutions from the VSD benefits offered to other corporate actors in the export control and sanctions context, citing the "unique reporting obligations" imposed on financial institutions "under their applicable statutory and regulatory regimes."[9] Despite this lack of guidance, the recent adoption of DOJ's FCPA Corporate Enforcement Policy may provide insight on how prosecutors could treat voluntary disclosures by financial institutions moving forward.  Enacted in the fall of 2017, the Corporate Enforcement Policy arose from DOJ's 2016 FCPA Pilot Program, which was created to provide improved guidance and certainty to companies facing DOJ enforcement actions, while incentivizing self-disclosure, cooperation, and remediation.[10]  One year later, based on the success of the program, many of its aspects were codified in the USAM.[11]  Specifically, the new policy creates a presumption that entities that voluntarily disclose potential misconduct and fully cooperate with any subsequent government investigation will receive a declination, absent aggravating circumstances.[12]  In early 2018, Acting Assistant Attorney General John Cronan announced that the Corporate Enforcement Policy would serve as non-binding guidance for corporate investigations beyond the FCPA context.[13] This expanded consideration of VSDs beyond the FCPA space was on display in March 2018, when, after an investigation by DOJ's Securities and Financial Fraud Unit, the Department publicly announced that it had opted not to prosecute a financial institution in connection with the bank's alleged front-running of certain foreign exchange transactions.[14]  DOJ's Securities and Financial Fraud Unit specifically noted that DOJ's decision to close its investigation without filing charges resulted, in part, from "timely, voluntary self-disclosure" of the alleged misconduct,[15] a sentiment echoed by Cronan in subsequent remarks at an American Bar Association white collar conference regarding the reasons for the declination.[16]  Cronan further commented that "[w]hen a company discovers misconduct, quickly raises its hand and tells us about it, that says something. . . . It shows the company is taking misconduct seriously . . . and we are rewarding those good decisions."[17] Other Agency Guidance Guidance issued by other enforcement agencies similarly may offer clues as to how financial institutions can utilize VSDs to more successfully navigate a criminal enforcement action. In the context of export and import control, companies that self-disclose to the U.S. Treasury Department's Office of Foreign Asset Control ("OFAC") can benefit in two primary ways.  First, OFAC may be less likely to initiate an enforcement proceeding following a VSD, as OFAC considers a party's decision to cooperate when determining whether to initiate a civil enforcement proceeding.[18]  Second, if OFAC decides it is appropriate to bring an enforcement action, companies that self-disclose receive a fifty-percent reduction in the base penalty they face, as detailed in the below-base-penalty matrix published in OFAC guidance:[19] As depicted by the chart, in the absence of a VSD, the base penalty for egregious violations[20] is the applicable statutory maximum penalty for the violation.[21]  In non-egregious cases, the base penalty is calculated based on the revenue derived from the violative transaction, capped at $295,141.[22]  When the apparent violation is voluntarily disclosed, however, OFAC has made clear that in non-egregious cases, the penalty will be one-half of the transaction value, capped at $147,571 per violation.[23]  This is applicable except in circumstances where the maximum penalty for the apparent violation is less than $295,141, in which case the base amount of the penalty shall be capped at one-half the statutory maximum penalty applicable to the violation.[24]  In an egregious case, if the apparent violation is self-disclosed, the base amount of the penalty will be one-half of the applicable statutory maximum penalty.[25] Other agencies tasked with overseeing the enforcement of financial regulations also have issued guidance encouraging voluntary disclosures.  Although the Financial Crimes Enforcement Network ("FinCEN") has not provided guidance on how it credits voluntary disclosures,[26] guidance issued by the Federal Financial Institutions Examination Council ("FFIEC"), consisting of the Office of the Comptroller of the Currency ("OCC"), the Federal Reserve, the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision ("OTS"), and the National Credit Union Administration ("NCUA"), has made clear that, in determining the amount and appropriateness of a penalty to be assessed against a financial institution in connection with various types of violations, the agencies will consider "voluntary disclosure of the violation."[27] In 2016, the OCC published a revised Policies and Procedures Manual to ensure this and other factors are considered and to "enhance the consistency" of its enforcement decisions.[28]  That guidance includes a matrix with several factors, one of which is "concealment."[29]  In the event that a financial institution self-discloses, they are not penalized for concealment.  Thus, while not directly reducing potential financial exposure, a VSD ensures that a financial institution is not further penalized for the potential violation. It is also worth noting that, unlike DOJ, these regulators do not appear to draw distinctions regarding the type of offense at issue (i.e., FCPA versus BSA versus sanctions violations).  Moreover, financial institutions contemplating not disclosing potential misconduct need to consider whether the nature of the potential misconduct at issue goes to the financial institution's safety and soundness, adequacy of capital, or other issues of interest to prudential regulators such as the Federal Reserve, OCC, and FDIC.  To the extent such prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and may face penalties for failing to do so. The Securities and Exchange Commission ("SEC") also has indicated that it will consider VSDs as a factor in its enforcement actions under the federal securities laws.  In a 2001 report (the "Seaboard Report"), the SEC confirmed that, as part of its evaluation of proper enforcement actions, it would consider whether "the company voluntarily disclose[d] information [its] staff did not directly request and otherwise might not have uncovered."[30]  The SEC noted that self-policing could result in reduced penalties based on how much the SEC credited self-reporting—from "the extraordinary step of taking no enforcement action to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents . . . use[d] to announce and resolve enforcement actions."[31]  In 2010, the SEC formalized its cooperation program, identifying self-policing, self-reporting, and remediation and cooperation as the primary factors it would consider in determining the appropriate disposition of an enforcement action.[32]  In 2015, the former Director of the SEC's Division of Enforcement, reaffirmed the importance of self-reporting to the SEC's enforcement decisions, stating that previous cases "should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits."[33]  As of mid-2016, the SEC had signed over 103 cooperation agreements, six non-prosecution agreements, and deferred nine prosecutions since the inception of the cooperation program.[34] Finally, like its federal counterparts, the New York Department of Financial Services ("NYDFS") has previously signaled, at least in the context of export and import sanctions, that "[i]t is vital that companies continue to self-report violations,"[35] and warned that "those that do not [self-report] run the risk of even more severe consequences."[36]  The NYDFS has not directly spoken to money laundering enforcement, but financial institutions considering disclosures to New York state authorities should keep this statement in mind.  Similar to the considerations an institution might face when dealing with federal regulators, to the extent DFS prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and face penalties for failing to do so. Recent BSA/AML and FCPA Resolutions Even against this backdrop, over the last few years, voluntary self-disclosure has not appeared to play a significant role in the resolution of criminal enforcement proceedings arising from alleged BSA/AML violations.  Since 2015, DOJ, in conjunction with other enforcement agencies, has resolved BSA/AML charges against twelve financial institutions.[37]  In eleven of those cases, the final documentation of the resolution—the settlement agreements and press releases accompanying the settlement documents—make no mention of voluntary self-disclosure.  Even in the FCPA context, where DOJ has sought to provide greater certainty and transparency concerning the benefits of voluntary disclosure, there is a scant track record of financial institutions making voluntary disclosures in connection with FCPA resolutions.  Since 2015, DOJ has announced FCPA enforcement actions with six financial institutions.  The Justice Department did not credit any of them with voluntarily self-disclosing the conduct.[38] Although recent resolutions have not granted credit for VSDs, financial entities facing enforcement actions should consider how such a disclosure might affect the nature of a potential investigation and the ultimate disposition of an enforcement action.  It is worth noting that in the one recent BSA/AML resolution with a financial institution in which voluntary self-disclosure was referenced—DOJ's 2017 resolution with Banamex USA—it was in the course of explaining why the financial institution did not receive disclosure credit.  In other words, there is no example of a criminal enforcement action commending a financial institution for a VSD, or of an agency softening the enforcement measures as a result of a VSD.[39]  The fact that the Banamex USA resolution affirmatively explains why the defendant did not receive VSD credit may imply that this type of credit may be available to financial institution defendants when they do make adequate VSDs. Furthermore, over the same time period, prosecutors have credited financial institutions for other forms of cooperation.  For example, in 2015, the Department of Justice deferred prosecution of CommerceWest Bank officials for a BSA charge arising from their willful failure to file a SAR, in part because of the bank's "willingness to acknowledge and accept responsibility for its actions" and "extensive cooperation with [DOJ's] investigation."[40]  Similarly, a 2015 non-prosecution agreement with Ripple Labs Inc. credited the financial institution with, among other factors, "extensive cooperation with the Government."[41]  These favorable dispositions signal that the government is willing to grant mitigation credit for cooperation, even when financial institutions are not credited with making VSDs. Other Relevant Considerations Relating to VSDs As discussed above, the government's position regarding the value of VSDs and their effect on the ultimate resolution of a case vary based on the agency and the legal and regulatory regime(s) involved.  Given the lack of clear guidance from FinCEN about how it credits VSDs and the fact that BSA/AML resolutions tend not to explicitly reference a company's decision to disclose as a relevant consideration, navigating the decision of whether to self-report to DOJ is itself a fraught one.  Beyond the threshold question of whether or not to self-disclose to DOJ, financial institutions faced with potential BSA/AML liability should be mindful of a number of other considerations, always with an eye on avoiding the specter of a full-blown criminal investigation and trying to minimize institutional liability to the extent possible. Likelihood of Discovery:  A financial institution deciding whether to self-disclose to DOJ must contemplate the possibility that the government will be tipped off by other means, including by the prudential regulators, and will investigate the potential misconduct anyway, without the financial institution gaining the benefits available for bringing a case to the government's attention and potentially before the financial institution has had the opportunity to develop a remediation plan.  Financial institutions that plan to forego self-disclosure of possible misconduct will have to guard against both whistleblower disclosures and the possibility that other institutions aware of the potential misconduct will file a Suspicious Activity Report implicating the financial institution. Timing of Disclosure:  Even after a financial institution has decided to self-report to DOJ, it will have to think through the implications of when a disclosure is made.  A financial institution could decide to promptly disclose to maximize cooperation credit, but risks reporting without developing the understanding of the underlying facts that an internal investigation would provide.  Additionally, a prompt disclosure to DOJ may be met with a deconfliction request, in which the government asks that the company refrain from interviewing its employees until the government has had a chance to do so.  This may slow down the company's investigation and impede its ability to take prompt and decisive remedial actions, including those related to personnel decisions.  On the other hand, waiting until after the internal investigation has concluded (or at least reached an advanced stage) presents the risk of the government finding out first in the interim.  The financial institution also will have to decide whether to wait longer to report to the government having already designed and begun to implement a remediation plan or to disclose while the remediation plan is still being developed. Selective or Sequential Disclosures:  Given the number of agencies with jurisdiction over the financial industry and the overlaps between their respective spheres of authority, financial institutions contemplating self-disclosure will often have to decide how much to disclose, whether to both prudential regulators and DOJ, and in what order.  In some cases, a financial institution potentially facing both regulatory and criminal liability may be well-advised to engage civil regulators first in the hope that, if DOJ does get involved, they will stand down and piggy-back on a global resolution with other regulators rather than seeking more serious penalties.  Indeed, DOJ prosecutors are required to consider the adequacy of non-criminal alternatives – such as civil or regulatory enforcement actions – in determining whether to initiate a criminal enforcement action.[42]  For example, the non-prosecution agreement DOJ entered in May 2017 with Banamex recognized that Citigroup, Banamex's parent, was already in the process of winding down Banamex USA's banking operations pursuant to a 2015 resolution with the California Department of Business Oversight and FDIC and was operating under ongoing consent orders with the Federal Reserve and OCC relating to BSA/AML compliance; consequently, DOJ sought only forfeiture rather than an additional monetary penalty.[43]  Of course, any decision to selectively disclose must be balanced carefully against the practical reality that banking regulators will, in certain instances, notify DOJ of potential criminal violations whether self-disclosed or identified in the examination process.  Whether that communication will occur often is influenced by factors such as the history of cooperation between the institutions or the relationships of those involved.  Nevertheless, the timing and nature of any referral by a regulator to DOJ might nullify any benefit from a selective or sequential disclosure. Conclusion In this inaugural Developments in the Defense of Financial Institutions Client Alert, we addressed whether and to what extent a financial institution should anticipate receiving a benefit when approaching the pivotal decision of whether to voluntarily self-disclose potential BSA/AML violations to DOJ.  We hope this publication serves as a helpful primer on this issue, and look forward to addressing other topics that raise unique issues for financial institutions in this rapidly-evolving area in future editions.    [1]   U.S. Dep't of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.    [2]   Rod Rosenstein, Deputy Att'y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign.    [3]   Throughout this alert, we use the term "financial institution" as it is defined in the Bank Secrecy Act.  "Financial institution" refers to banks, credit unions, registered stock brokers or dealers, currency exchanges, insurance companies, casinos, and other financial and banking-related entities.  See 31 U.S.C. § 5312(a)(2) (2012).  These institutions should be particularly attuned to the role that voluntary disclosures can play in the disposition of a criminal enforcement action.    [4]   See, e.g., 31 CFR § 1020.320 (FinCEN SAR requirements for banks); 12 C.F.R. § 21.11 (SAR requirements  for national banks).    [5]   See Non-Prosecution Agreement with Banamex USA, U.S. Dep't of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (noting that "the Company did not receive voluntary self-disclosure credit because neither it nor Citigroup voluntarily and timely disclosed to the Office the conduct described in the Statement of Facts").    [6]   U.S. Dep't of Justice, U.S. Attorneys' Manual § 9-28.700 (2017).    [7]   For a definition of self-disclosure in the sanctions space, see U.S. Dep't of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.  For a definition in the FCPA context, see U.S. Dep't of Justice, U.S. Attorneys' Manual § 9-47.120 (2017).    [8]   U.S. Dep't of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations, at 4 n.7 (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.  Gibson Dunn's 2016 Year-End Sanctions Update contains a more in-depth discussion of this DOJ guidance.    [9]   Id. at 2 n.3 [10]   Press Release, U.S. Dep't of Justice, Criminal Division Launches New FCPA Pilot Program (Apr. 5, 2016), https://www.justice.gov/archives/opa/blog/criminal-division-launches-new-fcpa-pilot-program.  For a more in-depth discussion of the original Pilot Program, see Gibson Dunn's 2016 Mid-Year FCPA Update, and for a detailed description of the FCPA Corporate Enforcement Policy, see our 2017 Year-End FCPA Update.  For discussion regarding specific declinations under the Pilot Program, in which self-disclosure played a significant role, see our 2016 Year-End FCPA Update and 2017 Mid-Year FCPA Update. [11]   Rod Rosenstein, Deputy Att'y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign (announcing that the FCPA Corporate Enforcement Policy would be incorporated into the USAM); U.S. Dep't of Justice, U.S. Attorneys' Manual § 9-47.120 (2017). [12]   Id. [13]   Jody Godoy, DOJ Expands Leniency Beyond FCPA, Lets Barclays Off, Law360 (Mar. 1, 2018), https://www.law360.com/articles/1017798/doj-expands-leniency-beyond-fcpa-lets-barclays-off. [14]   U.S. Dep't of Justice, Letter to Alexander Willscher and Joel Green Regarding Investigation of Barclays PLC (Feb. 28, 2018), https://www.justice.gov/criminal-fraud/file/1039791/download. [15]   Id. [16]   Tom Schoenberg, Barclays Won't Face Criminal Case for Hewlett-Packard Trades, Bloomberg (Mar. 1, 2018), https://www.bloomberg.com/news/articles/2018-03-01/barclays-won-t-face-criminal-case-over-hewlett-packard-trades. [17]   Id. [18]   31 C.F.R. Pt. 501, app. A, § III.G.1 (2018). [19]   Id. § V.B.1.a.iv (2018). [20]   OFAC has established a two-track approach to penalty assessment, based on whether violations are "egregious" or "non-egregious."  Egregious violations are identified based on analysis of several factors set forth in OFAC guidelines, including, among others: whether a violation was willful; whether the entity had actual knowledge of the violation, or should have had reason to know of it; harm caused to sanctions program objectives; and the individual characteristics of the entity involved. [21]   31 C.F.R. Pt. 501, app. A, § V.B.2.a.iv (2018). [22]   Id. § V.B.2.a.ii (2018). [23]   Id. § V.B.2.a.i (2018). [24]   Id. [25]   Id. § V.B.2.a.iii (2018). [26]   Robert B. Serino, FinCEN's Lack of Policies and Procedures for Assessing Civil Money Penalties in Need of Reform, Am. Bar Ass'n (July 2016), https://www.americanbar.org/publications/blt/2016/07/07_serino.html.  It is worth noting, however, that there are certain circumstances in which FinCEN imposes a continuing duty to disclose, such as when there has been a failure to timely file a SAR (31 C.F.R. § 1020.320(b)(3)); failure to timely file a Currency Transaction Report (31 C.F.R. § 1010.306); and failure to timely register as a money-services business (31 C.F.R. § 1022.380(b)(3)).  In circumstances in which a financial institution identifies that it has not complied with these regulatory requirements and files belatedly, the decision whether to self-disclose to DOJ is impacted by the fact that the late filing will often be evident to FinCEN. [27]   Federal Financial Institutions Examination Council: Assessment of Civil Money Penalties, 63 FR 30226-02, 1998 WL 280287 (June 3, 1998). [28]   Office of the Comptroller of the Currency, Policies and Procedures Manual, PPM 5000-7 (Rev.) (Feb. 26, 2016), https://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-5a.pdf. [29]   Id. at 15-17. [30]   U.S. Secs. & Exch. Comm'n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Release No. 44969 (Oct. 23, 2001), https://www.sec.gov/litigation/investreport/34-44969.htm. [31]   Id. [32]   U.S. Secs. & Exch. Comm'n, Enforcement Cooperation Program, https://www.sec.gov/spotlight/enforcement-cooperation-initiative.shtml (last modified Sept. 20, 2016). [33]   Andrew Ceresney, Director, SEC Division of Enforcement, ACI's 32nd FCPA Conference Keynote Address (Nov. 17, 2015), https://www.sec.gov/news/speech/ceresney-fcpa-keynote-11-17-15.html. [34]   Juniad A. Zubairi & Brooke E. Conner, Is SEC Cooperation Credit Worthwhile?, Law360 (Aug. 30, 2016), https://www.law360.com/articles/833392. [35]   Press Release, N.Y. Dep't Fin. Servs., Governor Cuomo Announced Bank of Tokyo-Mitsubishi UFJ to Pay $250 Million to State for Violations of New York Banking Law Involving Transactions with Iran and Other Regimes (June 20, 2013), https://www.dfs.ny.gov/about/press/pr1306201.htm. [36]   Id. [37]   Press Release, U.S. Dep't of Justice, U.S. Gold Refinery Pleads Guilty to Charge of Failure to Maintain Adequate Anti-Money Laundering Program (Mar. 16, 2018), https://www.justice.gov/usao-sdfl/pr/us-gold-refinery-pleads-guilty-charge-failure-maintain-adequate-anti-money-laundering; Deferred Prosecution Agreement with U.S. Bancorp, U.S. Dep't of Justice (Feb. 12, 2018), https://www.justice.gov/usao-sdny/press-release/file/1035081/download; Plea Agreement with Rabobank, National Association, U.S. Dep't of Justice (Feb. 7, 2018), https://www.justice.gov/opa/press-release/file/1032101/download; Non-Prosecution Agreement with Banamex USA, U.S. Dep't of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download; Press Release, U.S. Dep't of Justice, Western Union Admits Anti-Money Laundering and Consumer Fraud Violations, Forfeits $586 Million in Settlement with Justice Department and Federal Trade Commission (Jan. 19, 2017), https://www.justice.gov/opa/pr/western-union-admits-anti-money-laundering-and-consumer-fraud-violations-forfeits-586-million; Non-Prosecution Agreement Between CG Technology, LP and the United States Attorneys' Offices for the Eastern District of New York and the District of Nevada, U.S. Dep't of Justice (Oct. 3, 2016), https://www.gibsondunn.com/wp-content/uploads/documents/publications/CG-Technology-dba-Cantor-Gaming-NPA.PDF; Press Release, U.S. Dep't of Justice, Normandie Casino Operator Agrees to Plead Guilty to Federal Felony Charges of Violating Anti-Money Laundering Statutes (Jan. 22, 2016), https://www.justice.gov/usao-cdca/pr/normandie-casino-operator-agrees-plead-guilty-federal-felony-charges-violating-anti; Press Release, U.S. Dep't of Justice, Hong Kong Entertainment (Overseas) Investments, Ltd, D/B/A Tinian Dynasty Hotel & Casino Enters into Agreement with the United States to Resolve Bank Secrecy Act Liability (July 23, 2015), https://www.justice.gov/usao-gu/pr/hong-kong-entertainment-overseas-investments-ltd-dba-tinian-dynasty-hotel-casino-enters; Deferred Prosecution Agreement with Bank of Mingo, U.S. Dep't of Justice (May 20, 2015), https://www.gibsondunn.com/wp-content/uploads/documents/publications/Bank-of-Mingo-NPA.pdf; Settlement Agreement with Ripple Labs Inc., U.S. Dep't of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; Deferred Prosecution Agreement with Commerzbank AG, U.S. Dep't of Justice (Mar. 12, 2015), https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/12/commerzbank_deferred_prosecution_agreement_1.pdf; Deferred Prosecution Agreement with CommerceWest Bank, U.S. Dep't of Justice (Mar. 10, 2015) https://www.justice.gov/file/348996/download. [38]   Deferred Prosecution Agreement with Société Générale S.A., U.S. Dep't of Justice (June 5, 2018), https://www.justice.gov/opa/press-release/file/1068521/download; Non-Prosecution Agreement with Legg Mason, Inc., U.S. Dep't of Justice (June 4, 2018), https://www.justice.gov/opa/press-release/file/1068036/download; Non-Prosecution Agreement with Credit Suisse (Hong Kong) Limited, U.S. Dep't of Justice (May 24, 2018), https://www.justice.gov/opa/press-release/file/1077881/download; Deferred Prosecution Agreement with Och-Ziff Capital Management Group, LLC, U.S. Dep't of Justice (Sept. 29, 2016), https://www.justice.gov/opa/file/899306/download; Non-Prosecution Agreement with JPMorgan Securities (Asia Pacific) Ltd, U.S. Dep't of Justice (Nov. 17, 2016), https://www.justice.gov/opa/press-release/file/911206/download; Non-Prosecution Agreement with Las Vegas Sands Corp., U.S. Dep't of Justice (Jan. 17, 2017), https://www.justice.gov/opa/press-release/file/929836/download. [39]   See Non-Prosecution Agreement with Banamex USA, U.S. Dep't of Justice, at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (explaining that Banamex "did not receive voluntary disclosure credit because neither it nor [its parent company] Citigroup voluntarily and timely disclosed to [DOJ's Money Laundering and Asset Recover Section] the conduct described in the Statement of Facts") (emphasis added). [40]   Deferred Prosecution Agreement Between United States and CommerceWest Bank, U.S. Dep't of Justice, at 2-3 (Mar. 9, 2015), https://www.justice.gov/file/348996/download. [41]   Settlement Agreement Between United States and Ripple Labs Inc., U.S. Dep't of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; see also Press Release, U.S. Dep't of Justice, Ripple Labs Inc. Resolves Criminal Investigation (May 5, 2015), https://www.justice.gov/opa/pr/ripple-labs-inc-resolves-criminal-investigation. [42]   See U.S. Attorney's Manual 9-28.1200 (recommending the analysis of civil or regulatory alternatives). [43]   Non-Prosecution Agreement Between U.S. Dep't of Justice, Money Laundering and Asset Recovery Section and Banamex USA at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download. The following Gibson Dunn attorneys assisted in preparing this client update:  F. Joseph Warin, M. Kendall Day, Stephanie L. Brooker, Adam M. Smith, Linda Noonan, Elissa N. Baur, Stephanie L. Connor, Alexander R. Moss, and Jaclyn M. Neely. Gibson Dunn has deep experience with issues relating to the defense of financial institutions, and we have recently increased our financial institutions defense and anti-money laundering capabilities with the addition to our partnership of M. Kendall Day.  Kendall joined Gibson Dunn in May 2018, having spent 15 years as a white collar prosecutor, most recently as an Acting Deputy Assistant Attorney General, the highest level of career official in the U.S. Department of Justice's Criminal Division.  For his last three years at DOJ, Kendall exercised nationwide supervisory authority over every Bank Secrecy Act and money-laundering charge, deferred prosecution agreement and non-prosecution agreement involving every type of financial institution. Kendall joined Stephanie Brooker, a former Director of the Enforcement Division at the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor and Chief of the Asset Forfeiture and Money Laundering Section for the U.S. Attorney's Office for the District of Columbia, who serves as Co-Chair of the Financial Institutions Practice Group and a member of White Collar Defense and Investigations Practice Group.  Kendall and Stephanie practice with a Gibson Dunn network of more than 50 former federal prosecutors in domestic and international offices around the globe. For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact any Gibson Dunn attorney with whom you usually work, or any of the following leaders and members of the firm's White Collar Defense and Investigations or Financial Institutions practice groups: Washington, D.C. F. 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Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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July 11, 2018

2018 Mid-Year False Claims Act Update

Click for PDF Six months ago, we remarked in these pages on the largely unchanged and unrelenting pace of False Claims Act ("FCA") enforcement under the Trump Administration.  Now, with another half-year behind us, the Administration has started to put its stamp on FCA enforcement and to signal openness to less draconian FCA enforcement, at least on the margins.  In a series of internal guidance memoranda and public speeches, high-ranking Department of Justice ("DOJ") officials have indicated their recognition of the very real costs of overly aggressive and unchecked FCA enforcement by qui tam whistle-blowers and DOJ itself, and laid out some steps they plan to take.  It is still too early to tell what effect, if any, these announcements will have in practice.  But the next six months and beyond are likely to provide telling indications of whether DOJ matches its shift in tone with a real shift in tactics. For now, however, broader FCA trends appear unaffected by these recent developments.  DOJ announced a typically robust, albeit slightly reduced, set of eight- and nine-figure settlements and judgments, including at least two that topped $100 million apiece, over the course of the last six months.  Meanwhile the courts continued to explore the important intricacies and nuances of FCA jurisprudence, with nearly a dozen notable circuit court cases released in just the last half-year.  The Supreme Court also indicated that it might engage again with the FCA by inviting the views of the Solicitor General on important issues arising from the Court's last seminal decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  And there were also a handful of regulatory and state-law changes that could affect the scope of FCA enforcement going forward. We address all of these and other developments in greater depth below.  We discuss enforcement activity at the federal and state levels first, turn to activity on the legislative front, and then conclude with an analysis of significant court decisions from the past six months.  As always, Gibson Dunn's recent publications on 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.    NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2018 The first half of 2018 saw several notable developments in DOJ enforcement activities, including both positive and not-so-positive developments for companies facing FCA exposure.  On the one hand, several internal DOJ guidance documents suggested that the current leadership at DOJ is considering a less aggressive approach to FCA enforcement than we have seen develop increasingly over the last 10 years.  But on the other hand, DOJ also continued to announce significant settlements and stringent enforcement programs, aimed at a wide variety of industries, under a wide variety of theories.  We explore these developments below. A.    DOJ Releases Important Guidance on FCA Enforcement and Signals More Changes to Come Though many have advocated for FCA reform as the number of qui tam cases and enforcement efforts have exploded in recent years, those efforts have not proven too fruitful.  But the new Administration may be a more receptive audience, as recent guidance from DOJ signals the first significant policy changes in recent memory that recognize the burden of FCA exposure.  As we reported in our client alerts on these topics (available here and here), there were three major announcements during the last six months that introduced current, and forthcoming, changes from DOJ. First, on January 10, 2018, Michael Granston, the Director of the Fraud Section of DOJ's Civil Division, issued a memorandum (the "Granston Memo") directing government lawyers evaluating a recommendation to decline intervention in a qui tam FCA action to "consider whether the government's interests are served . . . by [also] seeking dismissal [of the underlying qui tam] pursuant to 31 U.S.C. § 3730(c)(2)(A)."[1]  The memorandum notes that DOJ "has seen record increases in qui tam actions" filed under the FCA, and while the "number of filings has increased substantially over time," DOJ's "rate of intervention has remained relatively static."  Emphasizing that DOJ "plays an important gatekeeper role in protecting the False Claims Act," the memorandum identifies dismissal of non-intervened cases as "an important tool to advance the government's interests, preserve limited resources, and avoid adverse precedent."  The memo then sets forth seven factors that prosecutors should consider when evaluating whether seeking dismissal of a declined qui tam action is appropriate.  Although those factors all stem from existing precedent in cases where DOJ has previously moved for dismissal, the fact that DOJ issued the Granston Memo indicates that DOJ may be more willing to go beyond merely declining unmeritorious cases.  By taking additional steps to dismiss such cases, DOJ may mitigate the extreme burden caused by unbridled qui tam plaintiffs.. Second, on January 25, 2018, then-Associate Attorney General Rachel Brand, the Department's third-ranking official, issued a memorandum (the "Brand Memo") that prohibits DOJ from using noncompliance with other agencies' "guidance documents as a basis for proving violations of applicable law in" affirmative civil enforcement cases and from using "its enforcement authority to effectively convert agency guidance documents into binding rules."[2]  Agencies commonly issue guidance documents interpreting legislation and regulations, and the government has sometimes employed evidence that a defendant violated such guidance to prove a violation of the underlying statute or regulation—which, in turn, may support a showing that a defendant's claims or statements were "false" under the FCA.  The memorandum explicitly prohibits DOJ attorneys from engaging in this practice, although it is careful to note that prosecutors can continue to use such guidance as evidence that a defendant knew of its obligations under the law.  The Brand Memo builds on an earlier memo from Attorney General Jeff Sessions, from November 2017, that prohibited DOJ from issuing "guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch" without adhering to rulemaking processes as required by the Administrative Procedure Act (the "Sessions Memo").[3]  Together, the Brand Memo and Sessions Memo reflect the Administration's efforts to reign in administrative and regulatory requirements, with the Brand Memo signaling the Administration's determination to extend that broader policy agenda in the FCA space. Third, DOJ has continued to reinforce its interest in taking measures to promote a more fair and consistent application of the FCA.  In a June 14 speech, Acting Associate Attorney General Jesse Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement, including the Brand and Granston memos highlighted above, as well as three additional areas: (i) cooperation credit; (ii) compliance program credit; and (iii) preventing "piling on."  As to the latter three, Panuccio noted that DOJ is working on formalizing its practices with regard to cooperation credit and suggested that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure.  Cooperation credits in FCA cases have traditionally been less well spelled-out than in some other contexts (e.g., under the Foreign Corrupt Practices Act), and Panuccio's speech is a step towards formalizing those processes.  He also explained that DOJ will "reward companies that invest in strong compliance measures," and that to prevent piling on, DOJ attorneys will promote coordination within the agency and with other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement. DOJ's continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department. B.    Opioid Enforcement Efforts Continue In our 2017 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices, we noted the surge in enforcement activities surrounding the opioid epidemic.  From public pronouncements to criminal indictments, the current Administration has demonstrated widespread commitment to enforcement efforts around opioid issues.  The focus is unlikely to let up soon. For the time being, many of the enforcement efforts with regard to opioids have been on the criminal side and not directly related to the FCA.  But given DOJ's close coordination between its criminal and civil divisions, widespread criminal enforcement efforts against an industry are often correlated with current, or imminent, FCA enforcement. The intense focus on the criminal side can hardly be overstated.  In June, the chief executive officer of a health care company and four physicians were charged in a superseding indictment with numerous crimes, including conspiracy to commit wire fraud and money laundering, as part of an ongoing investigation into the defendants' alleged $200 million fraudulent health care scheme involving Michigan- and Ohio-based pain clinics, laboratories, and other providers.[4]  This was followed later in June by a DOJ announcement regarding the "National Health Care Fraud and Opioid Takedown."[5]  Attorney General Sessions announced that DOJ was "charging 601 people, including 76 doctors, 23 pharmacists, 19 nurses, and other medical personnel with more than $2 billion in medical fraud."[6]  DOJ also announced it has a "new data analytics program that focuses specifically on opioid-related health care fraud."[7]  DOJ has also made forays into civil litigation by filing a statement of interest in a high-stakes multi-district action against opioid manufacturers and distributors that is premised on allegedly false, deceptive, or unfair marketing practices for prescription opioid drugs.[8] FCA enforcement is not far behind.  On May 15, 2018, for example, an unsealed complaint revealed that the United States had intervened in five lawsuits accusing an Arizona-based opioid manufacturer of paying kickbacks to induce physicians and nurses to prescribe the company's opioid painkiller for their patients.  The lawsuits allege that these kickbacks took the form of payments for sham speaking engagements, jobs for the prescribers' friends and relatives, and extravagant meals and other entertainment.  The lawsuits likewise allege that the manufacturer improperly encouraged physicians to prescribe its opioids to patients who did not have cancer—the approved use of the drug—and that company employees also lied to insurers in order to obtain reimbursement under Medicare and TRICARE.[9] C.    Notable Settlements All told, DOJ has announced more than approximately $600 million in settlements this year.  This amount represents a decrease from previous years at the same point, largely because there have been comparatively fewer blockbuster settlements during the last six months.  Still, the cadence of enforcement activity has continued to be steady. 1.    Health Care and Life Sciences Industries On January 10, a dental management company and more than 130 of its affiliated dental clinics agreed to pay $23.9 million, plus interest, to settle allegations that the companies knowingly submitted false claims to state Medicaid programs for unnecessary services on Medicaid-insured youth.  DOJ alleged that the companies incentivized and disciplined dentists to meet goals on procedures performed, ignoring when dentists complained about overutilization.  DOJ alleged that the companies submitted false Medicaid claims in 17 states, and also submitted false claims to an additional program, the Texas Medicaid Program for First Dental Home.  The federal government will receive approximately $14.2 million, plus interest, and states will receive approximately $9.7 million, plus interest.  This investigation was initiated by five whistle-blower lawsuits.  Three of the whistle-blowers, former employees of the dental clinics, will receive a total of more than $2.4 million from the federal portion of the settlement.[10] On March 7, a Pennsylvania hospital and cardiology group agreed to pay approximately $20.8 million combined to resolve claims that the two engaged in improper financial relationships to secure physician referrals.  Specifically, the government alleged that the hospital paid the cardiology group up to $2 million per year under physician and administrative service arrangements for services that were duplicative, not performed, or not needed.  The whistle-blower, a doctor in the cardiology group, received approximately $6 million of the recovered amount.[11] On March 23, a medical device manufacturer and its domestic subsidiary agreed to pay approximately $33.2 million to resolve claims that the subsidiary caused hospitals to submit false claims to government health care programs by knowingly selling materially unreliable point-of-care diagnostic testing devices.  The government claimed that the subsidiary received customer complaints that put it on notice that devices it sold produced erroneous results and failed to take corrective action until FDA inspections prompted a nationwide product recall.  The whistle-blower, a former senior quality control analyst at the subsidiary, will receive approximately $5.6 million of the recovered amount.[12] On March 28, a Virginia ambulance services provider agreed to pay $9 million to settle allegations that it submitted false or fraudulent claims to Medicare, Medicaid, and TRICARE for ambulance transports that were not medically necessary, that did not qualify as Specialty Care Transports, and that should have been billed to other payers.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG.[13] On March 29, a Texas company operating radiation therapy centers nationwide, along with its acquirer, agreed to pay up to $11.5 million to settle allegations that the Texas company paid kickbacks to physicians for referring patients to its cancer treatment centers.  The companies also agreed to enter into a five-year corporate integrity agreement with HHS OIG, which includes internal and external monitoring of relationships between the companies and referring physicians.  The Texas company allegedly distributed a share of the profits through a series of leasing companies in which referring physicians were permitted to invest.  The whistle-blower will receive up to $1.7 million as part of the settlement.[14] On April 12, a Florida respiratory equipment supplier agreed to pay approximately $9.7 million to settle allegations that it knowingly submitted false claims for portable oxygen contents to Medicare between January 2009 and March 2012.  Specifically, the government alleged that the company billed Medicare without verifying that beneficiaries used or needed the oxygen, and without obtaining the requisite proof of delivery.  The whistle-blower will receive approximately $1.6 million as part of the settlement.[15] On April 12, an Arizona company that owns acute-care hospitals agreed to pay over $18 million to resolve allegations that 12 of its hospitals knowingly overcharged Medicare patients for short-stay, inpatient procedures that should have been billed on a less costly outpatient basis.  The settlement also resolved claims that the company inflated the number of hours for which patients received outpatient observation in its reports to Medicare.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG, which includes the requirement to retain an independent review organization to review the accuracy of claims submitted to federal health care programs.  The whistle-blower, a former employee of the company, will receive approximately $3.3 million of the recovered amount.[16] On April 19, a California diagnostics laboratory agreed to pay $2 million to settle claims that it submitted and caused the submission of false claims to Medicare for Breast Cancer Index tests that were not reasonable and necessary.  The government alleged the company promoted and performed the tests for patients who had not been in remission for five years and who had not been taking tamoxifen.  The government claimed performing tests under such circumstances is medically unnecessary based on published clinical trial data and clinical practice guidelines.[17] On May 10, a Cincinnati-based nonprofit company operating several health care facilities in Ohio and Kentucky agreed to pay $14.25 million to settle allegations that the company provided compensation to six referring physicians in excess of the fair market value for the physicians' services.  Per the government's announcement, these issues were self-reported by the nonprofit hospital system.[18] On May 24, a large pharmaceutical company agreed to pay $23.85 million to resolve claims that the company illegally paid the co-pays of Medicare patients taking three of the company's drugs.  The alleged scheme involved the use of a foundation as a conduit for the remuneration.[19] On May 31, two owners of a Philadelphia pharmacy agreed to pay $3.2 million to resolve claims that over the course of roughly seven years the pair fraudulently billed Medicare for prescription medications that their pharmacy did not actually dispense to its patients.[20] On June 8, a Kentucky-based health care company that owns and operates roughly 115 skilled nursing facilities in several states agreed to pay more than $30 million to resolve allegations that it knowingly submitted false claims to Medicare for medically unreasonable or unnecessary rehabilitation therapy services.  As part of the agreement, the State of Tennessee will receive a portion of the final settlement.  The two relators who initially brought the suit will also receive a yet undetermined portion of the eventual settlement.[21] On June 20, a national wound-care provider agreed to pay $22.5 million to settle allegations that it billed the government for unnecessary and unreasonable hyperbaric oxygen therapy, which is a therapy indicated for certain chronic wounds.  According to the government, the company billed for these unnecessary treatments for five years, between 2010 and 2015.  In addition to the monetary settlement, the company entered into a five-year corporate integrity agreement that subjects the company to independent reviews.[22] On June 25, a hospice chain agreed to pay $8.5 million to resolve allegations that it improperly billed the federal government for hospice services.  The government alleged that the company provided hospice care to patients who were not terminally ill (and therefore ineligible for the services), despite repeated warnings that ineligible patients were being admitted.[23] 2.    Government Contracting and Defense/Procurement On March 15, a Japanese fiber manufacturer and its American subsidiary agreed to pay approximately $66 million to resolve claims that they sold defective Zylon fiber used in bulletproof vests, which the United States purchased for law enforcement agencies.  The government alleged that between 2001 and 2005, the companies knew that Zylon degraded quickly in normal heat and humidity, rendering it unfit for use in bulletproof vests.  Yet, according to the government, the companies published misleading degradation data that understated the defect and engaged in a marketing campaign that advocated for the continued sale of Zylon-containing vests after a body armor manufacturer recalled such vests.  The whistle-blower will receive over $5.7 million as part of the settlement.[24]  The settlement resolves part of a long-running series of FCA cases related to allegedly defective bulletproof vests that goes back several decades and involved several companies.[25] On April 19, a former professional cyclist agreed to pay $5 million to resolve allegations that he submitted millions of dollars in false claims for sponsorship payments to the U.S. Postal Service ("USPS"), which sponsored his cycling team.  The government claimed that the cyclist violated the terms of his team's USPS sponsorship by using performance enhancing drugs ("PEDs"), as well as making numerous false statements—including statements under oath—denying his PED use to induce the USPS to renew and increase its sponsorship.  The whistle-blower, a former teammate, will receive $1.1 million as part of the settlement.[26] On May 29, a foreign-based federal contractor and several of its subsidiaries agreed to pay $20 million to resolve allegations that the companies knowingly overbilled the United States Navy under contracts to provide ship husbanding services in numerous ports around the world.  As part of the resolution, the whistle-blowers in the case, three former employees of the contractor, will receive approximately $4.4 million.[27] 3.    Financial Services On February 28, an audit firm agreed to pay $149.5 million to resolve potential FCA claims related to the firm's role as the independent outside auditor for a now-defunct originator of mortgage loans that were insured by the Federal Housing Administration ("FHA") under the Department of Housing and Urban Development ("HUD").  As part of a HUD program, the mortgage company was considered to be a Direct Endorsement Lender, and could submit claims to the United States to recover any losses that occurred as a result of a default on a loan insured by the FHA that the company had underwritten and endorsed.  To maintain Direct Endorsement Lender status, the mortgage company was required to submit annual audited financial statements in compliance with HUD requirements.  The audit firm issued audit reports on the mortgage company's annual financial statements for fiscal years 2002 through 2008.  The United States alleged that the mortgage company was engaged in a fraudulent scheme involving the alleged sale of "fictitious or double-pledged" loans, leading to financial statements that failed to accurately reflect that the company was in financial distress.  The United States also alleged that the audit firm did not identify the mortgage company's fraudulent conduct and alleged that by continuing to issue audit reports notwithstanding the mortgage company's misconduct, the company was able to continue originating the insured loans until the mortgage company declared bankruptcy in 2009.  A number of officials from the mortgage company were criminally convicted in connection with the conduct at issue as well. [28] 4.    Other On January 16, a home furnishings company agreed to pay $10.5 million to settle claims that it knowingly made false statements on customs declarations forms to avoid paying antidumping duties on imported bedroom furniture from China.  The company classified the furniture as non-bedroom furniture, which was not subject to the antidumping duties. In connection with the FCA settlement, a whistle-blower will receive approximately $1.9 million.[29] D.    Notable Verdicts and Judgments In addition to the settlements noted above, there were several notable verdicts and judgments in FCA cases during the last six months. On January 11, a federal district court in Florida reversed a $350 million FCA jury verdict.  The jury reached a verdict that a nursing home operator had submitted false claims by allegedly failing to maintain a comprehensive care plan that was "ostensibly required by Medicaid regulation," alongside other relatively minor infractions.  United States v. Salus Rehab., LLC, 304 F. Supp. 3d 1258, 1260 (M.D. Fla. 2018).  The court overturned the verdict, holding that "[t]he record fatally wants for evidence of materiality and scienter."  In so holding, the court took umbrage that "relator won judgments for almost $350 million based" only on the theory that "a handful of paperwork defects" and "failure to maintain care plans made" defendants' claims to Medicare and Medicaid false or fraudulent.  Id.  The court explained that "the relator offered no meaningful and competent proof that the federal or the state government, if either or both had known of the disputed practices (assuming that either or both did not know), would have regarded the disputed practices as material to each government's decision to pay the defendants and, consequently, that each government would have refused to pay the defendants."  Id.  It also disagreed that there was any evidence the defendants acted knowingly.  Id.  In so holding, the court affirmed the importance of the Supreme Court's Escobar decision and its role in enforcing the FCA's materiality standard. On May 29, the United States District Court in the District of South Carolina entered a judgment totaling approximately $114 million against three individuals found liable under the FCA of paying kickbacks to physicians in exchange for patient referrals.  The underlying claims were initially brought as part of three lawsuits filed by four whistle-blowers, alleging that the kickback scheme caused two blood testing laboratories in Virginia and California to bill federal health care programs for medically unnecessary tests.  The whistle-blowers' share of the judgment has not yet been determined.[30] II.    LEGISLATIVE ACTIVITY A.    Federal Legislation As with the latter half of 2017, the first half of 2018 has seen little to no federal legislative activity affecting the FCA.  While President Trump's plan to repeal and replace the Affordable Care Act ("ACA") could have affected the ACA's amendments to the FCA—as discussed in our 2017 Mid-Year False Claims Act Update[31]—Congress has not shown any signs that it will pass such a bill in the near future, though some commentators have speculated that Senate Republicans may attempt such a feat in an effort to rally the base for the 2018 elections.[32]  Senator Lindsey Graham (R-S.C.) announced in May that he is working on a new repeal-and-replace bill, but no new bills have been introduced in Congress and Senator Graham's "effort appears to have little, if any, chance of passing this year."[33] In a February speech on the Senate floor, Senator Chuck Grassley laid out his views about problems arising from the Supreme Court's 2016 Escobar decision that are "getting some defendants, and judges, tied in knots."[34]  In particular, Senator Grassley criticized courts for applying the Supreme Court's instruction regarding so-called "government knowledge"—that continued government payment, in the face of government knowledge of non-compliance with regulatory or contractual requirements, may be strong evidence that the violation is not material.  According to Grassley, the Court "did not say that in every case, if the government pays a claim despite the fact that someone, somewhere in the bowels of the bureaucracy might have heard about allegations that the contractor may have done something wrong, the contractor is automatically off the hook."[35]  And he set forth his views of how courts should apply Escobar without "piling on bogus restrictions that are just not in the law."[36]  Notably, the issue of the interplay between government knowledge and materiality is back before the Supreme Court on a petition for certiorari in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017), as discussed below.  If the Court takes that case, and rules in a way that bolsters its Escobar decision instead of the viewpoint espoused by Senator Grassley, we will be watching closely to see if the Court's interpretation prompts a Congressional response. Consistent with the Trump administration's agenda, Federal regulatory activity implicating the FCA has also remained stagnant.  As noted in our 2017 Year-End False Claims Act Update,[37] the FDA proposed a regulation in January 2017 that would amend and expand the agency's definition of "intended use" for drugs and devices codified in 21 C.F.R. § 201.128 and 21 C.F.R. § 801.4, but that rule's effective date was delayed until March 19, 2018 after opposition from industry.[38]  On March 16, the FDA delayed indefinitely the effective date of the portions of the rule relating to intended use "to allow further consideration of the substantive issues raised in the comments received regarding the amendments."[39] On March 23, 2018, President Trump signed an omnibus appropriations bill authorizing $1.3 trillion in spending, $654.6 billion of which was designated for the Department of Defense—a $60 billion increase from 2017 defense spending.[40]  The bill also includes a $21.2 billion appropriation for infrastructure spending.  This law does not amend the FCA or substantively alter enforcement, but the increase in spending may invite greater FCA enforcement scrutiny or relator actions for the defense and construction contractors who work with the federal government. B.    State Legislation In 2005, Congress created financial incentives for states to enact their own False Claims Acts and make them as effective as the federal FCA in facilitating qui tam lawsuits.  If a state meets this standard, it may be eligible to "receive a 10-percentage-point increase in [its] share of any amounts recovered under such laws."[41]  The Department of Health and Human Services Office of Inspector General ("HHS OIG") is tasked with assessing whether a state's law qualifies.  As reported in our last Mid-Year update,[42] HHS OIG notified 15 states at the end of 2016 that their laws required amendment to meet the federal standard, and it set a "grace period" through the end of 2018 to bring state law into compliance or risk losing the 10% financial incentive.[43]  Since our Year-End update: A Michigan bill that would amend the civil penalties in the Michigan Medicaid False Claims Act to mirror penalties allowed under the federal FCA has not progressed beyond its November 28, 2017 referral to the Senate Judiciary Committee.[44] A similar New York bill died in the Senate and was returned to the Assembly on January 3, 2018.[45] A similar North Carolina bill has not progressed since it was re-referred to the Committee on Rules and Operations of the Senate in April 2017.[46] Other notable state legislative developments include: A Florida bill to exempt information from disclosure under the state's public records law that is related to an "investigation of violation of Florida False Claims Act" was approved by the governor on March 21, 2018.[47]  As noted in our 2017 Year-End Update, this bill exempts the Florida FCA's under seal requirements from review and potential repeal under the Sunset Review Act.[48] There has been no action on a Michigan bill that would create a general Michigan False Claims Act since it was referred to the state's Senate Committee on the Judiciary in January 2017.[49]  The bill would expand Michigan's current Medicaid False Claims Act beyond the Medicaid context. No action has been taken on a Pennsylvania bill that would create a state False Claims Act; the bill has been in the House Judiciary Committee since March 2017.[50] We expect to see additional state legislative activity in the second half of 2018, as the HHS OIG "grace period" draws to an end.  To date, HHS OIG has informed 12 states that their laws meet the federal standard (Colorado, Connecticut, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, Oklahoma, Tennessee, Texas, and Vermont) and has informed 14 states that their laws do not meet the federal standard (California, Delaware, Florida, Georgia, Hawaii, Michigan, Minnesota, New Hampshire, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin).[51]  Three other states were informed prior to recent federal amendments that their state laws did not meet the old federal standard (Louisiana, New Jersey, and New Mexico).[52] III.    NOTABLE CASE LAW DEVELOPMENTS Thus far in 2018, courts have continued to advance the body of FCA case law.  The appellate courts have issued nearly a dozen notable cases in the first part of the year, including decisions that explored the meaning of the Supreme Court's decision in Universal Health Services, v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the FCA's statute of limitations, and the public disclosure bar.  These decisions clarified some areas of the law, yet deepened splits in others.  As always, we have closely monitored these developments and summarize the most notable decisions below. A.    Post-Escobar Developments Now two years since it was decided, courts continue to grapple with the Supreme Court's landmark decision in Escobar.  As we have previously discussed in depth (including here), in Escobar, the Supreme Court held that an implied false certification theory of liability under the FCA is actionable when: (1) a claim "does not merely request payment, but also makes specific representations about the goods or services provided" and (2) the defendant's failure to disclose noncompliance with some "material statutory, regulatory, or contractual requirement[] makes those representations misleading half-truths."  Id. at 2001.  The Escobar Court further instructed courts to apply a "rigorous" and "demanding" materiality standard, necessitating the plaintiff show something akin to that the government actually refused payment, or would have refused payment had it known of the alleged misrepresentations regarding compliance.  Id. at 2002–03. Since Escobar, lower courts have worked to determine the precise requirements for establishing materiality at the pleading stage.  The fact-intensive analysis involved with materiality has produced some useful guidance for FCA defendants.  For example, conclusory statements by a plaintiff that the government would not have paid had it known of the alleged false statement are insufficient to survive a pleadings challenge, United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614, 2017 WL 3326452, at *7 (C.D. Cal. Aug. 3, 2017), yet, pleading that the government has previously terminated eligibility for similar falsities may be sufficient, depending upon the other allegations asserted, see United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., No. 14-cv-5739, 2017 WL 5515860, at *10 (S.D.N.Y. Sept. 26, 2017). As in prior years, the appellate courts continued to grapple with the application of Escobar's "rigorous" and "demanding" materiality requirement in the first half of 2018. 1.    The Sixth Circuit Considers Government Payment Practices In Escobar, the Supreme Court explained that "proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement."  Escobar, 136 S. Ct. at 2003.  The Sixth Circuit recently weighed in on the question of what is required to adequately allege materiality at the pleading stage in such cases. United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) involved alleged false claims for home health services.  Specifically, the relator alleged that the defendant home health provider failed to timely obtain provider physician certifications in violation of a regulation requiring such certifications to "be obtained at the time the plan of care is established or as soon thereafter as possible."  Id. at 825.  Despite concluding that compliance with the timing regulation was an express condition of payment, the district court had dismissed the claim for failure to adequately allege materiality under the standards articulated in Escobar.  Id. at 826, 832.  The district court reasoned that the complaint failed to identify any instance in which the government denied reimbursement for a similar violation in the entire 50-plus year history of the regulation, which suggested the government did not view violations of the certification regulation as material.  Id. at 834.  In addition, the relator cited materials suggesting the government's concern focused on ensuring the services were medically necessary, not that the certification was made at a particular time.  Id. 847–48 (J. McKeague, dissenting). By a 2 to 1 vote, the Sixth Circuit reversed.  Id. at 825.  The court faulted the lower court for drawing "a negative inference from the absence of any allegations about past government action."  Id. at 834.  The majority explained that a relator is "not required to make allegations regarding past government action," and so absent the government's actual knowledge of the alleged fraud being pled, its past payment practices were irrelevant to whether an FCA plaintiff has adequately pled materiality in their complaint.  Id.  The court went on to find that the relator adequately alleged materiality, including based on the fact that the timing requirement was an express condition of payment.  Id. at 836.  The majority also concluded that the relator had adequately alleged scienter.  Id. at 838. In contrast, a vigorous dissent took the majority to task for failing to faithfully apply Escobar and for not requiring materiality to be alleged with particularity under Federal Rule of Civil Procedure 9(b) despite the fact that "every [other] Circuit to address this question agrees that Rule 9(b) governs materiality allegations."  Id. at 845.  As the dissent pointed out, the relator failed to allege that the government routinely refuses to pay claims based on the alleged violations, or that it would have refused to pay particular claims under the circumstances, which ran afoul of Escobar's guidance that "[t]he government's payment habits are, by far, the best evidence of materiality."  Id.  Moreover, the dissent faulted the court for "equating negligence with fraud"; as the dissent pointed out, the complaint alleged facts that were, at best, "only consistent with recklessness" and therefore did not adequately allege scienter.  Id. at 852–53. 2.    The Eleventh Circuit Revives an Implied False Certification Claim  The Eleventh Circuit similarly revived an FCA claim predicated on an implied false certification theory in Marsteller ex rel. United States v. Tilton, 880 F.3d 1302 (11th Cir. 2018).  Marsteller involved allegations that a defense contractor had certified compliance with code of business ethics and conduct requirements applicable to government contractors, but that the company did not comply with those requirements because it failed to disclose evidence of purportedly unethical acts of bribery, and that it provided the government with incomplete pricing data in violation of the Truth in Negotiations Act, 10 U.S.C. § 2306a.  Id.  In a pre-Escobar decision, the district court had dismissed the complaint, after declining the government's suggestion in a statement of interest "to limit the restrictive reading of the implied certification theory found in" prior precedent, and instead ruling that the theory only encompassed claims for payment made "despite a knowing failure to comply" with an express condition of payment.  Id. at 1309–10. On appeal, the Eleventh Circuit held that the line of cases relied upon by the district court was no longer good law in light of Escobar and remanded the case for the lower court to consider whether "in fairness to the relators, they should have an opportunity to replead their allegations in light of the Supreme Court's guidance" in Escobar.  Id. at 1312–14.  As the court emphasized, Escobar directs the materiality inquiry towards "whether [the] Government would have attached importance to the violation in determining whether to pay the claim" at issue.  Id. at 1313. In both Marsteller and Prather, the government filed a statement of interest regarding the district court's materiality analysis, despite having declined to intervene.  In Marsteller, although the Government took no position on the viability of the complaint itself, it nevertheless "respectfully urge[d]" the district court "not to adopt the atextual position that implied certification False Claims Act liability for non-compliance with a contract provision (including regulatory or statutory provisions incorporated therein) necessarily hinges on the presence of an express statement within that provision that payment is conditioned on its compliance."  880 F.3d at 1309 n.15.  Likewise in Prather, although the government took no position on the complaint at issue in the case, it argued that an express condition of payment is not required under Escobar, and further argued that Escobar does not require an FCA plaintiff to plead prior government denials of payments for similar violations.  United States' Statement of Interest Regarding Defendants' Motion To Dismiss Third Amended Complaint at 2–3, 6, Prather, 892 F.3d 822 (No. 17-5826).  If these cases are any indication, FCA defendants can expect to face the government's opposition in future cases that turn on allegations of materiality. 3.    The Supreme Court Invites the Government's Views on Gilead In our 2017 Mid-Year False Claims Act Update, we addressed the Ninth Circuit's materiality analysis in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017).  As a reminder, in Gilead, the Ninth Circuit reversed dismissal of an implied certification claim.  Id. at 895.  In doing so, the court rejected the argument that the alleged violation was immaterial because the FDA was aware of the falsity and yet did not withdraw product approval.  Id. at 906.  This decision was appealed and the petition for certiorari is currently pending.  See Petition for Writ of Certiorari, Gilead, 862 F.3d 890 (No. 17-936). In April, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the government's views on the case.  This may signal the Court's interest in reviewing the matter to provide more guidance on the impact of government acquiescence.  Clarification here would be welcomed, as we have previously noted that a circuit split is developing in this area.  However, in recent years the Supreme Court has asked for the Solicitor General's views on key FCA issues only to go on to deny certiorari anyway.  See, e.g., United States ex rel. Nathan v. Takeda Pharm., 707 F.3d 451 (4th Cir. 2013), cert. denied 81 U.S.L.W. 3650 (U.S. Mar. 31, 2014) (No. 12-1349). B.    The Eleventh Circuit Deepens a Circuit Split Regarding When the FCA's Extended Statute of Limitations Applies For most FCA relators, the statute of limitations requires a suit be brought within six years of the underlying alleged violation.  31 U.S.C. § 3731(b)(1).  However, an extended limitations period of up to ten years applies in select cases.  31 U.S.C. § 3731(b)(2) (permitting actions for "3 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, but in no event more than 10 years after the date on which the violation is committed").  Circuits are split in determining whether this greater, up to ten-year period is only available when the government files or intervenes in the FCA suit, as opposed to being pursued only by the relator after the government declines intervention.  Currently, most courts only apply the extended statute of limitations to suits brought by the government itself, as well as qui tam actions in which the government chooses to intervene.  See United States ex rel. Sanders v. North American Bus Indus. Inc., 546 F.3d 288, 295 (4th Cir. 2008) (holding that "only a subset of civil actions may benefit from the extended limitations period in Section 3731(b)(2)—those in which the government is a party"); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 725–26 (10th Cir. 2006) ("[W]e hold that § 3731(b)(2) was not intended to apply to private qui tam relators at all."); but see United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1214 (9th Cir. 1996) ("[T]here is nothing in the entire statute of limitations subsection which differentiates between private and government plaintiffs at all."). The Eleventh Circuit recently went the other way, however, in an opinion holding that relators can utilize the extended statute of limitations period even in qui tam cases where the government has declined to intervene.  In United States ex rel. Hunt v. Cochise Consultancy Inc., 887 F.3d 1081 (11th Cir. 2018), the court considered this issue as a matter of first impression in the circuit.  Id. at 1083.  First, the court emphasized that "nothing in § 3731(b)(2) says that its limitations period is unavailable to relators when the government declines to intervene."  Id. at 1089.  The court also found that "the legislative history provides no convincing support for [the defendant's] position" that the greater limitations period is only available where the government files suit or intervenes.  Id. at 1097.  The court recognized its decision "is at odds with the published decisions of two other circuits," but found those opinions unpersuasive because those cases "reflexively applied the general rule that a limitations period is triggered by the knowledge of a party" while failing to consider "the unique role that the United States plays even in a non-intervened qui tam case."  Id. at 1092. In reaching this decision, the Eleventh Circuit departs from the Fourth and Tenth circuits but largely aligns with the Ninth Circuit.  See Hyatt, 91 F.3d at 1214.  However, on the question of the knowledge required to trigger the limitations period, the Eleventh Circuit concluded, contrary to the Ninth Circuit, that "it is the knowledge of a government official, not the relator, that triggers the limitations period," further complicating the circuit split.  Hunt, 887 F.3d at 1096. C.    The Third Circuit Examines the Public Disclosure Bar The FCA's public disclosure bar instructs courts to dismiss a relator's FCA action if "substantially the same allegations or transactions" were previously publicly disclosed in certain enumerated sources.  31 U.S.C. § 3730(e)(4).  The "original source" exception to this rule, which allows relators to proceed on publicly disclosed allegations if they have "knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions," 31 U.S.C. § 3730(e)(4)(B), was the subject of a recent Third Circuit decision. In United States ex rel. Freedom Unlimited, Inc. v. City of Pittsburgh, No. 17-1987, 2018 WL 1517159 (3d Cir. Mar. 28, 2018), the district court had dismissed the case at the pleading stage under the public disclosure bar, concluding that the relator "filed a qui tam suit based on information that the city revealed" publicly.  Id. at *3.  The Third Circuit reversed, and in doing so, emphasized the sometimes factual nature of whether there "has been a public disclosure within the meaning of the FCA and whether a relator qualifies as an original source."  Id. (internal quotations omitted).  In particular, the court noted that the relator claimed to have "directly observed" the defendant's alleged conduct and had "independent knowledge" of the falsity.  Id.  While taking care to avoid suggesting that dismissal would never be appropriate at the pleading stage, the Third Circuit concluded the lower court "should have given the parties an opportunity to develop the facts in discovery inasmuch as appellants claim that they did not rely on public disclosures."  Id.  Additionally, because the district court's opinion pre-dated Escobar, the Third Circuit directed the district court to "rely on the factors set forth in Escobar in making a materiality decision," to the extent the complaint survived the public disclosure bar.  Id. at *4. D.    Updates to the Causation Standard in Retaliation Claims The FCA's anti-retaliation provision provides remedies to employees if "discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts" conducted in furtherance of an FCA claim.  31 U.S.C. § 3730(h)(1).  In a series of recent decisions, several courts have addressed the question of what an employee must show to demonstrate that an adverse action was "because of" the employee's activity protected under the FCA. In DiFiore v. CSL Behring, LLC, 879 F.3d 71 (3d Cir. 2018), the Third Circuit provided guidance on the causation standard.  There, the district court had required the plaintiff to show "protected activity was the 'but-for' cause of an adverse action."  Id. at 76.  On appeal, the plaintiff argued that the FCA only requires proof that "protected activity was a 'motivating factor' in the adverse action[]."  Id.  Rejecting this argument, the Third Circuit affirmed, relying on the Supreme Court's analysis in a pair of decisions regarding the causation standard in age discrimination and Title VII claims respectively.  Id. (citing Gross v. FBL Financial Services, Inc., 129 S.Ct 2343 (2009) and University of Texas Southwestern Medical Center v. Nassar, 133 S.Ct 2517 (2013)).  As the court noted, the FCA used the "same 'because of' language" found in both the Age Discrimination in Employment Act and Title VII that had "compelled the Supreme Court to require 'but-for' causation." Id. at 78.  As a result, in the Third Circuit, a plaintiff must show that he would not have faced the relevant adverse employment action "but for" his alleged protected activity. The Sixth and Seventh Circuits similarly recently indicated a willingness to adopt a "but-for" causation standard in FCA retaliation claims.  In Heath v. Indianapolis Fire Dept., 889 F.3d 872 (7th Cir. 2018), the Seventh Circuit affirmed the district court's grant of summary judgment for the defendant.  Id. at 874.  The opinion was more notable, however, because—even though the Seventh Circuit had previously adopted a "motivating factor" standard—the Heath court nevertheless raised the question of whether that is the proper standard.  Id.  The court discussed the Supreme Court's opinion in Nassar and hinted that the similarity between the statutory language in Title VII and the FCA compels the conclusion that a plaintiff must show the adverse employment action was the "but for" result of activity protected under the FCA.  Id. Meanwhile, in Smith v. LHC Group Inc., No. 17-5850, 2018 WL 1136072 (6th Cir. Mar. 2, 2018), the Sixth Circuit reversed dismissal of an FCA retaliation claim and concluded an employer's subjective intent need not be established to prevail on a theory of constructive discharge.  Id. at *2.  Although the panel's majority did not address causation, a concurring opinion expressed the view that causation requires a showing of "but-for" causation under Supreme Court's Nassar and Gross decisions.  Id. at *9 (citing DiFiore). E.    The Third Circuit Explores the Link Between the FCA and the Anti-Kickback Statute The AKS prohibits companies and individuals from offering, paying, soliciting, or receiving "remuneration" to induce or reward referrals of business that will be paid for by Medicare, Medicaid, or other federal health care programs.  42 U.S.C. § 1320a-7b(b).  By submitting a claim resulting from a violation of the AKS, an entity or individual also violates the FCA.  See 42 U.S.C. § 1320a-7b(g) ("[A] claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].") The Third Circuit recently addressed the evidentiary requirement to link FCA claims with violations of the Anti-Kickback Statute.  United States ex rel. Greenfield v. Medco Health Sol's, Inc., 880 F.3d 89 (3d Cir. 2018).  In Greenfield, a relator claimed a pharmacy (Accredo Health Group) illegally donated to specific charities in order to exclusively receive patient referrals in return.  Id. at 91.  The pharmacy then allegedly violated the FCA by falsely certifying that it complied with the Anti-Kickback statute when seeking reimbursement for the care provided to referred patients.  Id. at 92. The district court entered summary judgment for the defendant-pharmacy, finding the relator "failed to provide evidence of even a single federal claim for reimbursement . . . that was linked to the alleged kickback scheme."  Id. at 91.  In reaching its conclusion, the district court assumed that even if there was an Anti-Kickback Statute violation, there was an insufficient link to establish an FCA violation.  Id. at 93  Specifically, the district court stated the relator needed to establish a causal link between the pharmacy's donations and a patient's subsequent decision to patron the pharmacy.  Id. at 95. On appeal, the Third Circuit affirmed.  The panel first rejected the District Court's reasoning and concluded that a relator need not provide "proof that the underlying medical care would not have been provided but for a kickback."  Id. at 100.  Reviewing the legislative history of the FCA and Anti-Kickback Statute, the court concluded that "Congress intended both statutes to reach a broad swath of 'fraud and abuse' in the federal healthcare system" and "neither requires a plaintiff to show that a kickback directly influenced a patient's decision to use a particular medical provider."  Id. at 96–97. However, the court also rejected the notion that "the taint" of the alleged kickbacks automatically "renders every reimbursement claim false" and concluded that to prevail on summary judgment, it is not enough for a relator to show merely that the defendant "submitted federal claims while allegedly paying kickbacks."  Id. at 99–100.  In the court's view, "[a] kickback does not morph into a false claim unless a particular patient is exposed to an illegal recommendation or referral and a provider submits a claim for reimbursement pertaining to that patient."  Id. at 100.  Instead, the court held, a relator must therefore demonstrate at least one false claim, i.e., "at least one claim that covered a patient who was recommended or referred" in violation of the Anti-Kickback Statute.  Id.  Absent "evidence . . . link[ing the] alleged kickback scheme to any particular claim" in this manner, an FCA defendant is entitled to summary judgment.  Id. IV.    CONCLUSION The first half of 2018 saw developments that could portend important changes on the horizon.  We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year.  You can look forward to a comprehensive summary in our 2018 False Claims Act Year-End Update, which we will publish in January 2018. [1]      See Memo, U.S. Dep't of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for-Evaluating-Dismissal-Pursuant-to-31-U-S.pdf (emphasis added). [2]      See Memo, U.S. Dep't of Justice, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/file/1028756/download. [3]      See Memo, U.S. Dep't of Justice, Prohibition on Improper Guidance Documents (Nov. 16, 2017), https://www.justice.gov/opa/press-release/file/1012271/download. [4]      See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Health Care CEO and Four Physicians Charged in Superseding Indictment in Connection with $200 Million Health Care Fraud Scheme Involving Unnecessary Prescription of Controlled Substances and Harmful Injections (June 6, 2018), https://www.justice.gov/opa/pr/health-care-ceo-and-four-physicians-charged-superseding-indictment-connection-200-million. [5]      See Speech, U.S. Dep't of Justice, Attorney General Sessions Delivers Remarks Announcing National Health Care Fraud and Opioid Takedown (June 28, 2018), https://www.justice.gov/opa/speech/attorney-general-sessions-delivers-remarks-announcing-national-health-care-fraud-and. [6]      Id. [7]      Id. [8]      See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Justice Department to File Statement of Interest in Opioid Case (Feb. 27, 2018), https://www.justice.gov/opa/pr/justice-department-file-statement-interest-opioid-case. [9]      See Press Release, Office of Pub. Affairs, United States Intervenes in False Claims Act Lawsuits Accusing Insys Therapeutics of Paying Kickbacks and Engaging in Other Unlawful Practices to Promote Subsys, A Powerful Opioid Painkiller (May 15, 2018), https://www.justice.gov/opa/pr/united-states-intervenes-false-claims-act-lawsuits-accusing-insys-therapeutics-paying. [10]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Dental Management Company Benevis and Its Affiliated Kool Smiles Dental Clinics to Pay $23.9 Million to Settle False Claims Act Allegations Relating to Medically Unnecessary Pediatric Dental Services (Jan. 10, 2018), https://www.justice.gov/opa/pr/dental-management-company-benevis-and-its-affiliated-kool-smiles-dental-clinics-pay-239. [11]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Pennsylvania Hospital and Cardiology Group Agree to Pay $20.75 Million to Settle Allegations of Kickbacks and Improper Financial Relationships (Mar. 7, 2018), https://www.justice.gov/opa/pr/pennsylvania-hospital-and-cardiology-group-agree-pay-2075-million-settle-allegations. [12]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Alere to Pay U.S. $33.2 Million to Settle False Claims Act Allegations Relating to Unreliable Diagnostic Testing Devices (Mar. 23, 2018), https://www.justice.gov/opa/pr/alere-pay-us-332-million-settle-false-claims-act-allegations-relating-unreliable-diagnostic. [13]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Ambulance Company to Pay $9 Million to Settle False Claims Act Allegations (Mar. 28, 2018), https://www.justice.gov/opa/pr/ambulance-company-pay-9-million-settle-false-claims-act-allegations. [14]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Radiation Therapy Company Agrees to Pay Up to $11.5 Million to Settle Allegations of False Claims and Kickbacks (Mar. 29, 2018), https://www.justice.gov/opa/pr/radiation-therapy-company-agrees-pay-115-million-settle-allegations-false-claims-and. [15]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Rotech Agrees to Pay $9.68 Million to Settle False Claims Act Liability Related to Improper Billing for Portable Oxygen (Apr. 12, 2018), https://www.justice.gov/opa/pr/rotech-agrees-pay-968-million-settle-false-claims-act-liability-related-improper-billing. [16]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations. [17]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, San Diego Laboratory Agrees to Pay $2 Million to Settle False Claims Act Allegations Related to Unnecessary Breast Cancer Testing (Apr. 19, 2018), https://www.justice.gov/opa/pr/san-diego-laboratory-agrees-pay-2-million-settle-false-claims-act-allegations-related. [18]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Ohio Hospital Operator Agrees to Pay United States $14.25 Million to Settle Alleged False Claims Act Violations Arising From Improper Payments to Physicians (May 10, 2018), https://www.justice.gov/opa/pr/ohio-hospital-operator-agrees-pay-united-states-1425-million-settle-alleged-false-claims-act. [19]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Drug Maker Pfizer Agrees to Pay $23.85 Million to Resolve False Claims Act Liability for Paying Kickbacks (May 24, 2018), https://www.justice.gov/opa/pr/drug-maker-pfizer-agrees-pay-2385-million-resolve-false-claims-act-liability-paying-kickbacks. [20]     See Press Release, U.S. Atty's Office for the Eastern Dist. of Pa., U.S. Dep't of Justice, Pharmacy owners agree to pay $3.2 million to resolve False Claims case (May 31, 2018), https://www.justice.gov/usao-edpa/pr/pharmacy-owners-agree-pay-32-million-resolve-false-claims-case. [21]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy (June 8, 2018), https://www.justice.gov/opa/pr/signature-healthcare-pay-more-30-million-resolve-false-claims-act-allegations-related. [22]     See Press Release, U.S. Atty's Office for the Middle Dist. Of Fla., U.S. Dep't of Justice, Healogics Agrees To Pay Up To $22.51 Million To Settle False Claims Act Liability For Improper Billing Of Hyperbaric Oxygen Therapy (June 20, 2018), https://www.justice.gov/usao-mdfl/pr/healogics-agrees-pay-2251-million-settle-false-claims-act-liability-improper-billing. [23]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Caris Agrees to Pay $8.5 Million to Settle False Claims Act Lawsuit Alleging That it Billed for Ineligible Hospice Patients (June 25, 2018), https://www.justice.gov/opa/pr/caris-agrees-pay-85-million-settle-false-claims-act-lawsuit-alleging-it-billed-ineligible. [24]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Japanese Fiber Manufacturer to Pay $66 Million for Alleged False Claims Related to Defective Bullet Proof Vests (Mar. 15, 2018), https://www.justice.gov/opa/pr/japanese-fiber-manufacturer-pay-66-million-alleged-false-claims-related-defective-bullet. [25]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Point Blank Pays U.S. $1 Million for the Sale of Defective Zylon Bulletproof Vests (Nov. 7, 2011), https://www.justice.gov/opa/pr/point-blank-pays-us-1-million-sale-defective-zylon-bulletproof-vests; Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, U.S. Sues First Choice Armor & Equipment for Providing Defective Bullet-Proof Vests to Law Enforcement Agencies (Aug. 3, 2009), https://www.justice.gov/opa/pr/us-sues-first-choice-armor-equipment-providing-defective-bullet-proof-vests-law-enforcement. [26]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Lance Armstrong Agrees to Pay $5 Million to Settle False Claims Allegations Arising From Violation of Anti-Doping Provisions of U.S. Postal Service Sponsorship Agreement (Apr. 19, 2018), https://www.justice.gov/opa/pr/lance-armstrong-agrees-pay-5-million-settle-false-claims-allegations-arising-violation-anti. [27]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, United States Settles Lawsuit Alleging That Contractor Falsely Overcharged the U.S. Navy for Ship Husbanding Services (May 29, 2018), https://www.justice.gov/opa/pr/united-states-settles-lawsuit-alleging-contractor-falsely-overcharged-us-navy-ship-husbanding. [28]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Deloitte & Touche Agrees to Pay $149.5 Million to Settle Claims Arising From Its Audits of Failed Mortgage Lender Taylor, Bean & Whitaker (Feb. 28, 2018), https://www.justice.gov/opa/pr/deloitte-touche-agrees-pay-1495-million-settle-claims-arising-its-audits-failed-mortgage. [29]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Bassett Mirror Company Agrees to Pay $10.5 Million to Settle False Claims Act Allegations Relating to Evaded Customs Duties (Jan. 16, 2018), https://www.justice.gov/opa/pr/bassett-mirror-company-agrees-pay-105-million-settle-false-claims-act-allegations-relating. [30]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, United States Obtains $114 Million Judgment Against Three Individuals for Paying Kickbacks for Laboratory Referrals and Causing Claims for Medically Unnecessary Tests (May 29, 2018), https://www.justice.gov/opa/pr/united-states-obtains-114-million-judgment-against-three-individuals-paying-kickbacks. [31]   2017 Mid-Year False Claims Act Update, Gibson Dunn (July 12, 2017), https://www.gibsondunn.com/2017-mid-year-false-claims-act-update/. [32]   See, e.g., Quin Hillyer, Obamacare Repeal May Be Closer Than You Think, Wash. Examiner (Apr. 26, 2018), https://www.washingtonexaminer.com/opinion/obamacare-repeal-may-be-closer-than-you-think. [33]   Peter Sullivan, Graham Working on New ObamaCare Repeal Bill, The Hill (May 16, 2018), http://thehill.com/policy/healthcare/388000-graham-working-on-new-obamacare-repeal-bill. [34]     Prepared Senate Floor Statement by Senator Chuck Grassley of Iowa, Interpreting the False Claims Act; S. Comm. on the Judiciary (Feb. 13, 2018), https://www.grassley.senate.gov/news/news-releases/interpreting-false-claims-act. [35]     Id. [36]     Id. [37]   2017 Year-End False Claims Act Update, Gibson Dunn (Jan. 5, 2018), https://www.gibsondunn.com/2017-year-end-false-claims-act-update/. [38]   Industry opponents worried that expanding the definition of "intended use" could "spawn[] a flurry of unwarranted FCA lawsuits."  Id. [39]   See Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding "Intended Uses"; Partial Delay of Effective Date, U.S. Dep't of Health & Human Servs.—Food and Drug Admin. (Mar. 16, 2018), https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-05347.pdf.  The portions of the rule relating to the regulation of tobacco products went into effect on March 19, 2018. [40]   Mark A. Rush, David I. Kelch & Isaac T. Smith, The False Claims Act in 2017: The Year in Review and What to Watch in 2018, BNA (Apr. 25, 2018), https://www.bna.com/false-claims-act-n57982091498/; see also Pub. L. No. 115-141 (2018) (final law). [41]   State False Claims Act Reviews, Dep't of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [42]   See supra note 37. [43]   See supra note 41 (collecting letters to states). [44]   S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(y01pr1bmjos4hv4bgw5wcuid))/mileg.aspx?page=getobject&objectname=2017-SB-0669&query=on. [45]   A.B. A07989, 2017-2018 Leg. Sess. (N.Y. 2017), http://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A07989&term=2017&Summary=Y&Actions=Y. [46]   S.B. 378, 2017-2018 Reg. Sess. (N.C. 2017), https://www2.ncleg.net/BillLookup/2017/s378. [47]   H.B. 7013, 2017 Reg. Sess. (Fla. 2017), https://www.flsenate.gov/Session/Bill/2018/7013. [48]   See supra note 37. [49]   S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(2eethmzh3ynmq4revoals1xd))/mileg.aspx?page=GetObject&objectname=2017-SB-0065. [50]   H.B. 1027, 2017-2018 Reg. Sess. (Penn. 2017), http://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2017&sInd=0&body=H&type=B&bn=1027. [51]     See supra note 41. [52]     See id. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stephen Payne, Robert Blume, Timothy Hatch, Alexander Southwell, Charles Stevens, Joseph West, Benjamin Wagner, Stuart Delery, Winston Chan, Andrew Tulumello, Karen Manos, Monica Loseman, Robert Walters, Reed Brodsky, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Eva Michaels, Joshua Rosario, Jasper Hicks, and Trenton Van Oss. Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. 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