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Client Alert

August 23, 2019

SEC Issues New Guidance for Proxy Advisors and Investment Advisers Engaged in the Proxy Voting Process

Click for PDF On August 21, 2019, the Securities and Exchange Commission (the “Commission”) issued new guidance regarding two elements of the proxy voting process[1] that are influenced by proxy advisory firms: proxy voting advice issued by proxy advisors and proxy voting by investment advisers who use that proxy voting advice. The guidance, in the words of Commissioner Elad L. Roisman, “reiterate[s] longstanding Commission rules and positions that remain applicable and very relevant in today’s marketplace.” Notably, the two releases issued by the Commission are not subject to notice and comment and will instead become effective upon publication in the Federal Register. Specifically, the Commission approved issuing both: a Commission interpretation that the provision of proxy voting advice by proxy advisory firms generally constitutes a “solicitation” under federal proxy rules and new Commission guidance about the availability of exemptions from the federal proxy rules and the applicability of the proxy anti-fraud rule to proxy voting advice (the “Proxy Voting Advice Release”);[2] and new Commission guidance intended to facilitate investment advisers’ compliance with the fiduciary duties owed to each client in connection with the exercise of investment advisers’ proxy voting responsibilities, including in connection with their use of proxy advisory firms (the “Proxy Voting Responsibilities Release”[3] and together, the “Releases”). The Commission approved both Releases by a vote of 3-2, with Commissioners Robert J. Jackson, Jr. and Allison Herren Lee dissenting from each Release. In their statements explaining their opposition, Commissioners Jackson and Lee expressed concern that neither was subject to a notice and comment period, which prevented the Commission from fully considering the consequences of the new guidance.[4] Both Commissioners also questioned whether the Releases will increase costs associated with the provision and use of proxy voting advice, and Commissioner Lee expressed concern that greater issuer involvement in the proxy voting recommendation process could “undermine the reliability and independence of voting recommendations.” Background Over the past several years, the Commission and its staff (the “Staff”) have issued statements and held public forums to discuss issues related to voting advice issued by proxy advisory firms and investment advisers’ reliance on that advice. For example, in July 2010, the Commission issued a concept release[5] that sought public comment on, among other topics, the legal status and role of proxy advisory firms.[6] And in June 2014, the staff of the Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20 (“SLB 20”),[7] which provided guidance on investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms and the availability and requirements of two exemptions to the federal proxy rules often relied upon by proxy advisory firms.[8] Subsequently the Staff held a roundtable in November 2018 to provide an opportunity for market participants to engage with the Staff on various aspects of the proxy process (the “2018 Roundtable”).[9] The 2018 Roundtable included panels addressing each of the regulation of proxy advisory firms, proxy voting mechanics and technology, and shareholder proposals. Participants on the proxy advisory firms panel discussed investor advisers’ reliance on voting advice provided by proxy advisory firms, how proxy advisory firms address conflicts of interest and challenges issuers face in correcting factual errors in voting recommendations published by proxy advisory firms.[10] Following the 2018 Roundtable, Chairman Jay Clayton announced that Commissioner Roisman would lead the Commission’s efforts to improve the proxy voting process and infrastructure.[11] In his opening remarks at the Commission’s August 21 meeting, Commissioner Roisman indicated that the Releases were the first of several matters that the Commission may consider in the near future relating to its proxy voting rules.[12] Other matters that Commissioner Roisman mentioned would likely be considered “in the near future” include proposed reforms to the rules addressing proxy advisory firms’ reliance on proxy solicitation exemptions and the rules regarding the thresholds for shareholder proposals announced as part of the Commission’s Spring 2019 Regulatory Flexibility Agenda.[13] Summary of the Proxy Voting Advice Release The Proxy Voting Advice Release, developed by the Commission’s Division of Corporation Finance, addresses two topics: the Commission articulates its view that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” subject to the federal proxy roles, and the Commission provides an interpretation and additional guidance on the applicability of the federal proxy rules to proxy voting advice that is designed to influence the voting decisions of a proxy advisory firm’s clients. Proxy Voting Advice Constitutes a Solicitation Under the Federal Proxy Rules As explained in the Proxy Voting Advice Release, under Rule 14a‑1(l) of the Securities Exchange Act of 1934 (the “Exchange Act”), a “solicitation” includes “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” This includes communications seeking to influence the voting of proxies, even if the person issuing the communication does not seek authorization to act as a proxy and may be indifferent to its ultimate outcome. Communications that constitute “solicitations” under Rule 14a‑1(l) are subject to the information and filing requirements of the federal proxy rules. However, Exchange Act Rule 14a-2(b)(1) provides an exemption from the Commission’s information and filing requirements (but not from the anti-fraud rules) for “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.” Based on this background, in the Proxy Voting Advice Release the Commission explains that its interpretation is informed by the purpose, substance and circumstances under which the proxy voting advice is provided. Where a proxy advisory firm markets its expertise in the research and analysis of voting matters to assist a client in making proxy voting decisions by providing voting recommendations, the proxy advisory firm is not “merely performing administrative or ministerial services.” Instead, the Commission believes that providing such proxy voting recommendations constitutes a solicitation because the recommendations are “designed to influence the client’s voting decision.” Importantly, the Commission believes that such recommendations constitute a solicitation even where a proxy advisory firm bases its recommendations on its client’s own tailored voting guidelines or the client ultimately decides not to follow the proxy voting recommendations.[14] The Commission makes clear that its interpretation does not prevent a proxy advisory firm from relying on the exemptions from the federal proxy rules information and filing requirements under Exchange Act Rule 14a-2(b)(1).[15] Nevertheless, the Commission’s interpretation is an important foundational basis for any subsequent regulation of proxy advisory firms that addresses conditions for the availability of Rule 14a-2(b)(1). Proxy Voting Advice Remains Subject to Exchange Act Rule 14a-9 In the second part of the Proxy Voting Advice Release, the Commission emphasizes that even where a proxy advisory firm’s voting advice is otherwise exempt from the information and filing requirements of the federal proxy rules under Exchange Act Rule 14a-2(b)(1), that voting advice remains subject to the anti-fraud provisions of Exchange Act Rule 14a-9. Accordingly, when issuing proxy voting advice, proxy advisory firms may not make materially false or misleading statements or omit material facts that would be required to make the voting advice not misleading. Exchange Act Rule 14a-9 prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. In addition, solicitations may not omit any material fact necessary in order to make the solicitation false or misleading. Of particular importance for proxy voting advice based on the research and analysis of proxy advisory firms, Exchange Act Rule 14a-9 also extends to opinions, reasons, recommendations or beliefs that are disclosed as part of a solicitation. Where such opinions, recommendations or similar views are provided, disclosure of the underlying facts, assumptions, limitations and other information may need to be disclosed so that these views do not raise concerns under the rule. Depending on the materiality of the information and the particular circumstances, the Commission indicates that proxy advisory firms may need to disclose additional information to avoid issues under Exchange Act Rule 14a-9, including: an explanation of the firm’s methodology used to formulate its voting advice on a particular matter; non-public information sources and the extent to which the information from these sources differs from the publicly available disclosures; and any material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts. Summary of the Proxy Voting Responsibilities Release Developed by the Commission’s Division of Investment Management, the Proxy Voting Responsibilities Release clarifies how an investment adviser’s fiduciary duties to its clients inform the investment adviser’s proxy voting responsibilities, particularly where investment advisers retain proxy advisory firms to assist in some aspect of their proxy voting responsibilities. Under Rule 206(4)-6 of the Investment Advisers Act of 1940, an investment adviser that assumes proxy voting authority must implement policies and procedures that are reasonably designed to ensure it makes voting decisions in the best interest of clients. The Commission reiterates throughout the Proxy Voting Responsibilities Release that proxy voting must be consistent with the investment adviser’s fiduciary duties and in compliance with Rule 206(4)-6. The Proxy Voting Responsibilities Release sets forth six examples of considerations investment advisers should evaluate when discharging their fiduciary duties in connection with proxy voting. The Commission emphasizes that this list of considerations is non-exhaustive, and while its guidance is generally phrased as considerations or actions investment advisers “should” evaluate, the Commission further indicates that these examples are not the only way for investment advisers to discharge their fiduciary duties when voting proxies. 1. Determine the scope of the investment adviser’s proxy voting authority and responsibilities If an investment adviser agrees to assume proxy voting authority, the scope of the voting arrangements should be determined between the investment adviser and each of its clients on an individual basis.  The Commission emphasizes that any proxy voting arrangements must be subject to full and fair disclosure and informed consent. Among the variety of potential approaches to proxy voting arrangements, the Commission provides several examples to which an investment adviser and its client may appropriately agree, including the investment adviser exercising proxy voting authority pursuant to specific parameters designed to serve the best interests of the client based on the client’s individual investment strategy, the investment adviser refraining from exercising proxy voting authority under agreed circumstances or the investment adviser voting only on particular types of proposals based on the client’s express preferences. 2. Demonstrate that the investment adviser is making voting determinations in its clients’ best interests and in accordance with its proxy voting policies and procedures The Commission indicates that investment advisers must at least annually review and document the adequacy of its proxy voting policies and procedures, including whether the policies and procedures are reasonably designed to result in proxy voting in the best interest of the investment adviser’s clients. Because clients often have differing investment objectives and strategies, if an investment adviser has multiple clients then it should consider whether voting all of its clients’ shares under a uniform voting policy is in the best interest of each individual client.  Alternatively, an investment adviser should consider whether it should implement voting policies that are in line with the particular investment strategies and objectives of individual clients.  An investment adviser should also consider whether its voting policy or policies should be tailored to permit or require more detailed analysis for more complex matters, such as a corporate event or a contested director election. In addition, where an investment adviser retains a proxy advisory firm to provide voting advice or execution services, the investment adviser should consider undertaking additional steps to evaluate whether its voting determinations are consistent with its voting policies and in the best interests of its clients. 3. Evaluate any proxy advisory firm in advance of retaining it Before retaining a proxy advisory firm, investment advisers should consider whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which it is providing voting advice.  The Commission indicates that the scope of the investment adviser’s proxy voting authority and the services for which the proxy advisory firm has been retained should inform the considerations that the investment adviser undertakes. Such consideration could include an assessment of the adequacy and quality of the proxy advisory firm’s staffing, personnel and/or technology.  In addition, investment advisers should consider the proxy advisory firm’s process for obtaining input from issuers and other clients with respect to its voting polices, methodologies and peer group design. 4. Evaluate processes for addressing potential factual errors, incompleteness or methodological weakness in a proxy advisory firm’s analysis An investment adviser should have policies and procedures in place to ensure that its proxy voting decisions are not based on materially inaccurate or incomplete information provided by a proxy advisory firm.  By way of example, the Commission suggests that an investment adviser should consider periodically reviewing its ongoing use of the proxy advisory firm’s research or voting advice, including whether any potential errors, incompleteness or weaknesses materially affected the research or recommendations that the investment adviser relied on. In addition, the Commission indicates that investment advisers should consider the proxy advisory firm’s policies and procedures to obtain current and accurate information, including the firm’s engagement with issuers, efforts to correct identified material deficiencies, disclosure regarding its sources of information and its methodologies for issuing voting advice and the firm’s consideration of facts unique to the issuer or proposal. 5. Adopt policies for evaluating proxy advisory firms’ services Where an investment adviser has retained a proxy advisory firm to assist with its proxy voting responsibilities, the investment adviser should adopt policies and procedures that are designed to evaluate the services of the proxy advisory firm to ensure that votes are cast in the best interests of the investment adviser’s clients. The Commission indicates that investment advisers should consider implementing policies and procedures to identify and evaluate a proxy advisory firm’s conflicts of interest on an on-going basis and evaluate the proxy advisory firm’s “capacity and competency” to provide voting advice and execute votes in accordance with the investment adviser’s instructions. In addition, investment advisers should consider how and when the proxy advisory firm updates its methodologies, guidelines and voting advice. 6. Determine when to exercise proxy voting opportunities An investment adviser is not required to exercise every opportunity to vote in either of two circumstances—where the investment adviser and its client have agreed in advance that the investment adviser’s proxy voting authority is limited under certain circumstances and where the investment adviser and its client have agreed in advance that the investment adviser has authority to cast votes based on the best interests of the client. In both situations, the investment adviser’s action must be in accordance with its prior agreement with its client. Moreover, where an investment adviser may refrain from voting because doing so is in the best interest of its client, the investment adviser should first consider its duty of care to its client in light of the scope of services it has agreed to assume. Practical Considerations Just as the Commission was divided in approving the Releases, reactions to the Releases are likely to vary among participants in the proxy process. For example, public companies may both view the Releases as a positive step and believe that additional Commission action is needed to address the errors, conflicts of interests and other challenges with proxy advisory firms. The Commission was limited in the actions it could take via interpretation and issuing guidance in the Releases. However, the Commission signaled that the Staff is working on proposed rules “to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Exchange Act Rule 14a‑2(b).” Given that the rulemaking process can be time-consuming, the Releases provide helpful immediate guidance heading into the 2020 proxy season. That said, it remains to be seen whether and to what extent the proxy advisory firms and their investment adviser-clients will adjust their practices in response to the Releases. For example, the proxy advisory firms may increase the disclosures included in their reports, particularly when they are relying on debated premises such as studies asserting that certain corporate governance or sustainability actions increase shareholder value. They may also be less willing to rely on information provided either by proponents or activists unless that information has been filed with the Commission. Investment advisers inclined to vote lock-step with proxy advisory firm recommendations may be more willing to engage with companies in advance of voting. Similarly, the Commission’s statements on the application of Rule 14a-9 to proxy advisory firm reports and recommendations[16] may affect various proxy advisory firm practices due to the threat (real or perceived) of public companies commencing litigation against these firms in the event that statements in a proxy advisory firm’s report are viewed as materially false or misleading. For example, it is common to see parties in contested solicitations commence litigation under Rule 14a‑9 challenging the other side’s solicitation materials. It is not hard to envision similar litigation playing out in the future when there are differences of opinion as to whether a proxy advisory report contains information that is either inaccurate or misleading, or where it simply omits information that leaves the disclosed information materially misleading. As a result, proxy advisory firms may change their practices for vetting and issuing their voting recommendation reports; for example, the firms may be more inclined to provide drafts of their reports to public companies in advance of the reports being issued. ________________________ [1]   The two most influential proxy advisory firms are Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. [2]   Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Exchange Act Release No. 34-86721 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/34-86721.pdf. [3]   Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. IA-5325 and Investment Company Act Release No. IC-33605 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf. [4]   See Commissioner Robert J. Jackson, Jr., “Statement on Proxy-Advisor Guidance” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-jackson-082119; Commissioner Allison Herren Lee, “Statement of Commissioner Allison Herren Lee on Proxy Voting and Proxy Solicitation Releases” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-lee-082119. [5]   Concept Release on the U.S. Proxy System, Release No. 34-62495, 75 FR 42982 (July 22, 2010), available at https://www.sec.gov/rules/concept/2010/34-62495.pdf. [6]   For additional information on the 2010 concept release, please see our client alert dated July 22, 2010, available at https://www.gibsondunn.com/securities-and-exchange-commission-issues-concept-release-seeking-public-comment-on-u-s-proxy-system/. [7]   Staff Legal Bulletin No. 20 (June 30, 2014), available at http://www.sec.gov/interps/legal/cfslb20.htm. [8]   For additional information regarding SLB 20, please see our client alert dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/. [9]   See Securities and Exchange Commission, “Spotlight on Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/proxy-roundtable-2018. [10]   See Securities and Exchange Commission Webcast Archive, “Roundtable on the Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=111518roundtable. [11]   See Chairman Jay Clayton, “Remarks for Telephone Call with SEC Investor Advisory Committee Members” (Feb. 6, 2019), available at https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-call-020619. [12]   See Commission Elad L. Roisman, “Statement at the Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-roisman-082119. [13]   See Agency Rule List - Spring 2019, available here. [14]   In contrast, ISS previously asked the Commission to confirm that “a registered investment adviser who is contractually obligated to furnish vote recommendations based on client-selected guidelines does not provide ‘unsolicited’ proxy voting advice, and thus is not engaged in a ‘solicitation’ subject to the Exchange Act proxy rules.” Letter from Gary Retelny, President and CEO, ISS, to Brent J. Fields, Secretary, Commission (Nov. 7, 2018), available at https://www.sec.gov/comments/4-725/4725-4629940-176410.pdf. [15]   For additional information regarding the Staff’s views on the availability of such exemptions for proxy advisory firms, please see our client alert regarding SLB 20 dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/. [16]   The solicitation exemption in Rule 14a-2(b)(3) explicitly does not also provide an exemption from Rule 14a-9. Thanks to associate Geoffrey Walter in Washington, D.C. for his assistance in the preparation of this client update. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers: Securities Regulation and Corporate Governance: Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney - Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com) Ronald O. Mueller - Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Brian J. Lane - Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Lori Zyskowski - New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Shareholder Activism: Eduardo Gallardo - New York (+1 212-351-3847, egallardo@gibsondunn.com) © 2019 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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August 22, 2019

The Singapore Convention on Mediation and the Path Ahead

Click for PDF On August 7, 2019, forty-six State Parties, including the United States, China, India, and South Korea,[1] signed the United Nations Convention on International Settlement Agreements Resulting from Mediation, also known as the “Singapore Convention on Mediation.”[2] The Convention aims to promote the use of mediation to resolve cross-border commercial disputes by enhancing the enforceability of international mediated settlement agreements. Mediation can be an effective means for disputing parties to resolve their dispute efficiently and creatively. It seeks to achieve a practical outcome based on the disputing parties’ underlying motivations. Historically, there has been one significant barrier to settling international disputes through mediation: if a party to a mediated settlement agreement defaults on its obligations, the non-defaulting party must turn to litigation, arbitration, or any other method contemplated by the settlement agreement to enforce the agreement like it would any other contractual obligation. This can be costly and time-intensive, particularly if enforcement requires cross-border proceedings or the defaulting party has acted to obstruct the enforcement process. For example, a settlement agreement may require litigation in a particular jurisdiction, but the defaulting party may have transferred its assets to another jurisdiction after signing the settlement. In this situation, the non-defaulting party will need to pursue litigation in multiple jurisdictions. The Convention aims to resolve issues with cross-border enforcement by making mediated settlement agreements directly enforceable by the courts of all State Parties to the Convention.[3] Specifically, the Convention allows parties to the settlement agreement to invoke those agreements before the courts of State Parties to establish that the matter has already been resolved via mediation.[4] Once a court in a State Party is presented with a request, it must “act expeditiously” to enforce the settlement agreement.[5] Settlement Agreements Covered by the Singapore Convention on Mediation The Convention applies to any settlement agreement that: (i) resulted from mediation;[6] (ii) is related to a “commercial” dispute;[7] (iii) is in writing;[8] and (iv) is “international” in character. In order for the settlement agreement to be “international,” at least two parties to the settlement agreement must have their places of business in different countries, or the State Party with which the settlement agreement is most closely connected, or in which it must be performed, must be different from the parties’ places of business.[9] Notably, the parties to the settlement agreement do not need to be nationals of, or have their places of business in, the State Parties to the Convention. The Convention does not apply if a settlement agreement (i) has been concluded or approved in the course of a court proceeding and is enforceable as a judgment in that State; or (ii) is enforceable as an arbitral award.[10] State Parties may also restrict the Convention’s applicability by entering two types of reservations. First, a State Party may exclude application to settlement agreements to which the State Party or its governmental agencies are party.[11] Second, a State Party may restrict application of the Convention to settlement agreements only to the extent parties have expressly agreed to apply it.[12] Thus, when negotiating a mediated settlement agreement, it may be prudent to expressly agree to the Convention’s application.[13] Enforcement of Settlement Agreements under the Singapore Convention on Mediation In order to enforce a settlement agreement under the Convention, a party must provide to the court with jurisdiction the signed settlement agreement and evidence that the settlement agreement resulted from mediation.[14] Such evidence could include the mediator’s signature on the agreement or a document signed by the mediator confirming there was a mediation.[15] State Parties to the Convention may refuse to enforce mediated settlement agreements on the following limited, prescribed grounds: (i) a party to the agreement was under some incapacity; (ii) the agreement is null and void, inoperative or incapable of being performed under the law that governs it; (iii) the agreement is not binding or is not final; (iv) the agreement has been subsequently modified; (v) the obligations under the agreement have been performed, or are not clear or comprehensible; (vi) granting relief would be contrary to the terms of the settlement agreement; (vii) there was a serious breach by the mediator of standards applicable to the mediator or the mediation without which breach the party resisting enforcement would not have entered into the settlement agreement; (viii) the mediator failed to disclose to the parties circumstances that raise justifiable doubts as to the mediator’s impartiality or independence, and this had a material impact or unduly influenced one of the parties to enter into the settlement agreement; (ix) granting relief would be contrary to the public policy of the State Party; or (x) the subject matter of the dispute is not capable of settlement by mediation under the law of the State Party.[16] In practice, parties objecting to the enforcement of a settlement agreement may seek to interpret these grounds broadly. For example, the Convention does not define what qualifies as a “serious breach” of standards applicable to the mediator or mediation.[17] However, these grounds are similar to those in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”),[18] which seek to preserve procedural propriety and prevent abuse. Courts have generally construed the New York Convention grounds for challenging arbitral awards narrowly, and we would expect them to take a similar approach with respect to settlement agreements subject to scrutiny under the Singapore Convention on Mediation.[19] Current Status of the Singapore Convention on Mediation The Convention will enter into force six months after three signatories deposit instruments of ratification with the United Nations.[20] This will likely be achieved relatively soon given that forty-six countries have already signed the Convention. Its terms will then apply to qualifying settlement agreements concluded after its entry into force in the State Party where enforcement is sought.[21] A United Nations Commission on International Trade Law (“UNCITRAL”) working group has also issued a corresponding Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation.[22] The Model Law is intended to assist State Parties with legislation to implement the Convention, much like UNCITRAL’s Model Law on International Commercial Arbitration aimed to bolster the implementation of the New York Convention. Implications for Cross-Border Dispute Resolution Mediation is generally faster and less expensive than other forms of dispute resolution. It also tends to preserve commercial relationships to a greater degree than other forms of dispute resolution where there are clear winners and losers. Proponents of the Singapore Convention on Mediation hope that, by offering increased certainty with respect to enforcement of mediated settlement agreements, the Convention will provide the same boost to mediation that the New York Convention provided to arbitration. As parties gain confidence in the increased enforceability of mediated settlement agreements as a result of the Singapore Convention on Mediation, they should consider mediation as an alternative or supplement to other forms of dispute resolution. And mediation can be used as an effective tool at any stage of a dispute. For example, mediation may be appropriate for parties in bifurcated proceedings after a merits award is issued but before the remedies have been determined. In this context, mediation would offer the parties a mechanism for agreeing upon a remedy that is acceptable to all involved. In short, the Singapore Convention on Mediation gives companies an additional reason to consider the role of mediation in an overall dispute resolution strategy. And in the event of a successful mediation, companies must structure their mediated settlement agreements to take full advantage of the Convention. * * * Gibson Dunn lawyers have extensive experience advising clients on international dispute resolution, including international mediation processes. If you have any questions about how your company is impacted by or could take advantage of the Singapore Convention on Mediation, we would be pleased to assist you. ______________________    [1]   The complete list of signatories is available here: https://treaties.un.org/Pages/showDetails.aspx?objid=080000028054826c&clang=_en. It includes Afghanistan, Belarus, Benin, Brunei, Chile, China, Colombia, Congo, Democratic Republic of Congo, Eswatini, Fiji, Georgia, Grenada, Haiti, Honduras, India, Iran, Israel, Jamaica, Jordan, Kazakhstan, Laos, Malaysia, Maldives, Mauritius, Montenegro, Nigeria, North Macedonia, Palau, Paraguay, Philippines, Qatar, Republic of Korea, Samoa, Saudi Arabia, Serbia, Sierra Leone, Singapore, Sri Lanka, Timor-Leste, Turkey, Uganda, Ukraine, USA, Uruguay, and Venezuela.    [2]   The complete text of the Singapore Convention on Mediation is available here: https://uncitral.un.org/sites/uncitral.un.org/files/singapore_convention_eng.pdf.    [3]   See Singapore Convention on Mediation, Article 3(1).    [4]   See Singapore Convention on Mediation, Article 3(2).    [5]   See Singapore Convention on Mediation, Article 4(5).    [6]   Under the Convention, “mediation” is defined broadly to encompass any process “whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons . . . lacking the authority to impose a solution upon the parties to the dispute.” Singapore Convention on Mediation, Article 2(3).    [7]   The Convention specifically excludes from its scope disputes arising from transactions entered into for “personal, family or household purposes,” or if the settlement agreements relate to “family, inheritance or employment law.” Singapore Convention on Mediation, Article 1(2).    [8]   A settlement agreement will be in writing under the Convention if “its content is recorded in any form,” including “electronic communication if the information contained therein is accessible so as to be useable for subsequent reference.” Singapore Convention on Mediation, Article 2(2).    [9]   See Singapore Convention on Mediation, Article 1(1). Under the Convention, “[i]f a party has more than one place of business, the relevant place of business is that which has the closest relationship to the dispute resolved by the settlement agreement, having regard to the circumstances known to, or contemplated by, the parties at the time of the conclusion of the settlement agreement.” Alternatively, “[i]f a party does not have a place of business, reference is to be made to the party’s habitual residence.” Singapore Convention on Mediation, Article 2(1). [10]   See Singapore Convention on Mediation, Article 1(3). [11]   See Singapore Convention on Mediation, Article 8(1)(a). [12]   See Singapore Convention on Mediation, Article 8(1)(b). [13]   The Convention also permits parties to opt-out by expressly stipulating this in their settlement agreement. See Singapore Convention on Mediation, Article 5(1)(d). [14]   See Singapore Convention on Mediation, Article 4(1). [15]   See Singapore Convention on Mediation, Article 4(1)(b). [16]   See Singapore Convention on Mediation, Article 5. [17]   Singapore Convention on Mediation, Article 5(1)(e). [18]   See New York Convention, Article 5. [19]   See Gary Born, International Arbitration: Cases and Materials 3427 (2d ed. 2015). [20]   See Singapore Convention on Mediation, Article 14(1). [21]   See Singapore Convention on Mediation, Article 9. [22]   Available here: https://undocs.org/en/A/RES/73/199. Gibson, Dunn & Crutcher's lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's International Arbitration practice group, or the following: Cyrus Benson - London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com) Penny Madden - London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com) Jeffrey Sullivan - London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com) Rahim Moloo - New York (+1 212-351-2413, rmoloo@gibsondunn.com) Charline O. Yim - New York (+1 212-351-2316, cyim@gibsondunn.com) Zachary A. Kady - New York (+1 212-351-5305, zkady@gibsondunn.com) Marryum Kahloon - New York (+1 212-351-3867, mkahloon@gibsondunn.com) Ankita Ritwik - Washington, D.C. (+1 202-887-3715, aritwik@gibsondunn.com) © 2019 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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August 16, 2019

Delaware Court of Chancery Issues Important Ruling on Validity of Advance Notice Bylaws

Click for PDF In an important transcript ruling issued this week,[1] the Delaware Court of Chancery upheld the validity and vitality of advance notice bylaw provisions, which govern the timing and disclosure requirements of stockholder nominations of board candidates. The ruling should give further comfort to boards of public corporations in enforcing reasonable and customary safeguards commonly imposed on the critical director nomination process. The recent transcript ruling was issued in connection with the unsolicited efforts by Bay Financial Capital to acquire Barnes & Noble Education, Inc. (BNED). BNED operates physical and virtual bookstores for educational institutions, sells textbooks wholesale, and provides digital educational solutions. BNED was spun off from Barnes & Noble, Inc. in 2015. BNED’s bylaws require that director nominations be submitted by stockholders no earlier than 120 days and no later than 90 days prior to the anniversary date of the prior year’s annual meeting of stockholders. As customary, under BNED’s bylaws a stockholder must be a record holder as of the notice deadline in order to nominate directors. Between February and June 2019, Bay Capital submitted three unsolicited proposals to acquire BNED. The BNED Board rejected all three proposals, primarily for two reasons. First, the Board determined the financial consideration to be inadequate. Second, the Board believed that Bay Capital was not a credible potential acquirer, having doubts of its ability to finance an acquisition of a public company. On June 27, 2019, the last day to submit director nominations for the 2019 annual meeting of stockholder, Bay Capital noticed the nomination of a slate of director candidates. Although the notice was timely, as of June 27 Bay Capital was just a beneficial owner of BNED stock and not a record holder. BNED’s Board of Directors therefore rejected the notice as invalid. Two weeks later, Bay Capital filed a complaint in Delaware Court of Chancery seeking injunctive relief to run its slate of directors at the upcoming annual meeting of stockholders. The Court found that despite being reminded no fewer than four times by its advisor of the record holder requirement set forth in the BNED bylaws, Bay Capital did not acquire shares until three days before the nomination deadline. And when the shares were acquired, it was done through a broker such that there was not sufficient time to get the shares transferred in Bay Capital’s record name. The Court dismissed various arguments advanced by Bay Capital in seeking an injunction, including a purported ambiguity in the BNED bylaws as to the need for the nominating stockholder to be a holder of record at the time it delivered the notice of nomination. Ultimately, the Court noted: “Needless to say, not even Delaware's strong public policy favoring the stockholder franchise will save Bay Capital from its dilatory conduct. Bay Capital blew the deadline. It then made up excuses for doing so. No record evidence suggests that the company is in any way at fault for that mistake. If this Court required the company to accept the nomination in these circumstances, advance notice requirements would have little meaning under Delaware law.” In light of the continuing prevalence of shareholder activism and hostile takeover activity, public corporations should continuously review their advance notice bylaw with counsel to confirm that they include state-of-the-art guardrails that can ensure an orderly and timely nomination process. And, more importantly, well-informed boards should feel comfortable uniformly enforcing those provisions, and not be intimidated by efforts by activist shareholders and hostile bidders to try to bypass their requirements due to carelessness or ignorance. Gibson Dunn represents Barnes & Noble Education, Inc. in this matter. ________________________    [1]   Bay Capital Finance, LLC v. Barnes & Noble Education, Inc. (August 14, 2019), available here. 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 authors: Eduardo Gallardo - New York (+1 212-351-3847, egallardo@gibsondunn.com) Adam H. Offenhartz - New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) Aric H. Wu - New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 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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August 15, 2019

2019 Mid-Year Securities Litigation Update

Click for PDF The rate of new securities class action filings appears to be stabilizing, but that does not mean 2019 has been lacking in important developments in securities law. This mid-year update highlights what you most need to know in securities litigation trends and developments for the first half of 2019: The Supreme Court decided Lorenzo, holding that, even though Lorenzo did not “make” statements at issue and is thus not subject to enforcement under subsection (b) of Rule 10b-5, the ordinary and dictionary definitions of the words in Rules 10b-5(a) and (c) are sufficiently broad to encompass his conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud. Because the Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. We explain important developments in Delaware courts, including the Court of Chancery’s application of C & J Energy, as well as the Delaware Supreme Court’s (1) application and extension of its recent precedents in appraisal litigation to damages claims, (2) elaboration of its recent holding on MFW’s “up front” requirement, and (3) rare conclusion that a Caremark claim—“possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”—survived a motion to dismiss. Finally, we continue to monitor significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II. I.   Filing And Settlement Trends New federal securities class action filings in the first six months of 2019 indicate that annual filings are on track to be similar to the number of new cases filed in each of the prior two years. According to a newly released NERA Economic Consulting study (“NERA”), 218 cases were filed in the first half of this year. While there was a relative surge in new cases in the first quarter of the year, this higher level of new cases did not persist in the second quarter. Filing activity in the first half of 2019 indicates a continuation of the shift in the types of cases observed in 2018—an increase in the number of Rule 10b-5, Section 11, or Section 12 cases, and a decrease in the number of merger objection cases. If the filing composition and levels observed in the first half of 2019 are indicative of the pattern for the rest of the year, we will see a 15% increase in Rule 10b-5, Section 11, and Section 12 cases compared to the approximate 1% growth in this category of filings in 2018. On the other hand, merger objection cases filed in 2019 are on pace to be more than 16% lower than similar cases filed in the prior year. While the median settlement values for the first half of 2019 are roughly equivalent to those in 2018 (at $12.0 million, down from $12.70 million in 2018), average settlement values are down over 50% from 2018 (at $33 million, down from $71 million in 2018).  That said, this discrepancy is due predominantly to one settlement in 2018 exceeding $1 billion.  Excluding such outliers, we actually see a slight increase in average settlement values compared to the prior two years. The industry sectors most frequently sued thus far in 2019 continue to be healthcare (22% of all cases filed), tech (20%), and finance (15%). Cases filed against healthcare companies in the first half of 2019 are showing the continuation of a downward trend from a spike in 2016, while cases filed against tech and finance companies are on pace with 2018. A.   Filing Trends Figure 1 below reflects filing rates for the first half of 2019 (all charts courtesy of NERA). So far this year, 218 cases have been filed in federal court, annualizing to 436 cases, which is on pace with the number of filings in 2017 and 2018, and significantly higher than the numbers seen in years prior to 2017. Note that this figure does not include the many class suits filed in state courts or the rising number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. B.   Mix Of Cases Filed In First Half Of 2019 1.   Filings By Industry Sector As seen in Figure 2 below, the split of non-merger objection class actions filed in the first half of 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the Health Technology and Services and the Electronic Technology and Technology Services sectors accounted for over 40% of filings. The two sectors reflecting the largest changes from 2018 thus far are Consumer Durables and Non-Durables (at 9%, up from 6% in 2018) and Consumer and Distribution Services (at 5%, down from 9% in 2018). See Figure 2, infra. 2.   Merger Cases As shown in Figure 3, 83 “merger objection” cases have been filed in federal court in the first half of 2019 —below the pace of 109 cases at this point in 2018. If the 2019 trend continues, the 166 merger objection cases projected to be filed in 2019 will be about 16% fewer than the 198 merger objection cases filed in the prior year. C.   Settlement Trends As Figure 4 shows below, during the first half of 2019, the average settlement declined to $33 million, more than 50% lower than the average in 2018 but higher than the average in 2017. This phenomenon is primarily driven by one settlement in 2018 exceeding $1 billion, heavily skewing the average for that year.  If we limit our analysis to cases with settlements under $1 billion, there is actually a slight increase in the average settlement value in 2019 compared to the prior years. Finally, as Figure 5 shows, the median settlement value for cases was $12 million, which is in line with the median in 2018 and almost double the median value in 2017. II.   What To Watch For In The Supreme Court A.   Lorenzo Affirms That Disseminators Of False Statements May Be Held Liable Under Rules 10b-5(a) And 10b-5(c) Even If Janus Shields Them From Liability Under Rule 10b-5(b) We discussed the Supreme Court’s decision to grant review of Lorenzo v. Securities and Exchange Commission, No. 17-1077, in our 2018 Mid-Year Securities Litigation Update, and our 2018 Year-End Securities Litigation Update. Readers will recall that the question presented in Lorenzo was whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be actionable as a “fraudulent scheme” under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), even though it would not support a claim under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). On March 27, 2019, the Supreme Court affirmed the D.C. Circuit in a 6–2 opinion by Justice Breyer (Justice Kavanaugh took no part in the decision because he participated in the panel decision while a judge on the court of appeals).  The Court held that the ordinary and dictionary definitions of the words in Rules 10b-5(a) and 10b-5(c) are sufficiently broad to encompass Lorenzo’s conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud, even if the disseminator did not “make” the statements and is thus not subject to enforcement under subsection (b) of the Rule.  Lorenzo v. SEC, 587 U.S. ___ (2019), slip op. at 5–7. Underlying the Court’s opinion is the principle that the securities laws and regulations work together as a whole. The Court rejected Lorenzo’s argument that Rule 10b-5 should be read to mean that each provision of the Rule governs different, mutually exclusive spheres of conduct. Under Lorenzo’s reading, he could be liable for false statements only if his conduct violated provisions that specifically refer to such statements, such as Rule 10b-5(b), and could therefore not be liable under other provisions of the Rule, which do not specifically mention misstatements. The Court noted, however, that it has “long recognized considerable overlap among the subsections of the Rule” and related statutory provisions.  Id. at 7–8.  The opinion further noted that Lorenzo’s conduct “would seem a paradigmatic example of securities fraud,” making it difficult for the majority to reconcile Lorenzo’s argument with the basic purpose and congressional intent behind the securities laws.  Id. at 9. The majority also adopted the SEC’s argument that Janus concerned only Rule 10b-5(b), and thus does not operate to shield those who disseminate false or misleading information from scheme liability, even if they do not “make” the statement.  In response to Lorenzo’s contention that imposing primary liability here would weaken the distinction between primary and secondary liability, the Court drew what it characterized as a clear line:  “Those who disseminate false statements with intent to defraud may be held primarily liable under Rules 10b-5(a) and (c),” as well as Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act, “even if they are secondarily liable under Rule 10b-5(b).”  Id. at 10–11.  Finally, the Court identified a flaw in Lorenzo’s suggestion that he should only be held secondarily liable.  Under that theory, someone who disseminated false statements (even if knowingly engaged in fraud) could not be held to have aided and abetted a “maker” of a false statement if the maker did not violate Rule 10b-5(b). That is because the aiding and abetting statute requires that there be a violator to whom the secondary violator provides “substantial assistance.” Id. at 12. And if, under Lorenzo’s theory, the disseminator did not primarily violate other subsections (perhaps because the disseminator lacked the necessary intent), the fraud might go unpunished altogether.  Id. at 12–13. We noted in our 2018 Year-End Securities Litigation Update that Justice Gorsuch appeared accepting of Lorenzo’s positions during the oral argument, and he did join Justice Thomas (the author of Janus) in dissent. The dissent contended that the majority “eviscerate[d]” the distinction drawn in Janus between primary and secondary liability by holding that a person who did not “make” a fraudulent misstatement “can nevertheless be primarily liable for it.” Id. at 1 (Thomas, J., dissenting).  The dissent faulted the Court for holding, in essence, that the more general provisions of other securities laws each “completely subsumes” the provisions that specifically govern false statements, such as Rule 10b-5(b). Id. at 3.  Instead, the dissenters argued that these specific provisions must be operative in false-statement cases, and that the more general provisions should be applied only to cases that do not fall within the purview of these more specific provisions. B.   Pending Certiorari Petitions Regular readers of these updates will recall that we wrote about the Supreme Court’s pending decision in Emulex Corp. v. Varjabedian, No. 18-459, in the 2018 Year-End Securities Litigation Update. In April, the Supreme Court heard oral argument and then dismissed the writ of certiorari as improvidently granted. Emulex Corp. v. Varjabedian, 587 U.S. ___ (2019), slip op. at 1. As is common in such dismissals, the Justices offered no explanation of why they dismissed the case. Therefore, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. There is also at least one notable securities case in which a petition for certiorari is pending. Putnam Investments, LLC v. Brotherston, No. 18-926, an ERISA case, presents the question whether the plaintiff or defendant must prove that an alleged fiduciary breach related to investment option selection caused a loss to participants or the plan. The case also raises the issue of whether the First Circuit correctly held that showing that particular investment options did not perform as well as a set of index funds, selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.” The Supreme Court has entered an order requesting the Solicitor General file a brief expressing the views of the United States. The government has not yet filed its brief in this case. We will continue to monitor the petition and provide an update if the Supreme Court grants certiorari. III.   Delaware Developments A.   Delaware Supreme Court Affirms Deal Price Is Best Evidence Of Fair Value In Appraisal, And Of Damages In Entire Fairness Regular readers of these updates will recall that, since our 2017 Year-End Securities Litigation Update, we have been reporting on the significant shift in Delaware appraisal law resulting from the Delaware Supreme Court’s landmark decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), where it directed the Court of Chancery to use market factors to determine the fair value of a company’s stock. In our 2018 Mid-Year Securities Litigation Update, we wrote about the Delaware Court of Chancery’s decision in Verition Partners Master Fund v. Aruba Networks, Inc., where the trial court interpreted Dell as endorsing a company’s unaffected market price and deal price as reliable indicators of fair value under certain circumstances. 2018 WL 2315943, at *1 (Del. Ch. May 21, 2018). In April, however, the Delaware Supreme Court reversed the trial court, clarifying that, although the “unaffected market price” of a seller’s stock “in an efficient market is an important indicator of its economic value that should be given weight” under appropriate circumstances, Dell “did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time.” Verition Partners Master Fund v. Aruba Networks, Inc., 210 A.3d 128, 2019 WL 1614026, at *6 (Del. Apr. 16, 2019). Eschewing remand, the Supreme Court instead ordered the trial court to enter judgment awarding deal price less synergies as the company’s “fair value.” Id. at *8–9. Then, in May, the Delaware Supreme Court extended the same market-based deference from the appraisal context to damages claims in its affirmance of In re PLX Technology Inc. Stockholders Litigation, 2018 WL 5018535 (Del. Ch. Oct. 16, 2018), aff’d, 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). Late last year, the Delaware Court of Chancery determined in a post-trial opinion that an activist hedge fund aided and abetted a breach of fiduciary duties by directors in connection with their sale of the target company. 2018 WL 5018535, at *1. This was a pyrrhic victory, however, as the Court of Chancery concluded that the plaintiffs failed to prove their allegation that, had the company remained a stand-alone entity, its value would have exceeded the deal price by more than 50%. Id. at *2. Instead, the Court of Chancery found that “[a] far more persuasive source of valuation evidence is the deal price that resulted from the Company’s sale process.” Id. at *54; see also id. & n.605 (citing Dell, 177 A.3d at 30). In affirming the Court of Chancery’s decision on appeal, the Delaware Supreme Court rejected the plaintiffs’ argument that “the Court of Chancery erred . . . by importing principles from . . . appraisal jurisprudence to give deference to the deal price.” In re PLX Tech. Inc. Stockholders Litig., 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). B.   Joint Valuation Exercise Constitutes Substantive Economic Negotiations Under Flood, Fails MFW’s “Up Front” Requirement In our 2018 Year-End Securities Litigation Update, we reported on the Delaware Supreme Court’s decision in Flood v. Synutra International, Inc., where it held that the element of Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014) that requires a transaction to be conditioned “ab initio” or “up front” on the approval of both a special committee and a majority of the minority stockholders, in turn “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” Flood v. Synutra Int’l, Inc., 195 A.3d 754, 763 (Del. 2018). In Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019), the Delaware Supreme Court added color to its holding in Flood that “up front” means “before the start of substantive economic negotiations,” Flood, 195 A.3d at 763. In the decision underlying Olenik, the Court of Chancery found that, although the parties to the merger had “worked on the transaction for months” before implementing MFW’s “up front” conditions, those “preliminary discussions” were “entirely exploratory in nature” and “never rose to the level of bargaining.” Olenik, 208 A.3d at 706, 716–17. Disagreeing with and reversing the Court of Chancery, the Delaware Supreme Court held that “preliminary discussions transitioned to substantive economic negotiations when the parties engaged in a joint exercise to value” the merging entities. Id. at 717. In particular, the Delaware Supreme Court found it reasonable to infer that two presentations valuing the target “set the field of play for the economic negotiations to come by fixing the range in which offers and counteroffers might be made.” Id. Thus, the parties could not invoke MFW’s protections because they did not condition the transaction on approval of both a special committee and a majority of the minority stockholders until after these “substantive economic negotiations.” Id. C.   Under C & J Energy, Curative Shopping Process “Cannot Be Granted” To Remedy Deal Subject To Entire Fairness Recently, the Court of Chancery declined to “blue-pencil” a merger agreement resulting from a flawed process based on the Delaware Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014). See FrontFour Capital Grp. LLC v. Traube, 2019 WL 1313408, at *33 (Del. Ch. Mar. 22, 2019). Recall that, in C & J Energy, the Delaware Supreme Court cautioned the Court of Chancery against depriving “adequately informed” stockholders of the “chance to vote on whether to accept the benefits and risks that come with [a flawed] transaction, or to reject the deal,” 107 A.3d at 1070, where (1) “no rival bidder has emerged to complain that it was not given a fair opportunity to bid,” id. at 1073, and (2) a preliminary injunction would “strip an innocent third party [buyer] of its contractual rights while simultaneously binding that party to consummate the transaction,” id. at 1054. In FrontFour, the plaintiff proved that the deal at issue was not entirely fair because conflicted insiders tainted the sale process; the special committee failed to inform itself adequately; standstill agreements prevented third parties from coming forward; and other deal protections prevented an effective post-signing market check, among other things. 2019 WL 1313408, at *32. Nevertheless, the Court of Chancery declined to grant “the most equitable relief” available—“a curative shopping process, devoid of [management] influence, free of any deal protections, plus full disclosures.” Id. at *33. The Court of Chancery reasoned that it had “no discretion” to do so under C & J Energy because the injunction sought would “strip an innocent third party of its contractual rights” under the merger agreement. Id. D.   Delaware Supreme Court Holds Caremark Claim Adequately Pleaded As we reported in our 2017 Year-End Securities Litigation Update, a Caremark claim generally seeks to hold directors personally accountable for damages to a company arising from their failure to properly monitor or oversee the company’s major business activities and compliance programs. On June 19, 2019, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a derivative suit against key executives and the board of directors of Blue Bell USA, carrying implications for both determinations of director independence and fiduciary duties under Caremark. See Marchand v. Barnhill, 2019 WL 2509617 (Del. June 19, 2019). In its demand futility analysis, the Court held that a combination of a “longstanding business affiliation” and “deep . . . personal ties” cast reasonable doubt on a director’s ability to act impartially. Id. at *2. Notably, the reversal turned on the length and depth of one director’s relationship with the CEO of Blue Bell and his family. Although being “social acquaintances who occasionally have dinner or go to common events” does not per se preclude one’s independence, the current CEO’s father and predecessor had hired, mentored, and quickly promoted the director in question to senior management. Id. at *11. The director maintained a close relationship with the CEO’s family that spanned more than three decades and the family even spearheaded a campaign to name a college building after the director. Id. at *10. This combination of facts persuaded the Court that this director was not independent for demand futility purposes. Id. at *10–11. The Court also held that a board’s failure to implement oversight systems related to a “compliance issue intrinsically critical to the business operation” gives rise to a duty of loyalty claim under Caremark. Id. at *13. The Court concluded that because food safety compliance was critical to the operation of a “single-product food company,” id at *4, neither the Company’s nominal compliance with some applicable regulations, nor management’s discussion of general compliance matters with the board were sufficient to satisfy the board’s oversight responsibilities, id. at *13–14. IV.   Loss Causation Developments The first half of 2019 saw several notable developments regarding loss causation, including continued developments relating to Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), discussed below in Section VI. Separately, on June 24, 2019, the Supreme Court rejected a petition for a writ of certiorari filed in First Solar, Inc. v. Mineworkers’ Pension Scheme, which we discussed in the 2018 Mid-Year Securities Litigation Update. First Solar involved a perceived ambiguity in prior precedent regarding the correct test for loss causation under the Securities Exchange Act of 1934 (the “Exchange Act”). Readers will recall that the Ninth Circuit held in First Solar that loss causation can be established even when the corrective disclosure did not reveal the alleged fraud on which the securities fraud claim is based. Mineworkers’ Pension Scheme v. First Solar, Inc., 881 F.3d 750, 754 (9th Cir. 2018), cert. denied, No. 18-164, 2019 WL 2570667 (U.S. June 24, 2019). First Solar filed its petition for writ of certiorari in August 2018, arguing that loss causation can be proven only if the market learns of, and reacts to, the underlying fraud. In May 2019, the Solicitor General filed an amicus brief recommending that certiorari be denied, arguing that the Ninth Circuit correctly rejected a “revelation-of-the-fraud” requirement for loss causation, pursuant to which a stock-price drop comes immediately after the revelation of a defendant’s fraud. Following the Ninth Circuit’s decision in First Solar, some courts have found that a plaintiff adequately pleaded loss causation for the purposes of stating a claim under the Exchange Act when the revelation that caused the decline in a company’s stock price could be tracked back to the facts allegedly concealed, thus establishing proximate cause at the pleadings phase. See, e.g., In re Silver Wheaton Corp. Sec. Litig., 2019 WL 1512269, at *14 (C.D. Cal. Mar. 25, 2019) (denying motion to dismiss); Maverick Fund, L.D.C. v. First Solar, Inc., 2018 WL 6181241, at *8–10 (D. Ariz. Nov. 27, 2018) (denying motion to dismiss and finding that plaintiffs had adequately pleaded facts that, if proven, would establish that disclosures related to misstatements were “casually related” to fraudulent scheme). We will continue to monitor these and other developments regarding loss causation. V.   Falsity Of Opinions – Omnicare Update In the first half of 2019, courts continued to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), the case in which the Supreme Court addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. In Omnicare, the Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. Under that standard, opinion statements give rise to liability under only three circumstances: (1) when the speaker does not “actually hold[] the stated belief;” (2) when the statement contains false “embedded statements of fact;” and (3) when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1326–27, 1329. Consistent with past years, Omnicare remains a high bar to pleading the falsity of opinion statements. See, e.g, Plaisance v. Schiller, 2019 WL 1205628, at *11 (S.D. Tex. Mar. 14, 2019) (dismissing complaint that was “[m]issing . . . allegations of fact capable of proving that [the company] did not subjectively believe its audit opinions when they were issued”); Teamsters Local 210 Affiliated Pension Tr. Fund v. Neustar, Inc., 2019 WL 693276, at *5 (E.D. Va. Feb. 19, 2019) (finding that plaintiffs did not “allege facts that create a strong inference that at the time they [made the alleged misstatement], the Defendants could not have reasonably held the opinion” proffered). For example, in Neustar, plaintiffs alleged that defendants’ opinion that a certain transition “would occur by September 30, 2018” was false or misleading. 2019 WL 693276, at *5. Even though defendants were in possession of a “Transition Report, which warned that the transition might not occur” by that date, the court found that “[t]hese statements were far from definitive pronouncements that the transition date would occur later than September 2018.” Id. In addition, courts have continued to flesh out the contours of when a plaintiff has alleged that a company is in possession of sufficient information cutting against its statements to render it liable for an omission. In In re Ocular Therapeutix, Inc. Securities Litigation, the court found that a CEO’s statement that the company “think[s]” it had remedied deficiencies leading to the FDA’s denial of its New Drug Application was inactionable, even where the FDA later rejected the resubmitted application. 2019 WL 1950399, at *8 (D. Mass. Apr. 30, 2019). Not only did the CEO’s language “signal[] to investors that his statement was an opinion and not a guarantee,” but he also cautioned that it was up to the FDA to determine whether or not those deficiencies were corrected. Id. In Securities & Exchange Commission v. Rio Tinto plc, the SEC alleged that Rio Tinto violated securities laws by overstating the valuation of its newly acquired coal business when there had been certain adverse developments concerning the ability to transport coal and the quality of coal in the ground. 2019 WL 1244933, at *9 (S.D.N.Y. Mar. 18, 2019). The court dismissed the claim based on early valuation statements because those statements were opinions that “‘fairly align[ed] with’” information known at the time: namely, the main transportation option had not been entirely rejected, and the SEC did not “allege that Rio Tinto had come to fully appreciate the difficulties” concerning other transportation options and coal reserves by the time of those statements. Id. The SEC has moved to amend its complaint. Gibson Dunn represents Rio Tinto in this and other litigation. This year, courts also weighed in on the question of whether Omnicare applies to claims other than those brought under Section 11. Specifically, a Northern District of California court found that “[t]he Ninth Circuit has only extended Omnicare to Section 10(b) and Rule 10b-5 claims, not to Section 14 claims,” and therefore “decline[d] to extend Omnicare past the Ninth Circuit’s guidance.” Golub v. Gigamon Inc., 372 F. Supp. 3d 1033, 1049 (N.D. Cal. 2019) (citing City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017)). Gibson Dunn represents several defendants in that matter. In contrast, the Fourth Circuit applied Omnicare to dismiss a Section 14 claim without any discussion about Omnicare’s limitations, determining that a forward-looking statement was still actionable as an omission. Paradise Wire & Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322–23 (4th Cir. 2019). Rather, the court emphasized the importance of context when evaluating opinion statements, noting that “words matter” and, as in Paradise Wire, can “render the claim for relief implausible.” Id. at 323. “When the words of a proxy statement, like the ones in this case, . . . contain tailored and specific warnings about the very omissions that are the subject of the allegations, those words render the claim for relief implausible.” Id. Additionally, a District of Delaware court recently declined to apply Omnicare to Section 10(b) claims: “Because the Third Circuit has twice declined to decide that Omnicare applies to Exchange Act claims, the Court is reluctant to decide that issue of first impression in connection with a motion to dismiss.” Lord Abbett Affiliated Fund, Inc. v. Navient Corp., 363 F. Supp. 3d 476, 496 (D. Del. 2019) (citing Jaroslawicz v. M & T Bank Corp., 912 F.3d 96 (3d Cir. 2018); In re Amarin Corp. PLC Sec. Litig., 689 F. App’x 124, 132 n.12 (3d Cir. 2017)). The Southern District of New York also considered whether Omnicare required broad disclosure of attorney-client privileged communications that might bear on whether omitted information rendered an opinion misleading. Pearlstein v. BlackBerry Ltd., 2019 WL 1259382, at *16 (S.D.N.Y. Mar. 19, 2019). In Pearlstein, plaintiffs argued that under Omnicare, a company’s “decision to include a legal opinion in [a] press release waived all attorney-client communications” related to the issuance of that release. Id. at *15. The court noted that Omnicare did not mandate a wholesale waiver, but “[a]t best . . . suggest[ed] that communications specific to a particular subject allegedly omitted or misrepresented within a securities filing may be subject to disclosure and, if the communications happen to be privileged, those communications may be subject to a finding of waiver.” Id. at *16. Accordingly, the company could not insulate itself with the privilege—documents containing relevant factual information were discoverable. However, privilege was not waived over the “side issue” of the company’s legal exposure, including as to documents on the strength and likelihood of any legal claims and “communications conducted solely for purposes of document preservation in connection with anticipated legal claims.” Id. VI.   Courts Continue To Define “Price Impact” Analysis At The Class Certification Stage We are continuing to monitor significant decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), but the one federal circuit court of appeal decision issued in the first half of 2019 did little to resolve outstanding questions regarding what it will mean for securities litigants. Recall that in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. There are three key questions we have been following in the wake of Halliburton II. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 573 U.S. at 283, with the Supreme Court’s previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 815 (2011); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? Third, what evidence is required to successfully rebut the presumption? As noted in our 2018 Year-End Securities Litigation Update, the Second Circuit addressed the first two questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc., 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, the defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. This puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. Nonetheless, that inconsistency was not enough to persuade the Supreme Court to review the Second Circuit’s decision.  Barclays PLC v. Waggoner, 138 S. Ct. 1702 (Mem.) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486. On remand, the district court again certified the class. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018). Plaintiffs argued on remand that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price.  See id. at *2. Defendants’ experts testified that correction of the alleged misstatements could not have caused the stock price drops, both because thirty-six similar announcements had not impacted the company’s stock price and because alternative news (i.e., news of regulatory investigations), in fact, caused the price drop. Id. at *3. The court found the plaintiffs’ expert’s “link between the news of [the company]’s conflicts and the subsequent stock price declines . . . sufficient,” and defendants’ expert testimony insufficient to “sever” that link. Id. at *4–6. In January, however, the Second Circuit agreed to review Goldman Sachs for a second time.  See Order, Ark. Teachers Ret. Sys. v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019) (“Goldman Sachs II”). In Goldman Sachs II, the Second Circuit is poised to address what evidence is sufficient to rebut the presumption and how the analysis is affected by plaintiffs’ assertion that the alleged misstatements’ price impact is evidenced not by a price increase when the alleged misstatement is made, but by a price drop when the alleged misstatements are corrected, known as “price maintenance theory.” Defendants-appellants challenged the district court’s finding in two primary ways. First, they argued that the district court impermissibly extended price maintenance theory. See Brief for Defendants-Appellants, Goldman Sachs II, at 28–52 (2d Cir. Feb. 15, 2019). They reasoned that a price maintenance theory is unsupportable where the alleged corrective disclosures revealed no concrete financial or operational information that had been hidden from the market for the purpose of maintaining the stock price, see id. at 28–40, and where the challenged statements are too general to have induced reliance (and thus impacted the stock’s price), see id. at 40–50. Second, defendants-appellants argued that the district court misapplied the preponderance of the evidence standard by considering plaintiffs-appellees’ allegations as evidence and misconstruing defendants-appellants’ evidence of no price impact. See id. at 53–67. Plaintiffs-appellees responded that defendants-appellants’ price-maintenance arguments are not supported by law and that such arguments regarding the general nature of the statements are, in essence, a materiality challenge in disguise and thus not appropriate at the class certification stage. Brief for Plaintiffs-Appellees, Goldman Sachs II, at 20–30 (2d Cir. Feb. Apr. 19, 2019). Plaintiffs-appellees further argued that the district court did not abuse its discretion in weighing the evidence. Id. at 36–61. Defendants-appellants submitted their reply brief in May, Reply Brief for Defendants-Appellants, Goldman Sachs II (2d Cir. May 3, 2019), and the Second Circuit heard the case in June. Seven amicus briefs were filed in this case, including by the United States Chamber of Commerce and a number of securities law experts supporting defendants-appellants, and by the National Conference on Public Employee Retirement Systems supporting plaintiffs-appellees. Our 2018 Year-End Securities Litigation Update also noted that the Third Circuit was poised to address price impact analysis in Li v. Aeterna Zentaris, Inc. in the coming months. Briefing there invited the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet, to rebut the presumption of reliance at the class certification stage and whether statistical evidence regarding price impact must meet a 95% confidence threshold. The district court had rejected defendants’ argument that plaintiff’s event study rebutted the presumption, and criticized defendants for not offering their own event study. See Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331, 345 (D.N.J. 2018). With limited analysis, the Third Circuit affirmed, finding that the district court did not abuse its discretion in its consideration of conflicting expert testimony. Vizirgianakis v. Aeterna Zentaris, Inc., 2019 WL 2305491, at *2–3 (3d Cir. May 30, 2019). We will continue to monitor developments in Goldman Sachs II and other cases. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Lindsey Young, Mark Mixon, Emily Riff, Jason Hilborn, Andrew Bernstein, Alisha Siqueira, Kaylie Springer, and Collin James Vierra. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation practice group steering committee: Brian M. Lutz - Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio - Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young - Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell - New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn - New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis - San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer - San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith - New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch - New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin - New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman - Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro - Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff - Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters - Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu - New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 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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August 14, 2019

2019 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers

Click for PDF Halfway through 2019 and the third year of the Trump Administration, we continue to observe complex trends in the health care regulatory and enforcement environment impacting providers. The Trump Administration continues to aggressively pursue its high priority initiatives, such as combatting the opioid crisis and reducing health care costs, through various measures extending to many types of providers. And the U.S. Department of Justice (“DOJ”) continues to pursue and announce significant civil and criminal enforcement actions against health care providers. But in certain other ways, the government has also signaled a softening of its health care enforcement agenda. For example, DOJ has taken a more aggressive approach to reining in non-meritorious qui tam suits brought under the False Claims Act, one of the government’s primary tools for enforcing the health care laws and recovering government health program funds. In a speech at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement earlier this year, Deputy Associate Attorney General Stephen Cox described the DOJ as a “gatekeeper” against frivolous or even low-value qui tam cases, and stated that DOJ attorneys have been instructed to consider dismissal when a qui tam case is not in the government’s interest.[1] This shift in tone is further reflected in the issuance of recent guidance and Justice Manual revisions, discussed in more detail below, that incentivize cooperation and voluntary disclosure by entities under investigation in False Claims Act cases, suggesting a more collaborative, thoughtful, and less rigid overall enforcement approach. Consistent with this shift, the overall number of DOJ and U.S. Department of Health and Humans Services (“HHS”) resolutions involving health care providers, while still reflecting historically high levels of recoveries, continues to decrease from its peak during the Obama Administration. HHS similarly saw a decrease in enforcement efforts against health care providers, continuing the downward trend we’ve observed since 2017. However, opioid enforcement efforts are unwavering, and we continue to see substantial civil and criminal cases being brought against a variety of health care entities as part of combating the opioid crisis. We review recent opioid-related enforcement actions and other health care enforcement developments below. Additionally, we provide updates on other HHS activity, including efforts surrounding conscience and religious freedom protection as they pertain to health care providers. Also addressed in this update are recent case law developments particularly salient to health care providers, including several related to False Claims Act interpretation and application and continued litigation regarding the Affordable Care Act. Finally, we discuss recent developments related to the Anti-Kickback Statute (“AKS”) and the Stark Law, key statutory schemes for health care provider compliance. A collection of recent publications and presentations on health care issues impacting providers is available on our website. As always, we are eager to discuss these recent developments, and their relevance to your business, with you. I.   DOJ Enforcement Activity A.   False Claims Act Enforcement Activity Between January 1 and June 30, 2019, the DOJ announced approximately $645 million in FCA recoveries from settlements with health care providers. This figure is more than triple the DOJ’s recovery of $201 million from settlements from January 1 through June 30, 2018, but it still marked a reduction from the $817 million the DOJ recovered during the same period of 2017.[2] The DOJ’s significant recovery during the first half of 2019 can likely be attributed to the fact that the DOJ reached several particularly large resolutions with providers during this period, including one $269 million settlement and four others over $35 million each. Of note, however, the 33 total health care provider settlements the DOJ announced during the first half of 2019 fell below the 40 health care provider settlements it announced during the first half of 2018 and considerably below the 54 health care provider settlements the DOJ announced during the first half of 2017.[3] The DOJ’s lower count of health care provider settlements during the first half of 2019 could reflect the shift in enforcement tone at the top, except that the amount of recoveries reflected in those settlements have been at historic highs: the DOJ’s average FCA settlement against a health care provider in the first half of 2019 was $19.5 million, nearly four times the average provider settlement the DOJ recovered against health care providers during the same time period last year.[4] Even excluding from this calculation the DOJ’s largest provider settlement of the period—an outlier $269 million settlement in January—the average settlement with a health care provider in the first six months of 2019 was still more than twice the average settlement reached during the same period last year.[5] Consistent with the DOJ’s new approach to using its dismissal authority for more declined qui tams, these numbers could reflect an attempt to put the government’s resources into higher-value cases. The FCA settlements the DOJ has announced this year featured many of the same legal theories the government has used to support actions against providers in years past. Also as in prior years, the DOJ’s provider settlements in the first six months of 2019 featured actions against a wide range of types of providers, including hospitals, clinics and single providers, providers of skilled nursing and rehabilitation services, and pharmacies. The DOJ also announced several settlements with entities we’ve classified as providers of “other” medical services, such as providers of medical records software. It remains to be seen whether this data point is an anomaly or whether it marks an increasing focus by the DOJ on providers of medical technology as the health care field continues to digitize and undergo technological innovation. As indicated in the chart above, during the first half of 2019, most FCA settlements with health care providers involved clinics and single providers as in years past. However, during the first half of 2019, the DOJ also completed numerous settlements with hospitals and entities providing skilled nursing and/or rehabilitation services. Unlike health care provider settlements from the same period of 2018, the vast majority of which involved clinics and single providers, settlements from the first half of 2019 were more evenly spread across provider types.[6] Continuing the trends of the recent past, the most prevalent legal theory among health care provider settlements in the first half of 2019[7] was the theory that providers defrauded the government by billing for services that lacked the medical necessity required by government health programs. The DOJ announced these settlements in roughly a half dozen different jurisdictions around the country, revealing that it had again used this theory in cases against providers of various stripes. Aside from cases involving medically unnecessary procedures or services, the first six months of 2019 also revealed a jump in the number of settlements involving allegations of “upcoding”—where an entity allegedly assigns billing codes for more expensive medical procedures or treatments, or for services of a greater quantity or duration, than it actually provided its patients in order to increase the amount of reimbursement. While only two settlements in 2018 featured upcoding allegations,[8] nine settlements from the first half of 2019 contained allegations of this kind. Indeed, through one enforcement action in the Northern District of Illinois against multiple health care providers of skilled nursing services accused of increasing their Medicare reimbursements through upcoding, the DOJ obtained six separate settlements totaling nearly $10 million.[9] Notably, by far the largest average source of recovery for the DOJ in the first half of 2019 were those settlements with providers involving allegations of either AKS and/or Stark Law violations. Although comprising just eight of the DOJ’s 33 settlements with providers during this period, actions involving allegations of AKS and/or Stark Law violations featured average settlement amounts of just over $22 million. All but three involved qui tam lawsuits. In general, the first half of 2019 featured many large, headline-grabbing settlement amounts. One of the top resolutions, announced in January, was a settlement with a pathology laboratory company resolving allegations of giving subsidies for electronic health records systems (“EHR”) and free and/or discounted consulting services to physicians who referred patients to the lab in violation of the AKS and the Stark Law. [10] As United States Attorney Maria Chapa Lopez of the Middle District of Florida stated in the press release announcing the settlement, “[p]atients deserve the unfettered, independent judgment of their health care professionals. Offering financial incentives to physicians and medical practices in exchange for referrals undermines citizens’ trust in our health care system[.]”[11] The pathology laboratory agreed to pay $63.5 million to settle these allegations.[12] Another top provider settlement from the first half of 2019 was the DOJ’s $57.5 million settlement in February with an EHR vendor, an emerging theme in DOJ resolutions. This settlement resolved allegations that the vendor had caused users of its EHR systems to submit false claims under federal healthcare programs after misrepresenting the nature of what its EHR product could do and providing unlawful remunerations to entice users to recommend its product.[13] As part of the settlement, the company agreed to enter into an “innovative” five-year Corporate Integrity Agreement requiring it to retain an Independent Review Organization to assess the company’s software quality control and compliance systems and to periodically review the company’s dealings with health care providers for compliance with the AKS.[14] Announcing the settlement and Corporate Integrity Agreement, United States Attorney Christina E. Nolan for the District of Vermont stated that going forward her office would be “unflagging in [its] efforts to preserve the accuracy and reliability of Americans’ health records and guard the public . . . against corporate greed.” Per U.S. Attorney Nolan, “EHR companies should consider themselves on notice.”[15] Other actions against EHR vendors in recent years, such as DOJ’s $155 million recovery against an EHR software vendor in 2017, discussed in detail in our 2017 Mid-Year Update,[16] underscore this warning. B.   Case Law Updates 1.   False Claims Act Developments a)   Statute of Limitations Clarified In the first half of 2019, courts have ruled on questions presented in several cases of concern for health care providers. Most notably, on May 13, 2019, the Supreme Court addressed a circuit split relating to the FCA’s statute-of-limitation tolling provisions, 31 USC § 3731(b).[17] The FCA requires that an action be brought by the later of (1) six years after the alleged FCA violation or (2) three years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but no later than 10 years after the alleged violation.[18] As we previewed in our 2018 Year-End Update, at issue in Cochise Consultancy Inc. v. United States, ex rel. Hunt was whether the latter provision, 31 U.S.C. § 3731(b)(2), applies in qui tam cases in which the government does not intervene, and if so, whether the relator’s knowledge of the facts relevant to the alleged FCA violation is sufficient to trigger the three-year period.[19] In the decision on appeal to the Supreme Court,[20] the Eleventh Circuit found that it does, and the relator’s knowledge is not sufficient to trigger the limitations period.[21] Other circuits had found that the provision does not apply to qui tam suits in which the U.S. does not intervene[22] or, if it does, the limitations period begins when the relator has knowledge of the facts giving rise to the alleged FCA violation.[23] The Court affirmed the Eleventh Circuit’s decision, finding based on the plain language of the statute that (1) the longer limitations period of section 3731(b)(2) was available to qui tam relators even if the government declined to intervene in the case, and (ii) the three-year limitations period began when the government—not the relator—had actual or constructive knowledge of the fraud allegations.[24] This decision will have substantial implications for providers and the FCA bar: following this ruling, some qui tam relators may have up to ten years from the date of the alleged violation to bring suit under the FCA. We will continue to monitor lower court applications of this decision and report back in future updates. b)   Public Disclosure Bar Updates The FCA’s public disclosure bar requires dismissal of qui tam suits based on information that has already been “publicly disclosed” unless the relator is an “original source” of the information.[25] In 2010, the FCA was amended to provide that a relator may qualify as an original source, even regarding an alleged FCA violation that has been publicly disclosed, if the relator’s knowledge is “independent of and materially adds” to the information in the public domain.[26] The Tenth Circuit recently weighed in on the meaning of “materially adds” in United States ex rel. Reed v. KeyPoint Government Solutions.[27] Adopting a standard set forth by the First Circuit, the court held that new information that is “sufficiently significant or important that it would be capable of ‘influenc[ing] the behavior of the recipient’—i.e., the government—” satisfies the materially-adds standard, whereas “background information or details about a known fraudulent scheme” typically will not.[28] In this particular case, the court found that relator’s information identifying individuals and an entity allegedly involved in a worthless services scheme did not materially add to publicly disclosed information because they provided only additional color.[29] Relator’s allegations regarding an additional scheme and the supervisors’ attempts to conceal it, however, materially added to the publicly disclosed information because her “allegations had the effect of ‘expanding the scope of the fraud’ revealed in the public disclosures and introducing ‘knowledge of scienter that is not specifically contained in a qualifying public disclosure.’”[30] In reaching this conclusion, the Tenth Circuit rejected differing interpretations of “materially adds” adopted by the Seventh and Third Circuits. The Seventh Circuit assesses whether the relator’s allegations are “substantially similar” to the public source information; the Tenth Circuit found this test conceptually indistinct from the inquiry that requires a court to assess whether the relator is an original source to begin with—whether the relator’s allegations are “substantially the same” as those publicly disclosed under 3730(e)(4)(A).[31] The Third Circuit requires that the relator provide information “that adds in a significant way to the essential factual background: ‘the who, what, when, where and how of the events at issue.’”[32] The Tenth Circuit found this interpretation insufficiently case-specific. For example, in a case such as the one before the Tenth Circuit, where “the publicly disclosed fraud exists within an industry with only a few players, a relator who identifies a particular industry actor engaged in the fraud (i.e., the ‘who’) is unlikely to materially add to the information that the public disclosures had already given the government.”[33] c)   Developments in Implied False Certification Theory We have long been reporting on interpretive difficulties faced by the lower courts following the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar.[34] That decision adopted the implied false certification theory of FCA liability; it also set forth new requirements for proving that the false statement was “material” and made with scienter.[35] In our 2018 Year-End Update, we describe the widening circuit splits relating to the interpretation of both elements. The Supreme Court has been asked repeatedly to resolve these circuit splits and clarify the meaning of materiality and scienter. However, in the first half of the year the Court denied five petitions for certiorari that presented the opportunity, including one we reported on at the end of 2018: Brookdale Senior Living Communities, Inc., v. United States ex rel. Prather.[36] The Supreme Court’s silence perpetuates uncertainty for providers, who must grapple with conflicting standards across the circuits. We will continue to report on post-Escobar developments in future updates. d)   Scrutiny of Government Dismissal of AKS Qui Tam Cases A cluster of twelve related qui tam actions filed in eight district courts by the same relator are pushing courts to consider the standard of review applicable to government motions to dismiss qui tam actions. Under the FCA, even where the government declines to intervene, it “may dismiss the action notwithstanding [the relator’s] objections” if the relator receives notice of the government’s motion to dismiss and an opportunity for a hearing.[37] However, the statute does not supply a standard for adjudicating these dismissals, and the courts of appeal are split on the standard to apply. The D.C. Circuit holds that the provision “give[s] the government an unfettered right to dismiss an action” that, like a government decision not to prosecute a case, is presumptively “unreviewable.”[38] The Ninth and Tenth Circuits, by contrast, apply a burden-shifting test: if the government demonstrates a “valid government purpose” for dismissing the case and a “rational relation between dismissal and accomplishment of the purpose,” then the burden shifts to the relator to show that the government’s dismissal is “fraudulent, arbitrary and capricious, or illegal.”[39] As discussed in our prior updates, in a January 2018 memo, Michael D. Granston, the Director of the DOJ’s Civil Fraud Section, Commercial Litigation Branch, indicated that the DOJ would take a more active role in curbing meritless qui tam actions by encouraging government attorneys to dismiss suits that appear meritless or likely to strain government resources.[40] Since the release of the Granston Memo, the DOJ has cited its principles in petitioning for dismissal,[41] and the courts have continued to grapple with the relevant standard applicable to these dismissals. The impact of this circuit split has become particularly clear in courts’ review of DOJ motions to dismiss claims predicated on essentially identical allegations made by one relator against pharmaceutical companies in twelve different cases. Relator alleges that the pharmaceutical companies engaged in three different AKS-violating schemes to induce additional prescriptions of their drugs: (1) “free nursing services” offered to induce prescriptions, (2) sending paid nurse educators to prescribers who purported to provide independent advice but in fact marketed defendants’ products, and (3) “reimbursement support services” offered to induce prescriptions.[42] In an April 2019 decision, a District Court in the Southern District of Illinois denied the government’s motion to dismiss a declined FCA case predicated upon an AKS violation.[43] Applying the burden-shifting standard for reviewing government dismissals of qui tam actions adopted by the Ninth and Tenth Circuits,[44] the court held that the government “failed to fully investigate the allegations against the specific defendants in [the] case” and failed to “assess or analyze the costs it would likely incur versus the potential recovery that would flow to the government if [the] case were to proceed.”[45] Accordingly, the court held that the government’s investigation “falls short of a minimally adequate investigation to support the claimed governmental purpose” for the dismissal, which was the avoidance of litigation costs.[46] The district court also noted that “the Government devoted a significant portion of its briefing – 6 ½ pages and all exhibits – to deriding the relator’s business model and litigation activities” and that the government contended, during the dismissal hearing, that “disapproval of ‘professional relators’ is a valid governmental purpose for dismissal.”[47] Under these circumstances, the court found that “one could reasonably conclude that the proffered reasons for the decision to dismiss are pretextual and the Government’s true motivation is animus towards the relator.”[48] Conversely, a magistrate judge in the United States District Court for the Eastern District of Texas upheld the government’s dismissal of two FCA claims predicated upon AKS violations.[49] Rather than adopt the Ninth and Tenth Circuit’s burden-shifting test to government dismissals, the magistrate judge adopted the D.C. Circuit’s view that the government has an “unfettered right” to dismiss qui tam cases.[50] In the alternative, however, the magistrate judge concluded that even under the burden-shifting standard adopted by the Ninth and Tenth Circuits, the relator’s claim should be dismissed. The magistrate judge found that the government’s stated purpose for dismissing the case – avoiding litigation costs – was valid and rationally related to the dismissal, relying in part on the government’s assertion that “DOJ attorneys in the Civil Division’s Fraud Section have collectively spent more than 1,500 hours” on relator’s cases.[51] The magistrate judge also rejected the relator’s claim that the government’s investigation was inadequate and found that the government was not obligated to present evidence of a cost-benefit analysis to justify its decision to dismiss.[52] As these cases continue to percolate through the district courts and up to the courts of appeal, we expect additional circuits will weigh in on the standard applicable to government dismissals of qui tam claims. 2.   Affordable Care Act Developments First, as we reported in our 2018 Year-End Update, a federal district court in Texas recently struck down the Affordable Care Act (“ACA”), holding that the ACA’s individual mandate provision will no longer be a valid exercise of congressional taxing power when the Tax Cuts and Jobs Act of 2017 eliminates the mandate’s tax penalty in 2019, and that the remainder of the Act is not severable.[53] A coalition of Democratic attorneys general who intervened as defendants in the Texas case have appealed to the Fifth Circuit. In the district court, the DOJ did not defend the constitutionality of the individual mandate, but it argued that the remainder of the Affordable Care Act was severable and, therefore, should remain standing even if the individual mandate were invalidated. Before the Fifth Circuit, however, the DOJ now argues that the individual mandate is not severable and the district court’s opinion should be affirmed in full.[54] If the Fifth Circuit agrees and the decision is not overturned by the Supreme Court, the decision could have much further-reaching ramifications than just the ACA’s well-known health exchange and individual mandate provisions, such as invalidating an array of ACA regulatory and enforcement provisions relating to drug pricing, Medicare payments, and AKS amendments. Oral arguments were heard before a Fifth Circuit panel on July 9, 2019; we will update you on the status of this development in our 2019 Year-End Update. Second, on June 24, 2019, the Supreme Court agreed to hear a dispute relating to specific provisions of the ACA that establish insurer incentives to offer exchange coverage.[55] Under the ACA’s risk corridors program, if insurers’ claims costs exceeded the premiums collected in benefits years 2014 through 2016, “the Secretary [of HHS] shall pay” an amount set by a statutory formula designed to compensate insurers for their losses.[56] However, in appropriations legislation for the 2015 fiscal year, Congress included a rider prohibiting HHS from making risk corridor program payments to insurers with the appropriated funds. When HHS failed to make these risk corridor payments, three insurers sued in the Court of Federal Claims. The insurers claim that HHS owes all insurers, including appellants, over $12 billion. In fact, one of the appellant insurers contends that it became insolvent in 2016 because it relied on risk corridor payments that never materialized in setting its premiums.[57] Although one insurer prevailed in the lower court, on appeal the U.S. Court of Appeals for the Federal Circuit found HHS had no obligation to pay the insurers because “Congress suspended the government’s obligation” to make risk corridor payments “through clear intent manifested in appropriations riders.”[58] The insurers’ petition for certioriari was granted by the Supreme Court, which will hear the case next term. C.   Opioid Crisis Enforcement and Updates Combatting the opioid epidemic remains a top priority for the DOJ. In 2018, the DOJ announced the expansion of its Medicare Fraud Strike Force, the formation of an Appalachian Regional Prescription Opioid (“ARPO”) Strike Force to target the “medically unnecessary prescription and dispensing of opioid-based controlled substances by licensed medical professionals across the region,”[59] and a 28 percent increase in the number of defendants charged with federal opioid-related crimes. This year, the DOJ’s enforcement efforts remain robust: in the first half of 2019, the DOJ brought charges against 62 medical professionals and eight other individuals involved in prescribing or filling prescriptions for opioids. As further demonstrated by the developments described below and throughout this update, DOJ continues to prioritize opioid-related issues in its enforcement and prosecution efforts against defendants ranging from manufacturers and prescribers to testing companies and treatment centers. Most significantly, on April 17, 2019, the DOJ announced charges against 60 individuals involved in opioid distribution, including 53 medical professionals, across 11 districts, brought by the ARPO Strike Force.[60] HHS Secretary Alex Azar explained in connection with the announcement that “[r]educing the illicit supply of opioids is a crucial element of President Trump’s plan to end this public health crisis.”[61] Many of these indictments allege that providers issued prescriptions for opioids and other controlled substances without a legitimate medical purpose and outside the scope of professional practice in violation of the Controlled Substances Act. For example, indictments allege that providers signed blank prescriptions, did not examine patients or conducted inadequate examinations, ignored or did not conduct drug screens, and ignored or failed to monitor for signs of addiction.[62] Some of the healthcare providers were also charged with criminal health care fraud for issuing medically unnecessary opioid prescriptions that were filled and reimbursed by Medicaid, Medicare, or Tricare.[63] DOJ has been pursuing opioid-related cases against a variety of health care providers. In May of this year, DOJ announced a settlement with a provider of behavioral healthcare services that resolved allegations involving seven of the provider’s West Virginia-based addiction treatment centers.[64] Specifically, the suit alleged that the facilities would send urine and blood analysis tests to an out-of-state lab, pay out of pocket for the tests, and then bill Medicaid for the services; Medicaid reimbursed the centers far more than the amounts charged by the lab. The DOJ’s Prescription Interdiction & Litigation (“PIL”) Task Force also brought a “first of its kind action” and obtained a temporary restraining order (“TRO”) to prevent two pharmacies in the Middle District of Tennessee, their owner, and three pharmacists from filling prescriptions for opioids.[65] In a complaint unsealed in February 2019, the DOJ alleges that the pharmacy and pharmacists filled prescriptions despite “red flags” that the medications were being diverted or abused, then falsely billed Medicaid for the prescriptions. For example, patients filled prescriptions for unusually high dosages of oxycodone and other opioids, in dangerous “cocktails” known to have a “synergistic” effect, paid cash, and travelled extremely long distances to fill prescriptions.[66] The DOJ seeks permanent injunctive relief and monetary penalties. In May 2019, the PIL Task Force announced a second TRO issued by the Northern District of Texas against two physicians who allegedly prescribed opioids despite similar “red flags” of abuse in violation of the Controlled Substances Act.[67] The Medicare Fraud Strike Force announced charges against three opioid prescribers in the first six months of 2019. Most recently, on June 25, 2019, it announced the indictment of a New Jersey physician on five counts of AKS violations for allegedly accepting kickbacks from an opioid manufacturer in exchange for writing medically unnecessary opioid prescriptions.[68] In March 2019, a Regional Medicare Fraud Strike force filed an information against a physician in the Eastern District of Pennsylvania charging him with eight counts of violating the Controlled Substances Act for improper opioid prescriptions.[69] The physician pleaded guilty to all eight counts ten days later; he will be sentenced in September 2019.[70] In April 2019, the Medicare Fraud Strike Force filed a two-count information against an Eastern District of Louisiana physician for conspiring to distribute controlled substances and conspiring to defraud Medicare and Medicaid for prescribing unnecessary opioid prescriptions.[71] The physician pleaded guilty in May 2019 and will be sentenced this September.[72] One additional individual was sentenced this year for charges brought in 2018 by the Medicare Fraud Strike Force in the Southern District of Florida. The pain-management clinic owner was sentenced to 78 months’ imprisonment and agreed to repay approximately $1.4 million in proceeds obtained from opioid prescriptions falsely billed to Medicare.[73] The DOJ has also engaged in substantial prosecution efforts against opioid manufacturers, to be detailed further in our upcoming 2019 Mid-Year Update (Drugs and Devices). Consistent with DOJ’s opioid enforcement efforts, thus far this year there have been six civil monetary penalty cases (“CMPs”) assessed by HHS OIG[74] against providers who allegedly sought Medicare reimbursement for specimen validity testing (“SVT”).[75] SVT is, in HHS OIG’s words, “a quality control process that evaluates a urine drug screen sample to determine if it is consistent with normal human urine and to ensure that the sample has not been substituted, adulterated, or diluted.”[76] According to HHS OIG, SVT is “not a separately billable Medicare‑covered service” if used to determine whether a urine sample has been adulterated, whereas use of the test for diagnostic or treatment purposes may be reimbursable.[77] Significantly, five of these six CMP assessments involved providers in Kentucky and Ohio,[78] two states that HHS OIG identified in April 2019 as focal points of the opioid crisis.[79] D.   DOJ Guidance Consistent with the shift, evidenced by DOJ’s movement toward dismissing qui tam actions, that we observed in the wake of the Granston Memo and described above, this spring the DOJ announced two sets of new guidance that may mark a further softening in the DOJ’s approach to companies who proactively address potential FCA issues. As described at greater length below, the DOJ’s new cooperation guidelines in civil FCA matters roll back the “all or nothing approach” to cooperation laid out in the Yates Memo of 2015 and give DOJ attorneys greater “flexibility to accept settlements that remedy the harm and deter future violations.”[80] The DOJ’s criminal division also announced new guidance designed to provide “additional transparency” into how the DOJ evaluates company compliance programs.[81] As noted by Assistant Attorney General Brian A. Benczkowski in announcing the new guidance, “if done right” a well-designed compliance program “has the ability to keep the company off our radar screen entirely.”[82] 1.   Civil Division Guidance on Cooperation On May 7, 2019, the DOJ announced new guidance on cooperation: “Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claims Act Matters.”[83] This guidance follows the DOJ’s November 2018 announcement that it was revising its cooperation policies because the “all or nothing approach to cooperation” introduced in the Yates Memo and requiring companies to identify all individuals responsible in underlying misconduct to receive any cooperation credit “was counterproductive in civil cases.”[84] The guidance, incorporated into the Justice Manual and described in detail in our client alert, explains how DOJ will award credit for cooperation and remedial measures in resolving FCA cases. The guidelines emphasize voluntary self-disclosure of misconduct unknown to the government. However, they also provide for credit for steps such as preserving and disclosing documents “beyond existing business practices or legal requirements;” identifying individuals aware of, or involved in, potential misconduct; and “[a]ssisting in the determination or recovery of the losses caused by the organization’s misconduct.”[85] To earn “maximum credit,” an entity or individual should “undertake a timely self-disclosure that includes identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future.” The guidance provides that the minimum possible penalty, after the award of maximum cooperation credit, is “full compensation for the losses caused by the defendant’s misconduct (including the government’s damages, lost interest, costs of investigation, and relator share).”[86] In a May 20, 2019 speech, Principal Deputy Associate Attorney General Claire McCusker Murray stated that the guidelines provide the DOJ’s enforcement attorneys with “significant flexibility” to credit cooperation.[87] 2.   Criminal Division Guidance on Corporate Compliance Programs This past April, the DOJ’s Criminal Division issued updated guidance regarding corporate compliance programs.[88] The guidance expands upon the Criminal Fraud Section’s February 2017 guidance, and aims to “better harmonize the guidance with other Department guidance and standards while providing additional context to the multifactor analysis of a company’s compliance program.”[89] Among the guidance’s notable features is its focus on providing examples of specific factors DOJ considers in evaluating compliance programs. For example, the guidance discusses the importance of “risk-tailored resource allocation” and ensuring that companies focus their energies on monitoring high-risk practices and transactions.[90] Likewise, the guidance instructs prosecutors to consider whether a company’s assessment of its own risk landscape is “current and subject to periodic review,” and whether lessons learned from periodic re-assessments are being incorporated into the company’s policies and procedures.[91] Other aspects of the guidance that are of particular relevance to health care providers are its instruction that prosecutors consider whether compliance trainings have been conducted “in a manner tailored the audience’s size, sophistication, or subject matter expertise,”[92] and its emphasis on effective implementation of compliance programs and on the extent to which senior management have demonstrated (not just stated) their commitment to compliance.[93] This guidance and other statements provide helpful contours to health care providers in developing compliance programs consistent with best practices and the expectations of the DOJ. II.   HHS Enforcement Update A.   HHS OIG Activity 1.   2018 and 2019 Developments and Trends In the period between October 1, 2018, and March 31, 2019,[94] HHS OIG reported 421 criminal actions.[95] This marked a decrease of less than 1% from the 424 criminal actions HHS OIG reported in the first half of FY 2018.[96] The number of civil actions, however, declined more significantly as compared to the same period in the last two fiscal years. There were 331 civil actions in the first half of FY 2019, compared to 349 in the first half of FY 2018 and 461 in the first half of FY 2017.[97] FY 2018 saw the first year-over-year decrease in civil actions in the FY 2012 through FY 2018 period. Also of note, as the chart below shows, FY 2018 marked the first time in several years that the number of civil actions surpassed the number of criminal actions. We will report back on the final 2019 numbers and emerging trends at the end of this year. HHS OIG’s expected recoveries for the first half of FY 2019 were $2.3 billion, approximately 58% higher than in the same period in FY 2018.[98] The expected recoveries for the first half of 2019 already equal nearly 80% of the total investigative recoveries for all FY 2018,[99] suggesting that FY 2019 may mark a reversal in what has otherwise been a gradual decrease in overall expected recoveries since FY 2012. This trend is shown in the chart below. The high sum of expected recoveries thus far this year is likely due to several large settlements, including one $625 million False Claims Act settlement involving a pharmaceutical company.[100] This settlement alone equals nearly half of the approximately $1.32 billion in settlements with pharmaceutical companies highlighted in HHS OIG’s year-end reports for FY 2014 through FY 2017.[101] 2.   Significant HHS OIG Enforcement Activity a)   Exclusions HHS is required to exclude from participation in the federal health care programs any individual or entity that is convicted of (1) a crime related to Medicare or state health care program, (2) a crime related to patient abuse or neglect, (3) felony health care fraud, or (4) a felony related to the manufacturing, distribution, prescription, or dispensing of a controlled substance.[102] HHS also has permissive authority to exclude individuals and entities falling into sixteen other categories, including those convicted of fraudulent conduct related to health care, those excluded or suspended from a federal or state health care program, and those HHS determines have paid kickbacks as defined by the AKS.[103] HHS OIG reported 1,440 exclusions from the federal health care programs in the first half of calendar year 2019.[104] Of that number, 18 exclusions were of entities rather than individuals, a 40% drop compared to the same period in calendar year 2018[105] and a 55% drop compared to the same period in calendar year 2017.[106] Of these entities, six were physician practices, two were home health agencies, and the remaining ten were a mix of other types of providers.[107] No single provider category dominated the entity exclusions list. The remaining 1,422 exclusions reported in the Exclusions Database for the first half of calendar year 2019 were of individuals, 173 of whom were classified as business owners or executives, and 116 of whom were classified as physicians.[108] Of the latter category, 56 were classified as family practitioners, pediatricians, internists, or general practitioners.[109] The remaining physicians practiced a mix of specialties, with psychiatry, pain management, neurology, cardiology, and anesthesiology dominating.[110] b)   Civil Monetary Penalties The first half of calendar year 2019 witnessed a significant downturn in both the number of civil monetary penalty (“CMP”) cases and the value of CMP settlements, as compared with the same period in 2018. Whereas in the first half of 2018 HHS OIG announced 61 CMPs totaling approximately $46 million,[111] in the first half of 2019 there were only 37 CMPs totaling only about $17 million.[112] This equates to a 39% decrease in the number of cases, and a 63% decrease in the total recovery amount. However, the CMP settlements from the first half of the year shared some characteristics with prior settlements. As in the first half of 2018, CMPs resulting from self-disclosures represented the lion’s share of the CMPs in terms of dollar value, at 82%. Thirty of the CMP cases settled for amounts under $500,000, with the remaining seven settlements accounting for 78% of the total dollar amount recovered. As in prior years, cases involving allegations of improper or false billing accounted for the bulk of the CMPs recovered—approximately $10.7 million across 17 cases. Six cases imposing a total of approximately $5.5 million in CMPs involved kickback allegations, representing approximately 32% of the total CMP recoveries by dollar value compared with only about 19% for the same period last year. In the first half of this year, there were also thirteen cases involving employment of individuals excluded from participation in the federal health care programs, though those settlements totaled less than $842,000. The three largest CMPs assessed against providers in the first half of 2019 all involved self-disclosures and are summarized below: After making a self-disclosure to HHS OIG, on April 4, 2019, an Iowa-based health system settled allegations that it paid a physician excessive compensation that constituted illegal remuneration. As part of the settlement, the health system agreed to pay $3,008,326.50.[113] On April 3, 2019, after self-disclosing conduct to HHS OIG, a Mississippi-based medical group agreed to pay $2,022,904.96 to resolve allegations that it submitted claims for inpatient behavioral health services that were not medically necessary and that involved “cloning of documentation for multiple dates of treatment for the same patients and for multiple patients on the same dates of treatment.”[114] On January 9, 2019, after self-disclosing conduct to HHS OIG, a Texas county agreed to pay $4,526,740.26 to settle allegations that it submitted improper claims for ambulance transport services. The crux of HHS OIG’s allegations was that the county did not obtain the required beneficiary authorization for the transports.[115] B.   Significant CMS Activity 1.   Transparency and Data Accessibility As reported in past updates, the Center for Medicare & Medicaid Services (“CMS”) has continued to prioritize improving access to data related to the use of Medicare and Medicaid services. The Trump Administration has continued to explore a wide range of approaches to reducing health care costs, including by increasing patient access to the cost of their care and facilitating competition among providers to drive down costs. A number of recently proposed rules came out of that effort. In February, HHS announced two proposed rules intended to “improve the interoperability of electronic health information” and “ensure patients can electronically access their electronic health information” by “increas[ing] choice and competition while fostering innovation that promotes patient electronic access to and control over their health information.”[116] One of the proposed rules, issued by CMS, would require Medicaid, the Children’s Health Insurance Program, Medicare Advantage plans and Qualified Health Plans in Federally-facilitated exchanges to provide patients with immediate electronic access to medical claims and health information by the year 2020. In addition, the rule would require these plans to implement open data sharing technologies to facilitate patients changing plan types. CMS received nearly 2,000 public comments on the proposed rule before the comment period ended on June 3, 2019, and has not yet officially responded to the received submissions.[117] 2.   Compliance Review Program The CMS Division of National Standards announced last year that it is launching a Compliance Review Program “to ensure compliance among covered entities with HIPAA Administrative Simplification rules for electronic health care transactions.”[118] CMS piloted the program in 2018 with health plan and clearinghouse volunteers, and officially began the program in April 2019 by randomly selecting nine HIPAA-covered entities for Compliance Reviews. The review program uses a “progressive penalty process” to address noncompliance. For less serious violations, HHS works collaboratively with an entity to remedy the issue, including by issuing a Corrective Action Plan; for “willful and egregious” instances of noncompliance, the agency may assess more severe monetary penalties.[119] 3.   CMS Guidance Regarding Co-Location of Hospitals and Health Care Facilities On May 6, 2019, CMS issued draft guidance to state survey agency directors regarding permissible hospital co-location with other hospitals or health care facilities, which would amend a prior interpretation of the Medicare Conditions of Participation that prohibited such co-location.[120] Among other things, the new guidance would allow healthcare entities to be co-located on the same campus or within the same building—including sharing staff and/or services—while prohibiting entities from sharing patient care spaces (e.g. nursing stations, exam and procedure rooms, outpatient clinics, operating rooms, etc.). The public comment period for the draft guidance ended on July 2, 2019, and CMS has not yet officially responded to the comments or issued final guidance. C.   OCR Enforcement Efforts 1.   HIPAA Enforcement HHS’s Office of Civil Rights (“OCR”) has been increasingly active in recent years in pursuing alleged violations of the privacy and security patient information protections under the Health Information Portability and Accountability Act (“HIPAA”). OCR reported that as of June 30, 2019, it had received over 211,109 HIPAA complaints and initiated 971 compliance reviews since HIPAA privacy rules took effect in April 2003.[121] To date, OCR’s enforcement efforts have yielded $102,681,582 in settlements and civil penalties.[122] In the first half of 2019, OCR reported only two settlements amounting to just over $3 million in fines for HIPAA violations.[123] In May, a diagnostic medical imaging services company agreed to pay $3 million to settle charges that it violated the HIPAA Security and Breach Notification Rules by allowing uncontrolled access to patients’ protected health information.[124] Later that month, a medical records service agreed to pay $100,000 to settle potential violations of the HIPAA Privacy and Security Rules by failing to conduct a comprehensive risk analysis prior to a data breach involving the protected health information of approximately 3.5 million patients.[125] If OCR’s enforcement continues at this pace, 2019 will see a dramatic decline in HIPAA enforcement actions from last year, when OCR reported ten settlements and one judgment totaling $28.7 million in fines—the highest ever total recovery from HIPAA settlements and rulings.[126] a)   Developments in HIPAA Compliance Guidance As noted in past updates, HHS continues to prioritize the protection of patients’ electronically stored confidential information. To that end, OCR issues cybersecurity newsletters “to help HIPAA covered entities and business associates remain in compliance with the HIPAA Security Rule by identifying emerging or prevalent issues, and highlighting best practices to safeguard [personal health information].”[127] The newsletters do not establish legally enforceable responsibilities or create safe harbors for companies that adhere to the guidance therein; rather, they outline recommendations for complying with the HIPAA Security Rule and highlight best practices to safeguard electronically stored confidential information. The Spring 2019 newsletter focused primarily on “advanced persistent threats” (“APTs”), or long-term cybersecurity attacks consisting of continuous attempts to exploit weaknesses in a target’s information systems, as well as “zero day vulnerabilities,” or attacks that take advantage of a previously unknown hardware, firmware, or software vulnerability.[128] The newsletter notes that APTs are a particularly serious threat to the healthcare industry due to the value of medical research information, genetic data, experimental treatment testing results, and other individual health information. With respect to zero day vulnerabilities or exploits, the newsletter advises entities to implement appropriate safeguards, including encryption and access controls, and to ensure that measures are in place to assess the need for software patches and implement them in a timely manner. 2.   Federal Conscience Protection Efforts We are beginning to see the impact of the 2018 launch of OCR’s Conscience and Religious Freedom Division and enforcement efforts pertaining to this administration’s emphasis on conscience protection generally. In January, OCR sent a letter to the California Attorney General asserting that a California state law requiring pregnancy resource centers to post information about abortion services—which had recently been invalidated in court—violated the federal Weldon and Coats-Snowe Amendments, which prohibit state and local government recipients of certain federal funds from discriminating against providers who do not perform or refer for abortions.[129] After investigating complaints from several pregnancy centers, OCR’s Conscience and Religious Freedom Division concluded that California’s Reproductive Freedom, Accountability, Comprehensive Care, and Transparency Act (“FACT Act”) violates federal law by (1) requiring license covered facilities to refer for abortion and (2) discriminating against unlicensed covered facilities by targeting them for burdensome and unnecessary notice requirements when they fail to make arrangements for abortions. Following the Supreme Court’s decision in National Institute of Family and Life Advocates v. Becerra[130] in June 2018, a federal district court enjoined the state of California from enforcing the FACT Act against any pregnancy resource center in the state. As such, OCR is closing the complaint as favorably resolved for all complainants. Similarly, in March, OCR issued a Notice of Resolution to the state of Hawaii after the state’s Attorney General took corrective action in response to an investigation regarding whether the state had discriminated against non-profit pregnancy resource centers.[131] Two pregnancy centers filed a complaint with OCR claiming that Hawaii had discriminated against them in violation of federal conscience laws by enacting notice requirements under Act 200, a law requiring pregnancy centers to disseminate notices promoting abortion. After OCR’s Conscience and Religious Freedom Division initiated an investigation, Hawaii’s Attorney General issued a memorandum indicating that the state will not enforce the notice provisions against any limited service pregnancy center. As such, OCR is closing the complaint as favorably resolved for all complainants.[132] Further bolstering its conscience protection efforts, OCR issued a final conscience rule in May—after receiving over 242,000 submissions during the public comment period—aimed at protecting individuals and health care entities from discrimination on the basis of their exercise of conscience as part of HHS-funded programs.[133] Among other things, the final rule expands OCR’s authority to enforce 25 federal conscience protection laws and broadens the definition of “covered entity” to include state governments, federally-recognized tribes, hospitals, skilled nursing facilities, home health care providers, doctor’s offices, front desk staff, insurance companies, ambulance providers, pharmacists, pharmacies, and non-health employers that offer insurance to their employees. The new rule empowers OCR to use the full scope of its investigative and enforcement authority to pursue relevant claims and requires covered entities to cooperate with any such enforcement efforts, submit certifications of compliance to HHS, and maintain records of any such compliance.[134] Although the rule was originally scheduled to take effect on July 22, HHS has since agreed to postpone this date until November 22, at the request of a group of plaintiffs—including a coalition of 23 cities and states led by the New York Attorney General— in three related lawsuits challenging the rule’s legality.[135] We will continue to monitor these developments and report back on updates at the end of the year. III.   Anti-Kickback Statute Developments The Anti-Kickback Statue remains one of the most important federal fraud and abuse laws applicable to providers. Given the connection between AKS violations and FCA liability – and the significant damages potentially at stake – it is perhaps unsurprising that the elements of an AKS violation remain actively contested in courts and that AKS-related regulatory developments are closely watched. Below, we discuss recent developments in AKS case law, prosecution of the largest health care fraud scheme ever charged, significant advisory opinions, and a relevant (but subsequently withdrawn) regulatory proposal. A.   Notable Case Law Involving the AKS Judicial interpretation of “remuneration” continues to evolve as courts discuss whether remuneration includes anything of value, even when the relators could not show a quid pro quo relationship between remuneration and referrals. In United States ex rel. Charles Arnstein v. Teva Pharm. USA, Inc., the United States District Court for the Southern District of New York declared that a quid pro quo relationship between remuneration and referrals is not a requirement under the AKS. The case centered around the question of whether a pharmaceutical company’s promotional speaker program, which allegedly offered speaker fees and expensive meals in exchange for prescribing certain products, constituted an illegal kickback scheme.[136] The court denied summary judgment for defendants, declining to adopt their argument that plaintiff’s failure to demonstrate a quid pro quo relationship between speaker fees and future prescriptions written by the speakers “entitle[d] them to summary judgment.”[137] The court held that “offering or paying a person ‘remuneration’” with the intent of inducing the person to recommend a drug, was sufficient to constitute an AKS violation, even if the attempt did not succeed in securing referrals, stating that to conclude otherwise would be to ignore the difference between separate causes of action for “offer[ing] or pay[ing] unlawful remuneration” and 2) “solicit[ing] or receiv[ing] it.”[138] A recent decision from the United States District Court for the Southern District of Texas narrowed the scope of AKS liability by requiring that the alleged remuneration flow directly to the person making the unlawful referrals.[139] The relator alleged that a health services company gave free items to elementary schools and transitional living shelters, and subsequently placed an independent contractor at each facility to provide “skills building services” through which patients were then referred to the company for mental health services.[140] The court held that because the independent contractor, not the organizations in receipt of the alleged remunerations, made the referrals, the relator failed to provide the “link” between the kickbacks and the inducement of referrals.[141] B.   Criminal AKS Prosecutions In April of 2019, a federal jury found a South Florida nursing home facility owner guilty in “the largest health care fraud scheme ever charged” by the DOJ.[142] The prosecution alleged that from 1998 through 2016, the facility owner bribed doctors to refer patients to his skilled nursing care facility, where he would keep them for the maximum 100 days chargeable to Medicare, then transfer them to assisted living facilities before moving them back to the skilled nursing care facility to repeat the cycle.[143] In sum, the scheme involved $1.3 billion in fraudulent claims.[144] The facility owner allegedly used the proceeds to purchase luxury goods and pay bribes to secure his son’s admission at an Ivy League school.[145] The facility owner is appealing his conviction.[146] C.   Notable HHS OIG Advisory Opinions The first half of 2019 proved to be a relatively quiet period for HHS OIG advisory opinions, with only three opinions released in the first six months of the year. The recent opinions, however, offer guidance for providers on important issues, namely the provision of waivers for cost-sharing amounts and arrangements promoting access to care. Below, we summarize two opinions of particular applicability to providers. 1.   Cost-Sharing Waivers On January 9, 2019, HHS OIG issued a favorable opinion regarding an arrangement by a charitable pediatric clinic to waive routine Medicare and Tricare cost-sharing amounts for pediatric patients who receive services not covered by Medicaid or another state insurance program.[147] HHS OIG determined that the arrangement did not fall under the cost-sharing waiver under the CMP Law because the clinic waives its cost-sharing amounts routinely and does not verify the financial need of all patients.[148] Nonetheless, HHS OIG determined that the arrangement presented a low risk of AKS violations because the clinic: (i) treats very few patients not covered by Medicaid or another state insurance program; (ii) does not offer waivers of cost-sharing amounts as part of an advertisement or solicitation; (iii) does not offer financial incentives to its health care providers to order unnecessary care or to steer patient referrals to requestor; (iv) serves an especially vulnerable patient population; and (v) demonstrated that it minimized the risk posed by the arrangement by implementing proper safeguards.[149] Though this favorable opinion contrasts with other instances in which HHS OIG has expressed concerns about arrangements involving routine waivers of cost-sharing amounts,[150] it is significant that (i) the number of Medicare beneficiaries who may benefit from this arrangement is very small, as it is limited to children with end-stage renal disease, and (ii) Tricare beneficiaries comprise less than one percent of the requestor’s patient population.[151] 2.   Free In-Home Follow-up Care On March 1, 2019, HHS OIG opined on an existing arrangement by a medical center to provide free, in-home follow-up care to eligible individuals with congestive heart failure, as well as a proposed expansion of the existing program to include individuals with chronic pulmonary disease.[152] Patients are eligible for the program if they, among other things, (i) have a high risk of readmission according to a medical assessment performed at the medical center and (ii) have arranged to receive follow-up care at the medical center. Under the terms of the program, eligible patients receive two free in-home follow-up care visits per week from a paramedic who, for instance, reviews the patient’s medication, performs a home safety inspection, and checks the patients vitals. When further care is needed, the paramedic directs the patient to follow up with his or her established provider.[153] Though the medical center typically is patient’s established provider, the program allows the patient to obtain care from the provider of his or her choice.[154] HHS OIG determined that the program technically could generate prohibited remuneration because it only offered the free care to those patients planning to receive follow-up care from the medical center, and therefore could influence patients to select the medical center for federally reimbursable items or services.[155] Further, HHS OIG found that the Promotes Access to Care Exception did not apply because “the full suite of [s]ervices offered,” such as the home safety assessments, did more than promote patient access to care.[156] Nonetheless, HHS OIG declined to impose sanctions upon the medical center for several enumerated reasons specific to the requestor’s case.[157] Notably, in the opinion, HHS OIG referenced the “broad reach” of the AKS and acknowledged that it can serve as a “potential impediment to beneficial arrangements that would advance coordinated care.”[158] HHS OIG also referenced back to its August 27, 2018 request for information which, as discussed in our 2018 Year-End Update, sought feedback about regulations that may act as “barriers to coordinated care” or “value-based care.” The request drew 359 public comments, but HHS has not yet published a proposed rule in response. D.   Regulatory Developments On February 6, 2019, HHS OIG proposed a rule to narrow the existing regulatory discount safe harbor under the AKS and create two new safe harbors.[159] The rule was subsequently withdrawn on July 10, 2019. As proposed, the rule would have (1) excluded rebates provided to Medicare Part D plans, Medicaid managed care organizations (“MCOs”), and pharmacy benefit managers (“PBMs”) from the existing safe harbor protections and (2) added two new safe harbors, one to protect point-of-sale drug price reductions under specific circumstances, and the other to protect written, fair market value fixed-fee arrangements between PBMS and manufacturers.[160] During the comment period, over 25,000 comments poured in from manufacturers, pharmacies, health plans, and policy and advocacy groups.[161] While comments from pharmaceutical industry commenters were generally favorable, other stakeholder, including providers and PBMs, opposed the proposal for fear that the proposal to eliminate an existing rebate-related safe harbor would increase costs for patients, particularly seniors. HHS abandoned the rule on July 10, 2019, citing the Trump Administration’s commitment to move away from administrative rulemaking and focus on passing bi-partisan legislation. Secretary Azar added that Congress has the ability to “look more holistically at changes to the system that could also mitigate or protect seniors from rate increases.”[162] Although the rule was not enacted, the efforts to refine existing safe harbors shows a continuing focus on the Trump Administration’s efforts to decrease drug pricing by closing loopholes and creating safe harbors commensurate with the practical experiences of industry stakeholders. IV.   Stark Law Developments The year 2019 marks the 30th anniversary of the enactment of the physician self-referral law, or Stark Law, a strict liability civil statute prohibiting hospitals and other providers of “designated health services” from submitting Medicare claims for services rendered as a result of patient referrals from a physician who has a “financial relationship” with the hospital, unless certain exceptions apply.[163] Due to the breadth of the definition of “financial relationship” under the Stark Law and the opaqueness of the enumerated exceptions, it remains a hotly debated topic and area of focus for the Trump Administration. The Patients over Paperwork initiative, launched in 2017, solicited feedback from the medical community about how CMS regulations affect their daily work. Among the responses gathered from over 2,000 stakeholders, one of the top complaints raised was about “the challenges associated with complying with the Stark law.”[164] In reaction to the challenges identified, we anticipate CMS may propose changes to Stark Law regulations this coming year. A.   Regulatory and Legislative Developments As reported in our 2018 Mid-Year Update, CMS has solicited feedback from stakeholders in connection with its efforts to reform some aspects of the Stark Law. Though proposed regulations have not been issued, according to public remarks by CMS Administrator Seema Verma, the agency is “actively working” on reforming Stark Law regulations, promising updated regulations in 2019 that would “represent the most significant changes to the Stark law since its inception.”[165] Administrator Verma’s remarks also foreshadowed some of the topics that are likely to be impacted by the future changes. In her comments, Administrator Verma highlighted the need to clarify “regulatory definitions of volume or value, commercial reasonableness and fair market value.”[166] She also suggested that the regulations will address issues related to technical noncompliance—for example, lack of signature or incorrect dates on a medical record.[167] The regulations are also expected to address modern dynamics related to electronic health records requirements, cybersecurity, and data privacy concerns. The anticipated proposed regulations are part of HHS’s “Regulatory Sprint to Coordinated Care,” a department-wide initiative under which various agencies have issued requests for information (“RFIs”) to solicit feedback from industry stakeholders on removing regulatory obstacles.[168] The proposed regulations are expected later this year.[169] B.   Notable Stark Law Enforcement In March 2019, the United States intervened in a FCA suit alleging that a struggling hospital engaged in a wide ranging referral scheme to save itself from financial ruin.[170] As part of the efforts, the hospital allegedly hired a large number of physicians as employees in order to secure those physicians’ referrals as a revenue stream for the hospital. According to the complaint, the compensation arrangements with the referring physicians failed to satisfy any statutory or regulatory exception to the Stark Law. The complaint explained that because inpatient and outpatient hospital services are designated health services under the Stark law, any fees billed to Medicare for hospital inpatient and outpatient services provided by the physicians were deemed a referral from the physician to the hospital.[171] In May 2019, the DOJ filed an intervenor complaint in a suit alleging that a home health care company violated the Stark Law by hiring the spouses of doctors they worked with and paying them based on the “volume or value” of referrals the doctors made.[172] The United States intervened in the case nearly four years after the commencement of the relator’s suit, which alleged violations of both the AKS and Stark Law. The defendant, a home health care company, allegedly entered into sham medical director agreements with three doctors, agreeing to pay them kickbacks if they made patient referrals to the home health care company. The home health care company also hired the spouses of the physicians to conduct sales and marketing efforts to refer patients to the company. The spouses were compensated by commissions based on the referrals they generated, which constituted a financial relationship that allegedly fell outside any defined Stark Law exception.[173] The DOJ announced four settlements related to Stark Law claims in the first half of 2019 , which collectively illustrate that a “financial relationship” with a health care provider can take many forms. For example, a January 30 settlement with a pathology laboratory centered around allegations that the laboratory offered physicians free or discounted technology consulting services as well as subsidies for electronic health records systems.[174] On June 7, the DOJ announced settlements in two cases against a home health agency that allegedly established a financial relationship with referring physicians in two ways: first, by offering a paid “medical directorship” position to referring physicians; and second, by employing spouses of physicians and paying them in a manner that took into consideration the volume of referrals made by their physician spouses.[175] We anticipate that the second half of 2019 may bring many long-anticipated proposed changes to Stark Law regulations, and we will continue to monitor developments in this area. V.   Conclusion The first half of 2019 brought notable developments, including a continued downturn in enforcement efforts and the issuance of DOJ guidance related to corporate compliance programs and cooperation credit. Many more potential developments have been foreshadowed or are pending in courts. As always, we will continue to monitor for updates and reports back at the end of the year.   __________________ [1] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [2] See Gibson Dunn 2018 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers (July 26, 2018) [hereinafter “Gibson Dunn 2018 Mid‑Year Update”]; See Gibson Dunn 2017 Mid-Year FDA and Health Care Compliance and Enforcement Update – Providers (Sept. 4, 2017) [hereinafter “Gibson Dunn 2017 Mid‑Year Update”]. [3] Gibson Dunn 2018 Mid-Year Update; Gibson Dunn 2017 Mid-Year Update. [4] See Gibson Dunn 2018 Mid-Year Update. [5] Id. [6] See id. [7] The total is greater than 33 because some cases had multiple claims. [8] See Gibson Dunn 2018 Mid-Year Update. [9] Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, N.D. of Ill., Chicago-Area Physical Therapy Center and 4 Nursing Facilities to Pay $9.7 Million to Resolve False Claims Act Allegations (June 11, 2019), https://www.justice.gov/usao-ndil/pr/chicago-area-physical-therapy-center-and-4-nursing-facilities-pay-97-million-resolve. [10] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [11] Id. [12] Id. [13] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $57.25 Million to Settle False Claims Act Allegations (Feb. 6, 2019), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-5725-million-settle-false-claims-act-allegations. [14] Id. [15] Id. [16] Gibson Dunn 2017 Mid-Year Update. [17] Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S.Ct. 1507 (2019). [18] See 31 U.S.C. § 3731(b)(1)-(2). [19] Cochise Consultancy, 139 S.Ct. at 1514. [20] Gibson Dunn represented the petitioners challenging this decision. [21] Cochise Consultancy, Inc. v. United States ex rel. Hunt, 887 F.3d 1081 (11th Cir. 2018). [22] United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288, 293-94 (4th Cir. 2008). [23] United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1216-18 (9th Cir. 1996). [24] Cochise Consultancy, 139 S.Ct. at 1512-14. [25] 31 U.S.C. § 3730(e)(4)(A). [26] Id. at § 3730(e)(4)(B) (emphasis added). [27] 923 F.3d 729 (10th Cir. 2019). [28] Id. at 757 (quoting United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201, 211 (1st Cir. 2016)). [29] Reed, 923 F.3d at 759–60. [30] Reed, 923 F.3d at 762 (quoting Joel D. Hesch, Restating the “Original Source Exception” to the False Claims Act’s “Public Disclosure Bar” in Light of the 2010 Amendments, 51 U. Rich. L. Rev. 991, 1023, 27 (2017)). [31] Reed, 923 F.3d at 757. [32] Id. (quoting United States ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 307 (3d Cir. 2016)). [33] Reed, 923 F.3d at 758. [34] 136 S. Ct. 1989 (2016). [35] See Escobar, 136 S. Ct at 2002. [36] United States ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 892 F.3d 822 (6th Cir. 2016), cert. denied, 139 S. Ct. 1323 (2019); see also United States ex rel. Rose v. Stephens Inst., 909 F.3d 1012 (9th Cir. 2018), cert. denied, 139 S. Ct. 1464 (2019); United States ex rel. Berg v. Honeywell Int’l, Inc., 740 F. App’x 535 (9th Cir. 2018), cert. denied, 139 S. Ct. 1456 (2019); United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), cert. denied, 139 S. Ct. 784 (2019); United States ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890 (9th Cir. 2017), cert. denied, 139 S. Ct. 783 (2019). [37] 31 U.S.C. § 3730(c)(2)(A). [38] Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003). [39] Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 940 (10th Cir. 2005) (internal quotation marks omitted); United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998) (internal quotation marks omitted). [40] Memorandum from Michael D. Granston, Director, United States Department of Justice, Civil Division, Commercial Litigation Branch, Fraud Section, to Commercial Litigation Branch, Fraud Section (Jan. 10, 2018), https://www.insidethefca.com/wp-content/uploads/sites/300/2018/12/Granston-Memo.pdf. [41] See, e.g., Order Granting Motion to Dismiss, United States ex rel. Stovall v. Webster Univ., No. 3:15-cv-03530-DCC (D.S.C. Aug. 8, 2018) (arguing that “dismissal will further [the government’s] interest in preserving scarce resources by avoiding the time and expense necessary to monitor this action”); Order Granting Motion to Dismiss, United States ex rel. Toomer v. Terrapower, LLC, No. 4:2016cv00226 (D. Idaho Oct. 10, 2018) (arguing that the case will “waste substantial government time and resources” due to the continued need “to monitor the case”). [42] E.g., United States ex rel. Health Choice All., LLC v. Eli Lilly & Co., Inc., No. 5:17-cv-123, 2018 WL 4026986, at *3 (E.D. Tex. July 25, 2018), report and recommendation adopted, No. 5:17-CV-123, 2018 WL 3802072 (E.D. Tex. Aug. 10, 2018). [43] United States ex rel. CIMZNHCA, LLC v. UCB, INC., No. 17-CV-765-SMY-MAB, 2019 WL 1598109, at *1–4 (S.D. Ill. Apr. 15, 2019); see also United States ex rel. Harris v. EMD Serono, Inc., 370 F. Supp. 3d 483, 488–91 (E.D. Penn. 2019) (adopting Ninth and Tenth Circuit heightened scrutiny standard, but upholding government dismissal). [44]Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 940 (10th Cir. 2005) (requiring government to identify a valid government purpose and a rational relation between dismissal and accomplishment of purpose; if government satisfies two-step test, burden switches to relator to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal); United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998) (same). [45] CIMZNHCA, 2019 WL 1598109, at *3. [46] Id. at *3. [47] Id. at *4. [48] Id. [49] Amended Report and Recommendation of the United States Magistrate Judge, United States ex rel. Health Choice All. v. Eli Lilly & Co., Inc., No. 5:17-CV-123-RWS-CMC (E. D. Tex. June 20, 2019); see also United States ex rel. Davis v. Hennepin Cty., No. 18-CV-01551, 2019 WL 608848, at *15 (D. Minn. Feb. 13, 2019) (holding that if courts constrain government’s ability to dismiss, “they would effectively be policing the Government’s right to dismiss, interfering with prosecutorial discretion in violation of an important separation-of-powers principle”). [50] Health Choice All., supra note 54, at 12 (quoting Swift v. United States, 318 F.3d 250, 252 (D.C. Cir. 2003)). [51] Health Choice All., supra note 54, at *28. [52] See id. at *34. [53] Texas v. United States, 340 F. Supp. 3d 579, 619 (N.D. Tex. 2018). [54] See Brief for Defendants-Appellants United States of America et al., Texas v. United States, No. 19-10011 (filed May 1, 2019). [55] Moda Health Plan Inc. v. United States, No. 18-1028 (Fed. Circ. 892 F.3d 1311; granted June 24. 2019). [56] The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 1342(b). [57] See Pet. for a writ Writ of Cert., Moda Health Plan Inc. v. United States (filed Feb. 4, 2019). [58] Moda Health Plan Inc. v. United States, 892 F.3d 1311, 1330-31 (Fed. Circ. 2018). [59] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Assistant Attorney General Matthew S. Miner Gives Remarks at the 29th Annual National Institute on Health Care Fraud (May 9, 2019), https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-matthew-s-miner-gives-remarks-29th-annual-national. [60] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Appalachian Regional Prescription Opioid (ARPO) Strike Force Takedown Results in Charges Against 60 Individuals, Including 53 Medical Professionals (April 17, 2019), https://www.justice.gov/opa/pr/appalachian-regional-prescription-opioid-arpo-strike-force-takedown-results-charges-against. [61] Id. [62] See, e.g., Indictment, U.S. v. Petway, No. 1:19-cr-10041, (W.D. Tenn. Apr. 15, 2019); Indictment, U.S. v. Young, No. 1:19-cr-10040, (W.D. Tenn. Apr. 15, 2019); Indictment, U.S. v. Brown, No. 3:19-cr-00068, (S.D. Ohio Apr. 9, 2019); Indictment, U.S. v. Prasad, No. 2:19-cr-00071, (E.D. La. Apr. 16, 2019). [63] See, e.g., Indictment, U.S. v. Prasad, No. 2:19-cr-00071, (E.D. La. Apr. 16, 2019); Indictment, U.S. v. Mahmood, No. 3:19-cr-00059, (W.D. Ky. Apr. 3, 2019); U.S. v. Assured Rx LLC, No. 3:19-cr-00058, (W.D. Ky. Apr. 3, 2019). [64] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, United States Attorney Announces $17 Million Healthcare Fraud Settlement (May 6, 2019), https://www.justice.gov/usao-sdwv/pr/united-states-attorney-announces-17-million-healthcare-fraud-settlement. [65] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Files First of its Kind Action to Stop Tennessee Pharmacies’ Unlawful Dispensing of Opioids (Feb. 8, 2019), https://www.justice.gov/opa/pr/justice-department-files-first-its-kind-action-stop-tennessee-pharmacies-unlawful-dispensing. [66] Complaint, U.S. v. Oakley Pharmacy Inc., No. 2:19-cv-00009, (M.D. Tenn. Feb. 7, 2019). [67] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Files Action to Enjoin Texas Doctors From Illegally Prescribing Highly Addictive Opioids and Other Controlled Substances (May 10, 2019), https://www.justice.gov/opa/pr/justice-department-files-action-enjoin-texas-doctors-illegally-prescribing-highly-addictive. [68] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, New Jersey/Pennsylvania Doctor Indicted For Accepting Bribes And Kickbacks From A Pharmaceutical Company In Exchange For Prescribing Powerful Fentanyl Drug (June 25, 2019), https://www.justice.gov/opa/pr/new-jerseypennsylvania-doctor-indicted-accepting-bribes-and-kickbacks-pharmaceutical-company. [69] Information, U.S. v. Mintz, No. 19-cr-00132, (E.D. Pa. Mar. 4, 2019). [70] Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, E.D. Pa., Philadelphia-Area Doctor Pleads Guilty to Eight Counts of Unlawfully Distributing Oxycodone (Mar. 13, 2019), https://www.justice.gov/usao-edpa/pr/philadelphia-area-doctor-pleads-guilty-eight-counts-unlawfully-distributing-oxycodone. [71] Information, U.S. v. Prasad, No. 2:19-cr-0007, (E.D. La. Apr. 16, 2019). [72] Press Release, U.S. Dep’t of Justice, U.S. Attorney’s Office, E.D. La., Mandeville, Louisiana Neurologist Pleads Guilty For Role in Scheme to Unlawfully Dispense Controlled Substances and To Commit Health Care Fraud (May 30, 2019), https://www.justice.gov/usao-edla/pr/mandeville-louisiana-neurologist-pleads-guilty-role-scheme-unlawfully-dispense. [73] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, South Florida Pill Mill Owner Sentenced to Prison for Role in $2.2 Million Medicare Fraud Scheme (June 30, 2019), https://www.justice.gov/opa/pr/south-florida-pill-mill-owner-sentenced-prison-role-22-million-medicare-fraud-scheme. [74] CMP Assessments discussed further in Section II of this update. [75] See Data gathered through HHS OIG press releases and publicly available information.  See generally U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Civil Monetary Penalties and Affirmative Exclusions, http://oig.hhs.gov/fraud/enforcement/cmp/index.asp  (last visited June 21, 2019) [hereinafter “CMP Assessments”]. [76] Id. [77] U.S. Dep’t of Health & Hum. Servs., Office of Inspector Gen., Medicare Improperly Paid Providers for Specimen Validity Tests Billed in Combination with Urine Drug Tests (Feb. 2018), at 2, https://oig.hhs.gov/oas/reports/region9/91602034.pdf. [78] See id. [79] See U.S. Dep’t of Health & Hum. Servs., Office of Inspector Gen., Concerns about Opioid Use in Medicare Part D in the Appalachian Region (Apr. 2019), https://oig.hhs.gov/oei/reports/oei-02-18-00224.pdf (noting that, in 2017, 36% of Medicare Part D beneficiaries in Alabama, Kentucky, Ohio, Tennessee, and West Virginia received a prescription opioid). [80] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Attorney General Rod J. Rosenstein, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [81] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Assistant Attorney General Brian A. Benczkowski, Keynote Address at the Ethics and Compliance Initiative (ECI) 2019 Annual Impact Conference (Apr. 30, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-keynote-address-ethics-and. [82] Id. [83] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual. [84] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Attorney General Rod J. Rosenstein, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [85] Justice Manual § 4-4.112, available at https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.112. [86] Justice Manual § 4-4.112, available at https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.112. [87] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Principal Deputy Associate Attorney General Claire McCusker Murray, Remarks at the Compliance Week Annual Conference (May 20, 2019), available at https://www.justice.gov/opa/speech/remarks-principal-deputy-associate-attorney-general-claire-mccusker-murray-compliance. [88] See generally U.S. Dep’t of Justice, Criminal Division, Evaluation of Corporate Compliance Programs (Apr. 2019), https://www.justice.gov/criminal-fraud/page/file/937501/download [hereinafter “April 2019 Compliance Guidance”]. [89] Press Release, U.S. Dep’t of Justice, Criminal Division Announces Publication of Guidance on Evaluating Corporate Compliance Programs (Apr. 30, 2019), https://www.justice.gov/opa/pr/criminal-division-announces-publication-guidance-evaluating-corporate-compliance-programs. [90] April 2019 Compliance Guidance at 3. [91] Id. [92] Id. at 4. [93] Id. at 9. [94] HHS reporting is on a fiscal-year basis; the Oct. 1, 2018 – March 31, 2019 period encompasses the first half of FY 2019. [95] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Semiannual Report to Congress (Oct. 1, 2018, through Mar. 31, 2019), at 5, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2019/2019-spring-sar.pdf [hereinafter “2019 SA Report”]. [96] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Semiannual Report to Congress (Oct. 1, 2017, through Mar. 31, 2018), at 4, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2018/sar-spring-2018.pdf [hereinafter “2018 SA Report”]. [97] See 2019 SA Report at 5; 2018 SA Report at 4; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Oct. 1, 2016 – Mar. 31, 2017), at ix, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf [hereinafter “2017 SA Report”]. [98] Compare 2019 SA Report at 5 with 2018 SA Report at 4. [99] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Semiannual Report to Congress (Apr. 1, 2018, through Sept. 30, 2018), at 4, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2018/2018-fall-sar.pdf [hereinafter “FY 2018 Report”]. [100] See 2019 SA Report at 29. [101] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2014 – Sept. 30, 2014), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2014/sar-fall2014.pdf; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2015 – Sept. 30, 2015), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2015/sar-fall15.pdf; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2016 – Sept. 30, 2016), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/sar-fall-2016.pdf; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1, 2017 – Sept. 30, 2017), https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-fall-2017.pdf. [102] 42 U.S.C. § 1320a‑7(a). [103] 42 U.S.C. § 1320a‑7(b). [104] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., LEIE Downloadable Databases, https://oig.hhs.gov/exclusions/exclusions_list.asp (last visited June 21, 2019) [hereinafter “Exclusions Database”]. [105] See Gibson Dunn 2018 Mid-Year Update. [106] See Gibson Dunn 2017 Mid-Year Update. [107] See Exclusions Database. [108] See Exclusions Database. [109] See id. [110] See id. [111] Gibson Dunn 2018 Mid-Year Update. [112] CMP Assessments; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Provider Self-Disclosure Settlements, http://oig.hhs.gov/fraud/enforcement/cmp/psds.asp (last visited June 21, 2019) [hereinafter “Provider Self-Disclosure Settlements”]. [113] Provider Self-Disclosure Settlements. [114] Id. [115] Id. [116] Press Release, U.S. Dep’t of Health & Human Servs., HHS Proposes New Rules to Improve the Interoperability of Electronic Health Information (February 11, 2019), https://www.hhs.gov/about/news/2019/02/11/hhs-proposes-new-rules-improve-interoperability-electronic-health-information.html. [117] Press Release, U.S. Dep’t of Health & Human Servs., HHS Extends Comment Period for Proposed Rules to Improve the Interoperability of Electronic Health Information (April 19, 2019),  https://www.hhs.gov/about/news/2019/04/19/hhs-extends-comment-period-for-proposed-rules-to-improve-the-interoperability-of-electronic-health-information.html; 84 Fed. Reg. 7424 (Mar. 4, 2010), https://www.federalregister.gov/documents/2019/03/04/2019-02224/21st-century-cures-act-interoperability-information-blocking-and-the-onc-health-it-certification. [118] U.S. Dep’t of Health & Human Servs., CMS.gov, Enforcement and Compliance Overview (April 10, 2019), https://www.cms.gov/Regulations-and-Guidance/Administrative-Simplification/Enforcements/index.html. [119] U.S. Dep’t of Health & Human Servs., CMS.gov, Compliance Review Program (June 18, 2019), https://www.cms.gov/Regulations-and-Guidance/Administrative-Simplification/Enforcements/Compliance-Review-Program.html. [120] Draft Only-Guidance for Hospital Co-Location with Other Hospitals or Healthcare Facilities, U.S. Dep’t of Health & Human Servs., Center for Medicare & Medicaid Services (May 3, 2019), available at https://www.cms.gov/Medicare/Provider-Enrollment-and-Certification/SurveyCertificationGenInfo/Policy-and-Memos-to-States-and-Regions-Items/QSO-19-13-Hospital.html. [121] U.S. Dep’t of Health & Human Servs., Health Information Privacy, Enforcement Highlights (April 30, 2019), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/index.html. [122] Id. [123] Data gathered through HHS press releases and other publicly available information. See generally U.S. Dep’t of Health & Human Servs., HIPAA News Releases & Bulletins, https://www.hhs.gov/hipaa/newsroom (last visited June 18, 2019). [124] Press Release, U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Tennessee diagnostic medical imaging services company pays $3,000,000 to settle breach exposing over 300,000 patients’ protected health information (May 6, 2019), https://www.hhs.gov/about/news/2019/05/06/tennessee-diagnostic-medical-imaging-services-company-pays-3000000-settle-breach.html. [125] Press Release, U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Indiana Medical Records Service Pays $100,000 to Settle HIPAA Breach (May 23, 2019), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/agreements/mie/index.html. [126] Press Release, U.S. Dep’t of Health & Human Servs., Office of Civil Rights, OCR Concludes 2018 with All-Time Record Year for HIPAA Enforcement (February 7, 2019), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/agreements/2018enforcement/index.html. [127] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Cybersecurity Newsletters Archive, https://www.hhs.gov/hipaa/for-professionals/security/guidance/cybersecurity/cybersecurity-newsletter-archive/index.html. In 2019, OCR moved to quarterly, rather than monthly, cybersecurity newsletters. [128] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Spring 2019 OCR Cybersecurity Newsletter, https://www.hhs.gov/sites/default/files/spring-2019-ocr-cybersecurity-newsletter.pdf. [129] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, OCR Finds the State of California Violated Federal Law in Discriminating Against Pregnancy Resource Centers (January 18, 2019), https://www.hhs.gov/about/news/2019/01/18/ocr-finds-state-california-violated-federal-law-discriminating-against-pregnancy-resource-centers.html. [130] 585 U.S. ___ (2018). [131] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, OCR Issues Notice of Resolution to the State of Hawaii after Hawaii Takes Action in Safeguarding Conscience Protections for Pregnancy Care Centers (March 22, 2019), https://www.hhs.gov/about/news/2019/03/22/ocr-issues-notice-resolution-state-hawaii-after-hawaii-takes-action-safeguarding-conscience.html. [132] Id. [133] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, HHS Announces Final Conscience Rule Protecting Health Care Entities and Individuals (May 2, 2019), https://www.hhs.gov/about/news/2019/05/02/hhs-announces-final-conscience-rule-protecting-health-care-entities-and-individuals.html. [134] 84 Fed. Reg. 23170 (May 21, 2019), https://www.federalregister.gov/documents/2019/05/21/2019-09667/protecting-statutory-conscience-rights-in-health-care-delegations-of-authority. [135] New York, et al., v. United States Dep’t of Health and Human Services, et al., 1:19-cv-04676-PAE (S.D.N.Y. 2019), ECF 95. [136] No. 13 CIV. 3702 (CM), 2019 WL 1245656, at *1 (S.D.N.Y. Feb. 27, 2019). [137] Id. at *10. [138] Id. at *3 (comparing 42 U.S.C. § 1320a-7b(b)(2) with § 1320a-7b(b)(1)). [139] United States v. Abundant Life Therapeutic Servs. Texas, LLC, No. CV-H-18-773, 2019 WL 1930274, at *7 (S.D. Tex. Apr. 30, 2019). [140] Id. at *2. [141] Id. at *7–8. [142] Press Release, U.S. Dep’t of Justice, South Florida Health Care Facility Owner Convicted for Role in Largest Health Care Fraud Scheme Ever Charged by The Department of Justice, Involving $1.3 Billion in Fraudulent Claims (Apr. 5, 2019), https://www.justice.gov/opa/pr/south-florida-health-care-facility-owner-convicted-role-largest-health-care-fraud-scheme-ever. [143] Id. [144] Id. [145] Id. [146] Adriana Gomez Licon, South Florida businessman convicted in $1B Medicare fraud, largest ever charged by Justice Department, Sun Sentinel (Apr. 5, 2019), https://www.sun-sentinel.com/news/crime/fl-ne-ap-philip-esformes-convicted-medicaid-fraud-20190405-story.html. [147] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 19-01 (Jan. 9, 2019), https://oig.hhs.gov/fraud/docs/advisoryopinions/2019/AdvOpn19-01.pdf. [148] Id. at 6. [149] Id. at 7–8. [150] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 17-02 (June 29, 2017), https://oig.hhs.gov/fraud/docs/advisoryopinions/2017/AdvOpn17-02.pdf. [151] OIG Advisory Op. 19-01 at 4, n.3. [152] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 19-03 (Mar. 1, 2019), https://oig.hhs.gov/fraud/docs/advisoryopinions/2019/AdvOpn19-03.pdf. [153] Id. at 4. [154] Id. [155] Id. at 7. [156] Id. [157] Id. at 8–9. [158] Id. at 9. [159] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees, 84 Fed. Reg. 2340 (proposed Feb. 6, 2019) (to be codified at 42 C.F.R. pt. 1001), https://www.federalregister.gov/documents/2019/02/06/2019-01026/fraud-and-abuse-removal-of-safe-harbor-protection-for-rebates-involving-prescription-pharmaceuticals [hereinafter Proposed Rule]. [160] Id. at 2344. [161] Fraud and Abuse: Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees, Regulations.gov (last visited Aug. 8, 2019), https://www.regulations.gov/document?D=HHSIG-2019-0001-0001. [162] Shira Stein, Trump Kills Drug Rebate ‘Safe Harbor’ Rule That Favored Pharma (5), Bloomberg Law (July 11, 2019) https://news.bloomberglaw.com/health-law-and-business/trump-kills-drug-rebate-safe-harbor-rule-that-favored-pharma. [163] 42 U.S.C. § 1395nn. [164] Seema Verma, Administrator, Remarks at the Federation of American Hospitals 2019 Public Policy Conference (Mar. 4, 2019), https://www.cms.gov/newsroom/press-releases/speech-remarks-administrator-seema-verma-federation-american-hospitals-2019-public-policy-conference. [165] Id. [166] Id. [167] Id. [168] See, e.g., Press Release, Dep’t of Health & Human Servs., Office of Civil Rights, HHS seeks public input on improving care coordination and reducing the regulatory burdens of the HIPAA Rules (Dec. 12, 2018), https://www.hhs.gov/about/news/2018/12/12/hhs-seeks-public-input-improving-care-coordination-and-reducing-regulatory-burdens-hipaa-rules.html. [169] See Roxanna Guilford-Blake, Sprinting Toward Value: HHS & Congress May Be Ready to Reconsider the Stark Law, Cardiovascular Business (Nov. 18, 2018), https://www.cardiovascularbusiness.com/topics/healthcare-economics/sprinting-toward-value-hhs-congress-may-be-ready-reconsider-stark-law. [170] See Intervenor Complaint, United States ex rel. Long v. Wheeling Hospital, No. 2:17-cv-01654 (W.D.P.A. Mar. 25, 2019). [171] Id. [172] See Intervenor Complaint, United States ex rel. Herbold v. Doctor’s Choice Home Care, Inc., No. 8:15-cv-1044 (M.D. Fl. May 24, 2019). [173] Id. [174] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [175] Press Release, U.S. Atty’s Off., U.S. Dep’t of Justice, United States Settles False Claims Act Cases Against Home Health Agency (June 7, 2019), https://www.justice.gov/usao-mdfl/pr/united-states-settles-false-claims-act-cases-against-home-health-agency. The following Gibson Dunn lawyers assisted in the preparation of this client update: Jonathan Phillips, John Partridge, Julie Rapoport Schenker, Claudia Kraft, Jasper Hicks, Erin Morgan, Michael Dziuban, Lucie Duvall, Susanna Schuemann, and summer associate Anna Aguillard. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s FDA and Health Care practice group: Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2019 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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August 14, 2019

UK Employment Update – Summer 2019

Click for PDF In this, our 2019 mid-year alert, we look back at the key developments in UK employment law over the past six months and look forward to anticipated developments in the six months to come. A brief overview of developments and key cases which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links. 1.   Political Developments in the UK (click on link) We consider the impact of the plans of the recently appointed Prime Minister, Boris Johnson, and his Conservative government for employment laws in the UK including in relation to the UK’s departure from the European Union which will take place on 31 October 2019 absent any further extension. 2.   Changes in Corporate Governance (click on link) We consider those UK corporate governance measures which have come into effect in 2019, increasing large companies’ reporting requirements. In particular, we consider the requirement to publish the ratio between CEO and workforce median pay and the impact of the introduction of the 2018 UK Corporate Governance Code, which places greater emphasis on employee engagement for listed companies. 3.   SMCR (click on link) We highlight those provisions of the Senior Managers and Certification Regime (the “SMCR”) which will be considerably expanded to apply to all UK financial services firms regulated only by the UK’s Financial Conduct Authority (“FCA”) with effect from 9 December 2019. 4.   #MeToo and Use of NDAs (click on link) We summarise recent developments in this area of law and consider government plans to change laws to stop NDAs purporting to prevent staff reporting allegations of illegal harassment and discrimination to the police. 5.   Restraint of Trade (click on link) We consider the impact of two recent cases in this area of UK law. First, the recent and much-anticipated judgment of the UK Supreme Court which has confirmed the circumstances in which courts have the power to strike out offending words from defective non-compete covenants. Second, a recent decision of the UK Employment Appeal Tribunal (the “EAT”) confirming the validity of “bad leaver” provisions contained in a company’s Articles of Association which required the forfeit of deferred earn-out shares and loan notes upon resignation. 6.   Whistleblowing (click on link) We consider the impact of a recent decision of the UK Court of Appeal concerning the application of UK whistleblowing protections to employees of a UK employer working overseas. 7.   SPL/Redundancy Pay (click on link) We report on two UK Court of Appeal cases which have provided welcome guidance for employers on the correct approach on payment for parental leave. Failure to pay a male employee enhanced shared parental pay was found to be neither direct nor indirect sexual discrimination, and did not amount to a breach of the equal pay sex equality clause. However, both employees are seeking permission to appeal to the UK Supreme Court. 8.   One Year On - General Data Protection Regulation (“GDPR”) and Gender Pay Gap Reporting (click on link) We consider the impact of the GDPR one year on including the Information Commissioner’s Office’s (the “ICO”’s) outlook for the future. We also consider the reasons for the reported increase in the gender pay gap following the conclusion of the second full year of gender pay gap reporting. APPENDIX 1.   Political Developments in the UK Following Theresa May’s resignation, the Conservative Party has elected a new leader and the UK has a new Prime Minister, Boris Johnson. The new Prime Minister has undertaken a significant cabinet reshuffle. Along with a number resignations, half of Theresa May’s cabinet are no longer in their roles. The new Government has not announced any changes to employment legislation, although it will be interesting to see whether they uphold the previous Government’s commitment to extend the period of maternity redundancy protection to start at the point at which a woman notifies her employer of her pregnancy, whether orally or in writing, and to last until six months after the end of the maternity leave. As readers will be aware, the UK did not leave the European Union on 29 March 2019 as originally planned. Brexit is now due to happen on 31 October 2019, although there is an impasse at the moment with the European Union having offered a deal that it has said will not be improved, but that has not been passed by Parliament. Boris Johnson has renewed his commitment for the UK to leave the European Union on 31 October 2019, with or without a deal. The only thing that can be said for certain at this stage is that it remains impossible to predict how Brexit will unfold. As we previously reported, it is not currently expected that Brexit will have a substantial immediate impact upon employment rights in the UK, whatever form it takes. 2.   Changes in Corporate Governance Below we summarise the most recent important changes to UK corporate governance. Although the focus is on listed companies, these principles are likely to eventually be applied to private companies, and many non-listed companies are already voluntarily complying with various governance codes as best practice. Action will be required by heads of HR departments, company secretaries, in-house counsel and boards themselves. As we reported in our last alert, a new set of regulations came into force on 1 January 2019 bringing in mandatory reporting of the ratio between CEO pay, including all elements of remuneration, and average staff pay for UK-incorporated companies that are quoted, with 250 or more employees in the group. We still await the publication of the first of these Directors’ remuneration reports as companies are collecting and analysing data now for publication in 2020: the new requirements apply to remuneration reports for financial years beginning on/after 1 January 2019. These regulations also include the following: Section 172(1) statement. All large private and public UK incorporated companies are to include in their strategic report a "section 172(1) statement" to explain how their directors have had regard to the duty to promote the long term success of the company when performing their directors’ duties under section 172. This includes consideration of the interests of employees and other stakeholders: non-employee workers may be relevant. If the company is not quoted, the same information must be published on a free to access website. Statement of engagement with employees. All companies with more than 250 employees in the UK must include in their directors’ report a statement on employee engagement which describes steps taken by the company to have regard to staff interests when taking decisions. Statement of engagement with stakeholders. All large UK incorporated companies must include in their directors' report a statement summarising how the directors have had regard to the need to foster the company's business relationships with suppliers, customers and others and the effect of that regard on the principal decisions taken by the company during the financial year. Statement of corporate governance arrangements. Non-listed UK incorporated companies that have either (1) 2,000 or more employees, or (2) both (i) a turnover of over £200 million and (ii) a balance sheet total over £2 billion, should include in their directors' report a statement to explain on a comply or explain basis their corporate governance arrangements, including whether they follow any formal code. Unquoted companies must also make the statement available on a website that is maintained by or on behalf of the company and identifies the company in question. The 2018 UK Corporate Governance Code, which applies to companies with a premium listing for all financial years beginning on or after 1 January 2019, also provides for greater employee engagement for listed companies including: (1) appointing a director from the workforce; (2) creating a workforce advisory panel; (3) the creation of a designated non-executive director responsible for employee engagement; or (4) a combination of the foregoing. 3.   The Senior Managers and Certification Regime Major financial institutions in the UK have been subject to the SMCR since 2016, when parallel provisions were introduced by the Prudential Regulation Authority and the FCA. However, from 9 December 2019, a form of the SMCR will be extended to apply to all solo-regulated firms (i.e. UK financial services firms regulated only by the FCA). There will be three levels of regulation: (1) Enhanced, (2) Core, and (3) Limited Scope. Under the Senior Managers Regime, individuals performing certain functions will be classed as “Senior Managers”. Prior to being permitted to perform a Senior Manager function, individuals will need to be approved as being “fit and proper” by initially both their firm and the FCA, and subsequently annually by their firm. If a breach of a regulatory requirement occurs in the area for which the Senior Manager is responsible, and the Senior Manager did not take reasonable steps to prevent that breach from occurring, they could be held personally accountable. Each Senior Manager must have a Statement of Responsibility setting out that Manager’s area of responsibility. The Certification Regime will mean that individuals and their firms are responsible for certification of individuals as being “fit and proper”, rather than the FCA. This new regime covers a wider range of people than those covered by the Approved Persons Regime, including anyone who could pose a risk of significant harm to the firm or its customers. In addition to the Senior Managers Regime and the Certification Regime, a third limb, the Conduct Rules, will apply to these firms. This is backed up by certain training requirements. The initial steps a firm needs to undertake are: Type of Firm Determine whether firm is an (1) Enhanced, (2) Core or (3) Limited Scope firm. Senior Managers Regime Identify which staff are Senior Managers, then formally and transparently allocate responsibilities amongst them. Certification Regime Identify those staff who will be subject to the Certification Regime, and then assess their fitness and propriety. Conduct Rules Train all staff, save for ancillary staff, in the Conduct Rules. The key dates are as follows: 9 December 2019 Senior Managers and Certified staff must be identified and trained in the Conduct Rules by this date. 9 December 2020   Certified staff must be assessed and, if appropriate, certified as being fit and proper by this date. All other staff, apart from ancillary staff, must be trained in the Conduct Rules by this date. 4.   #MeToo and Use of NDAs The #MeToo movement continues to gather pace. As previously reported, the use of NDAs has already come under scrutiny from the UK Parliament and the Solicitors’ Regulation Authority, of England and Wales (“SRA”). In particular, the use of NDAs and confidentiality provisions in settling claims in relation to harassment has come under the spotlight and become a political issue. The use of these clauses remains lawful, but there are calls for government action to regulate them. The Women and Equalities Committee of the UK Parliament published a report on 11 June 2019 which found that a series of measures needs to be introduced. Measures proposed include: (i) to strengthen corporate governance requirements to require employers to name senior managers at board level to oversee anti-discrimination and harassment policies and procedures, and the use of NDAs in discrimination and harassment cases; (ii) that an employer should pick up the legal of costs of a successful employee; and (iii) that the payment awarded in relation to the cost of legal advice prior to entering into a settlement agreement should reflect the actual cost of that advice and should be made even if the employee decides not to sign the agreement. On 21 July 2019, the UK Government published a response to its consultation on proposals to prevent the misuse of confidentiality clauses. The UK Government has committed to change laws on NDAs so that employers will be banned from drawing up NDAs which prevent individuals reporting allegations of illegal harassment and discrimination to police, regulated health and care professionals, or legal professionals. There will also be new requirements for the limitations of a confidentiality clause to be clear to those signing them, and for the mandatory independent legal advice on a settlement agreement to include the limitations of any confidentiality clause. Further, confidentiality clauses that do not comply with the new legal requirements will be void. However, this new legislation will be brought forward “when Parliamentary time allows” and it will be interesting to see whether the new UK Government follows through with these changes. As previously reported, while settlement agreements containing non-disclosure provisions remain a lawful and appropriate means by which UK employers can resolve disputes in which allegations of sexual harassment have been made, care should be taken to ensure that: (i) NDAs are not used in circumstances in which the subject of the NDA may feel unable to notify regulators or law enforcement agencies of conduct which might otherwise be reportable; (ii) lawyers do not fail to notify the SRA of misconduct, or a serious breach of regulatory requirements; and (iii) lawyers do not use NDAs as a means of improperly threatening litigation or other adverse consequences. 5.   Restraint of Trade An armoury of weapons is available to an employer who wishes to guard against the loss of a key employee. We report below on the first case concerning post-termination restrictions to reach the UK Supreme Court in over 100 years. We also consider financial disincentives, which are typically less discussed but still a useful tool for employers. Restrictive covenants: The UK Supreme Court has handed down its much-anticipated judgment in Tillman v Egon Zehnder [2019] UKSC 32. Ms Tillman’s employment contract included a number of post-termination restrictions, including a non-compete clause that meant she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company” for a period of six months. She tried to extricate herself from these non-compete restrictions by arguing that a clause restricting her from being interested in a competitor business had the effect of restraining her from even holding any shareholding in a competitor and was thus an unreasonable restraint of trade. We previously reported on the UK Court of Appeal judgment, where it was found that the non-compete restrictive covenant was unenforceable. Whilst the UK Supreme Court agreed that the construction of the clause prohibited Ms Tillman from holding shares in a competitor, it held that the words “or interested’” could be severed from the offending clause rendering the non-compete clause enforceable. This case is good news for employers who are looking to enforce restrictive covenants as the decision confirms that the courts have the power to strike out offending words from defective covenants, rendering the remaining restrictions enforceable so long as where removing the offending words from the covenant will not result in any major change in the overall effect of the restriction. Bad leaver provisions: In Nosworthy v Instinctif Partners Ltd UKEAT/0100/18/RN, the UK EAT confirmed that a bad leaver provision in a Company’s Articles of Association that required an employee to forfeit deferred earn-out shares and loan notes if she resigned was not invalid as she was not put at a serious disadvantage. Further, it was found that the provision was not void as a penalty clause, because the employer’s argument was not reliant upon a breach of contract by the employee but rather on provisions in the Articles that applied to bad leavers regardless of breach. The bad leaver provisions were clear as to the consequences of voluntary resignation. Ultimately, the deterrent effect of a bad leaver provision in an incentive scheme can be reduced by a new employer who is willing to make good the departing employee’s loss. Hence post-termination restrictive covenants remain an important tool for preventing a departing employee from engaging in unfair competition. 6.   Whistleblowing and Territorial Jurisdiction The UK Court of Appeal overturned the UK EAT’s decision in Foreign and Commonwealth Office and others v Bamieh [2019] EWCA Civ 803 and found that the employment tribunal did not have territorial jurisdiction over whistleblowing claims brought by an FCO employee working at an international mission in Kosovo against individual co-workers. The claimant worked as an international prosecutor employed by the FCO and was seconded to EULEX in Kosovo. She claimed that the reason her contract was not renewed was that she had made protected disclosures and she subsequently brought claims against the FCO for unfair dismissal and whistleblowing detriment. In addition, she brought whistleblowing detriment claims against two individual co-workers who were also FCO secondees. The UK Court of Appeal examined the factual reality of the relationships, and found that there was not a sufficient connection to British employment law, given that, in relation to the claims against the individual co-workers: (i) the co-workers worked together in Kosovo, (ii) it was an international mission, (iii) they were seconded separately, and (iv) that the whistleblowing detriment stemmed from “the conduct of their EULEX roles”. A degree of uncertainty remains however as to the correct approach for the employment tribunal to take in relation to jurisdiction over individual respondents in claims under the Equality Act 2010, such as discrimination. Leave to appeal to the UK Supreme Court has been sought, which will hopefully bring more clarity. 7.   Enhanced Provisions Relating to Shared Parental Leave and Parental Pay Failure to pay male employee enhanced shared parental pay was not direct or indirect sex discrimination The UK Court of Appeal in (i) Ali v Capita Customer Management Ltd ET/1800990/2016 and (ii) Hextall v Chief Constable of Leicestershire Police [2019] EWCA Civ 900 ruled that employers can enhance maternity pay while only offering statutory shared parental pay for partners. It was found that this was neither direct discrimination nor indirect discrimination, nor a breach of the equal pay sex equality clause. In Ali, the claim of direct discrimination failed because it was found that the correct comparator should be a female colleague on shared parental leave, and not a female on maternity leave. The purpose of statutory maternity leave is for the protection of the mother’s health during pregnancy and thereafter, and also the protection of the special relationship between the mother and child during the period following childbirth. Before the UK Court of Appeal in Hextall, the employer agreed that the claim should be characterised as an equal pay claim. Mr Hextall’s case was that there was a breach of his terms of work as modified by the sex equality clause implied into all terms of work by the UK Equality Act 2010. His claim was that his terms of work had been modified by the sex equality clause to include a term entitling him to take care of his new-born baby at the same rate of pay as mothers on maternity leave. The UK Court of Appeal rejected this claim as the UK Equality Act 2010 provides that the sex equality clause does not have effect in relation to terms of work affording special treatment to women in connection with childbirth or pregnancy. Whilst this provides an element of clarity for the time being, we understand that the claimants in both cases are seeking permission to appeal to the UK Supreme Court. Periods of part-time parental leave must not reduce average pay for redundancy pay purposes In RE v Praxair MRC SAS (C-486/18) the ECJ has held that the calculation of compensation payments for dismissal and redeployment of an employee who was on part-time parental leave must be carried out on the basis of the full-time salary and not take into account periods of part-time parental leave. Whilst the UK does not explicitly recognise the concept of part-time parental leave, this case provides useful guidance and confirms that EU law requires any benefits such as redundancy pay or holiday pay to be calculated on the basis of an individual’s normal salary. Any periods of parental leave in which pay is either reduced or suspended should be ignored. 8.   One Year On - GDPR and Gender Pay Gap Reporting GDPR – One year on: There is much to be done before the GDPR is truly embedded in organisations and its impact is fully understood. Reports to the ICO of personal data breaches have increased manifold, though fewer than one in five required the organisation to act or led to enforcement or penalties. Similarly, data protection concerns received from the public have almost doubled to 41,000. The ICO stresses the importance of resourcing and board level engagement with Data Protection Officers. On enforcement, the ICO has shown its willingness to deploy the full range of tools at its disposal: requisitioning information, making inspections, compelling action, setting penalties and issuing fines. Looking ahead, the ICO states its mission is to uphold “information rights for the UK public in the digital age” and “trust and confidence in how data is used”, so its priorities will include online data usage and security, artificial intelligence, surveillance, facial recognition, political campaigns using personal data, freedom of information, and children’s privacy. In addition to ICO written and interactive guidance, ICO statutory codes for data sharing, direct marketing, age-appropriate design, and journalism are in various stages of development and consultation. Gender Pay Gap Reporting – One Year on: As regular readers of our alerts will be aware, we have previously reported on the requirement for, uptake and reception of gender pay gap reporting (January 2018 client alert, September 2017 client alert, 2016 Year-End client alert). The second year of reports showed a median gender pay gap of 9.6%. However, 45% of reporting employers had seen an increase in their gender pay gap over the year, while a further 7% saw no change. Overall, 78% of companies had a gender pay gap in favour of men, with 14% reporting a pay gap in favour of women and only 8% reporting no difference. It is possible that one of the causes of the increasing gender pay gap is employers recruiting more women into lower paid positions within organisations as a long-term bid to tackle wage disparity. One of the most influential factors in these statistics is the gender balance across each pay quartile, so where more women are entering companies in junior positions this will be reflected in the gender pay gap reporting. In January 2019, the government confirmed that it will not be making any immediate changes to the regime, although it had taken on board some of the comments on the limitations of the regime. The UK Parliament Business, Energy and Industrial Strategy committee recommended a number of enhancements and extensions to the rules, however the government has said that this is a five year plan and so it will take time to see an impact in the numbers. The response by the government demonstrates that, while it is desirable to have action plans which set out how businesses intend to close the gender pay gap within their organisation, employers ultimately have the freedom to produce an action plan relevant to their individual situation. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm's London office: James A. Cox (+44 (0)20 7071 4250, jcox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Charlotte Fuscone (+44 (0)20 7071 4036, cfuscone@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@gibsondunn.com) © 2019 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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