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Eighth Circuit Affirms First Amendment Rights of Alcohol Makers, Distributors, and Retailers

WLF Legal Pulse - Wed, 01/08/2020 - 12:14pm

“As today’s decision confirms, the First Amendment cannot abide regulations that seek to keep people in the dark for what the State perceives to be their own good.”
—Cory Andrews, WLF Vice President of Litigation

WASHINGTON, DC—Earlier today, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court ruling that—with benefit of a bench trial—invalidated on First Amendment grounds portions of a Missouri law that restricted truthful, non-misleading commercial speech. The decision was a victory for Washington Legal Foundation (WLF), which filed an amicus curiae brief in the case urging affirmance. WLF’s brief was joined by the Show-Me Institute, a Missouri free-market nonprofit.

The case arose from a constitutional challenge to Missouri’s “tied-house” law. Enacted in 1934 in the wake of the repeal of Prohibition, the law prohibits alcohol manufacturers and distributors from giving any advertising-related support to alcohol retailers. Repeating the now-familiar claim of government regulators everywhere, Missouri claimed on appeal that its tied-house law regulates conduct, not speech, and so is exempt from First Amendment scrutiny. But, as WLF’s brief showed and the appeals court held, even laws aimed at proper regulatory concerns can unduly burden free-speech rights under the First Amendment.

The appeals court agreed with WLF that Missouri could not satisfy even the intermediate scrutiny prescribed by Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York. Under that test, Missouri must present solid evidence that the law’s speech restrictions directly advance its policy aims “to a material degree” and is narrowly tailored and no more restrictive than necessary. The trial record in this case contained no such evidence.

Celebrating its 43rd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.

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December 2019 Month in Review

WLF Legal Pulse - Mon, 01/06/2020 - 9:17am

To read more about the items below, click the link above for a PDF of the newsletter.

NEW FILINGS

To satisfy Article III’s case-or-controversy requirement, a plaintiff must prove a concrete injury in fact, not merely an injury in law. (Facebook, Inc. v. Patel)

The Consumer Financial Protection Act, which creates a bureau headed by a director who does not answer to the President, violates the Constitution’s separation of powers. (Seila Law v. CFPB)

Although some transportation workers are exempt from the Federal Arbitration Act’s mandate that arbitration agreements must be enforced, that exemption should be narrowly construed. (Wallace v. Grubhub)

Congress did not authorize the SEC to seek disgorgement—a penalty, not an equitable remedy—in securities enforcement actions in federal court. (Liu v. SEC)

The California Supreme Court should review a lower-court decision that sows confusion about when a jurisdictional appeal deadline applies. (State Farm v. Lara)

HHS’s Office of Inspector General should expand the agency’s safe harbor for drug and device makers trying to comply with the federal Anti-Kickback Statute. (In re Proposed Revisions to Anti-Kickback Statute Regulations)

RESULTS

The U.S. Supreme Court declines to review a Berkeley, California ordinance that requires all cell-phone retailers to warn their customers about the supposed dangers of ordinary cell-phone use. (CTIA—The Wireless Ass’n v. City of Berkeley)

The U.S. Court of Appeals for the District of Columbia Circuit holds that the FDA’s Deeming Rule for modified-risk tobacco products does not violate the First Amendment. (Nicopure Labs, LLC v. FDA)

The U.S. Court of Appeals for the Ninth Circuit affirms the denial of class certification in an employment discrimination action in which putative class plaintiffs could not show common issues of fact or law. (Moussouris v. Microsoft Corp.)

The post December 2019 Month in Review appeared first on Washington Legal Foundation.

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WLF Urges California High Court to Resolve Uncertainty Surrounding Appellate Filing Deadline

WLF Legal Pulse - Thu, 01/02/2020 - 3:25pm

“Simple, clear appeal deadlines are a key component of due process and the rule of law.”
—Corbin K. Barthold, WLF Senior Litigation Counsel

Click here for WLF’s letter.

(Washington, DC)—On December 23, Washington Legal Foundation joined an amicus curiae letter urging the California Supreme Court to review a crucial matter of appellate jurisdiction. The letter was submitted by the prominent California appellate law firm Horvitz & Levy LLP.

Like most other jurisdictions, California generally follows the “one judgment rule.” To keep things simple, a party must wait for a final judgment to issue before appealing. And, to keep things simple, that party is given a clear period—typically 60 days—within which to file its notice of appeal.

In this case, State Farm filed both a civil complaint and a petition for a writ of administrative mandate. When a party files just a writ petition, an order granting or denying that petition constitutes a final judgment. When a party files both a writ petition and a complaint, however, things are less clear. The appeal deadline then turns on whether the court’s order addressing the writ petition also resolves all issues and leaves nothing else to be decided.

This system works fine so long as a court’s order is clear. But in this case it wasn’t, and State Farm was left in the lurch. The trial court’s order resolving the writ petition did not say whether the court would issue a further order resolving the as yet unaddressed complaint. Four months later, the court issued a judgment that explicitly resolved all issues “in full.” State Farm met the deadline for filing an appeal from that judgment. The Court of Appeal dismissed, ruling that State Farm should instead have met the deadline for filing an appeal from the earlier order.

As Horvitz & Levy and WLF explain in their letter, State Farm was in effect left to guess when it needed to file an appeal. This is not how a proper set of appeal deadlines should function. If left to stand, the Court of Appeal’s ruling will lead parties to file scores of time-consuming and inefficient protective appeals. Others, meanwhile, will suffer State Farm’s fate: punishment for failing to guess how an unclear rule will be applied from case to case. Horvitz & Levy and WLF urge the California Supreme Court to step in and stop all this from happening. The high court should make clear that, to be appealable, an order must expressly resolve all issues and leave nothing else to be decided.

Celebrating its 43rd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law. 

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Ninth Circuit Affirms Straightforward Application of Class-Action Commonality Rule

WLF Legal Pulse - Thu, 01/02/2020 - 9:00am

“The Ninth Circuit confirmed what was clear from the start: the plaintiffs’ motion for class certification was just a replay of Wal-Mart v. Dukes.”
—Corbin K. Barthold, WLF Senior Litigation Counsel

(Washington, DC)—On December 24, the Ninth Circuit affirmed the denial of a motion to certify a class of current and former employees of Microsoft alleging gender discrimination. WLF filed an amicus curiae brief urging this affirmance. The case is Moussouris v. Microsoft, Case No. 18-35791.

Under Wal-Mart v. Dukes, 564 U.S. 338 (2011), a class may not challenge an array of employment decisions as discriminatory unless “some glue” holds “the alleged reasons for all those decisions together.” Without evidence that the various decisions are directly connected, Wal-Mart declares, it is “impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.”

In its brief, WLF established that this case is legally indistinguishable from Wal-Mart.  WLF also discussed the many benefits of dispersing authority to lower-level managers. To keep pace with the rapidly changing modern economy, WLF explained, companies must remain creative and adaptable—and thus decentralized. 

Citing Wal-Mart, the Ninth Circuit concluded that the plaintiffs had failed to “identify a common mode of exercising discretion,” at Microsoft, “that pervades the entire company.” As the court noted, the members of the putative class “held more than 8,000 different positions in facilities throughout the United States,” and the managers overseeing this diverse set of employees “had broad discretion” over pay and promotion decisions. Class treatment was therefore inappropriate.

Celebrating its 43rd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.

The post Ninth Circuit Affirms Straightforward Application of Class-Action Commonality Rule appeared first on Washington Legal Foundation.

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WLF Comments on HHS Agency’s Modernization of Safe Harbors from Anti-kickback Prosecution

WLF Legal Pulse - Thu, 01/02/2020 - 9:00am

“OIG has taken a positive step forward to bringing ‘value-based care’ to federal healthcare programs, but the agency’s unfounded decision to exclude entire industries from new safe harbors threatens the proposal’s viability.”
—Glenn Lammi, WLF Chief Counsel, Legal Studies

Click here for WLF’s comments.

WASHINGTON, DC—Washington Legal Foundation (WLF) has urged a federal healthcare regulator to reverse its decision to exclude pharmaceutical and medical-device manufacturers from the protection of proposed Anti-Kickback Statute safe harbors. In formal comments filed with the Department of Health and Human Service’s Office of Inspector General’s (OIG) on December 31, 2019, WLF applauds the agency’s removal of regulatory barriers to care coordination and value-based care, but also expresses serious reservations with the proposed rule’s discrimination against certain key players in federal healthcare programs.

The private healthcare market is rapidly moving away from pricing, contracting, and other arrangements based on the volume of services or products offered and toward arrangements based on tangible results. Such value-based arrangements can more closely align health outcomes with costs. HHS has encouraged greater use of outcome-based arrangements in Medicare and Medicaid, but because regulators would likely view compensation based on achieved outcomes, rebates, and other aspects of value-based care as unlawful kickbacks, federal healthcare contractors have refrained from such arrangements. In its October 17, 2019 proposal, OIG proposed safe harbors that will protect “value-based enterprise participants” from Anti-kickback Statute liability.

OIG also proposes that certain types of business entities, including producers of pharmaceuticals and durable medical devices, be prohibited from the protection of value-based-care safe harbors. The proposal further casts doubt on OIG’s intention to define “traditional” medical-device manufacturers as value-based enterprise participants in the final rule. WLF argues that the justifications OIG cites for excluding all companies in the disfavored industries are unfounded and that the agency should move away from entity-based participation decisions when finalizing the proposal.

Washington Legal Foundation preserves and defends America’s free-enterprise system by litigating, educating, and advocating for free-market principles, a limited and accountable government, individual and business civil liberties, and the rule of law.

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WLF Urges Supreme Court to Limit SEC’s Authority to Seek Disgorgement of Ill-Gotten Gains

WLF Legal Pulse - Mon, 12/23/2019 - 3:42pm

“Congress has supplied the SEC with many tools with which to ensure compliance with the securities laws. The SEC should rely on those tools rather than resorting to the non-statutory enforcement mechanisms it apparently finds more convenient.”
—Richard Samp, WLF Chief Counsel

Click here for WLF’s brief.

WASHINGTON, DC—Washington Legal Foundation (WLF) today urged the U.S. Supreme Court to rule that while federal law grants the Securities and Exchange Commission (SEC) authority to seek substantial penalties on those found to have violated the securities laws, the SEC may not seek additional, non-statutory penalties in the form of a “disgorgement” award. In an amicus curiae brief urging the Court to overturn a $27 million disgorgement judgment, WLF argues that separation-of-powers principles require that federal agencies be limited to the enforcement powers expressly granted to them by Congress.

The case involves two individuals found to have defrauded Chinese investors by selling them securities on the basis of false statements. The district court entered broad injunctive relief and imposed multi-million-dollar penalties on the defendants. It supplemented the penalties with an award not expressly authorized under the securities laws: a $27 million judgment designed to “disgorge” all of the defendants’ ill-gotten gains. The court justified its non-statutory award (requested by the SEC) by asserting that federal courts possess inherent “equitable” powers to order disgorgement. The total judgment vastly exceeded the amount the defendants received from investors.

WLF’s brief notes that the securities laws already, in effect, sanction “disgorgement” by authorizing the SEC to seek penalties of up to “the gross amount of pecuniary gain.” WLF argues that Congress has not authorized the SEC to engage in “double dipping” by supplementing the authorized penalties with a non-statutory disgorgement award. The SEC has routinely sought disgorgement awards in enforcement actions for the past 50 years; but the Supreme Court called that practice into question in its 2017 Kokesh decision. Kokesh held that disgorgement awards are “penalties” because they are designed to punish wrongdoers, not to provide restitution to victims. While restitution is a traditional form of “equitable” relief, a monetary penalty is not. 

Washington Legal Foundation preserves and defends America’s free-enterprise system by litigating, educating, and advocating for free-market principles, a limited and accountable government, individual and business civil liberties, and the rule of law.

The post WLF Urges Supreme Court to Limit SEC’s Authority to Seek Disgorgement of Ill-Gotten Gains appeared first on Washington Legal Foundation.

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WLF Urges Seventh Circuit to Read FAA § 1 Exemption in Line with Statutory Text and Context

WLF Legal Pulse - Fri, 12/20/2019 - 9:59am

“The text and context of FAA § 1 establish that it covers only workers who transport goods in bulk across borders.”
—Corbin K. Barthold, WLF Senior Litigation Counsel

Click here for WLF’s brief.

(Washington, DC)—Washington Legal Foundation today filed an amicus curiae brief urging the Seventh Circuit to read section 1 of the Federal Arbitration Act, known as the “transportation worker exemption,” in line with its text and context.

The FAA establishes a federal policy favoring arbitration. It requires, in section 2, that most people comply with their arbitration agreements. It contains a discrete exception, in section 1, for “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Two district courts ruled that drivers who deliver meals locally for Grubhub fall outside this exemption.

In its brief, WLF explains that section 1 is not the product of a legislative intent to excuse a few transportation workers—and, for some peculiar reason, them alone—from honoring arbitration agreements. Section 1 exists, rather, because Congress expected shipping-industry workers to engage in arbitration governed by other federal laws. And because section 1 fulfills this one focused purpose, there is no principled way to stretch its application. Although some judge-made tests purport to expand the exception beyond national and international transportation of goods, these contrived standards defy statutory text and context, produce inconsistent results, and serve no end set forth by Congress.

Because the plaintiffs in these cases made only local deliveries intrastate, they fall outside the section 1 exemption. The district courts’ rulings should therefore be affirmed.

Celebrating its 42nd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.

The post WLF Urges Seventh Circuit to Read FAA § 1 Exemption in Line with Statutory Text and Context appeared first on Washington Legal Foundation.

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WLF Urges Supreme Court to Restore President’s Removal Power

WLF Legal Pulse - Mon, 12/16/2019 - 10:28am

“The Court should dump the limit on the removal power that it created out of thin air in 1935.”
—Corbin K. Barthold, WLF Senior Litigation Counsel

Click here for WLF’s brief. 

(Washington, DC)—Washington Legal Foundation today filed an amicus curiae brief urging the U.S. Supreme Court to restore the president’s power to remove principal officers at will.

The framers of our Constitution rejected many royal prerogatives, but, chastened by their experience with the defective Articles of Confederation, they retained a broad executive removal power. This decision can be seen in (among other places) Article II’s clauses vesting “the executive Power” in a single “President” who must “take Care that the Laws be faithfully executed.” In 1935, however, the Supreme Court declared that Congress may grant for-cause removal protection to a principal officer on a panel of purportedly neutral “experts” who wield “quasi legislative” and “quasi judicial” power. The Court in effect granted Congress the power to create a fourth branch of government, a branch of independent boards and commissions.

Since 1935, Congress has steadily pushed the boundaries of its court-granted privilege to create “for-cause” removal protections. This has culminated in the creation of the Consumer Financial Protection Bureau, an entity headed by a single director who both wields extensive authority and enjoys for-cause protection.

The petitioner in Seila Law LLC v. Consumer Financial Protection Bureau contends that the structure of the CFPB violates the Constitution’s separation of powers. In its supportive amicus brief, WLF engages in an extensive review of the history of the removal power. The breadth of that power can be seen, WLF argues, in English history, in the text and structure of the Constitution, and in over a century of unbroken executive-branch practice after the founding.

Celebrating its 42nd year as America’s premier public-interest law firm and policy center, WLF advocates for free-market principles, limited government, individual liberty, and the rule of law.

The post WLF Urges Supreme Court to Restore President’s Removal Power appeared first on Washington Legal Foundation.

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Delaware’s Judiciary in the U.S. Supreme Court

WLF Legal Pulse - Fri, 12/13/2019 - 12:39pm

Stephen M. Bainbridge is William D. Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law.

What is the judicial role? Are judges mere umpires who call balls and strikes based solely on rules made by others? Or are judges lawmakers in their own right, creating laws and making public policy? The U.S. Supreme Court has just agreed to hear a case in which those questions could play a determinative role. In addition to being of great jurisprudential interest, however, the case will attract great attention from corporate lawyers, because it may call into question the validity of the judiciary of the state that dominates corporate law.

Delaware’s state constitution imposes two unique requirements on the state judiciary that differentiates its courts from those of all other states. Under the bare majority rule, no more than half of the total number of the members of the state Supreme and Superior courts and the Chancery Court can be from the same political party (50 percent plus one if there is an odd number of judges). Under the major party rule, those judges must be from a “major” political party.

James R. Adams is a Delaware lawyer who has been frustrated in his search for a Delaware judicial position because he is a political independent. Adams sued Delaware Governor Carney in federal court seeking to have the Delaware provisions declared unconstitutional. Delaware argued that Adams lacked standing and, in the alternative, that the judicial-selection provisions fell within the policymaker exception to the First Amendment’s ban on conditioning state government positions on membership in a specific political party. The district court ruled for Adams on both grounds.

On appeal, the Third Circuit held that Adams had sufficiently pled Article III standing.1 As to the merits, the Third Circuit addressed solely the major party rule. The court nevertheless struck down both it and the bare majority rule on grounds that the latter was not severable from the former.

Delaware’s filed a petition for a writ of certiorari with the U.S. Supreme Court, seeking review solely of the Third Circuit’s decision on the merits. In granting the state’s petition, however, the Supreme Court required the parties to also address the question of Adams’ standing.

The Supreme Court’s request for briefing on the standing issue suggests that the Court may be zeroing in on two key weaknesses in Adams’ case. First, Adams had been a registered Democrat until February 2017. While registered as a Democrat, Adams had once applied for a position on the state’s Family Court, as to which the major party rule does not apply, but had never applied for a position on any of the three courts to which that rule does apply. Second, since re-registering as an independent in 2017, Adams had considered applying for a Superior Court vacancy and a Supreme Court vacancy, but had not in fact done so. The Third Circuit found that Adams had nevertheless suffered the requisite injury on fact because it would have been futile for him—as an independent—to have done so. The Third Circuit also rejected Delaware’s argument that prudential considerations mitigated against recognizing Adams as having standing. Accordingly, it seems plausible that the Justices who voted to grant the petition may be teeing this cases up as an opportunity to clarify standing rules.

It is the merits that make the Adams case worthy of attention, however. In Elrod v. Burns,2 and its progeny, the Supreme Court has broadly invalidated the spoils system of political patronage. In general, a state government cannot terminate nor deny employment solely because of political party affiliation:

Employees who do not compromise their beliefs stand to lose the considerable increases in pay and job satisfaction attendant to promotions, the hours and maintenance expenses that are consumed by long daily commutes, and even their jobs if they are not rehired after a ‘temporary’ layoff. These are significant penalties and are imposed for the exercise of rights guaranteed by the First Amendment. Unless these patronage practices are narrowly tailored to further vital government interests, we must conclude that they impermissibly encroach on First Amendment freedoms.3

There are two principal exceptions to that ban. First, “where membership in a political party is essential to the discharge of the employee’s governmental responsibilities.”4 In Branti v. Finkel, for example, the Supreme Court suggested that “if a State’s election laws require that precincts be supervised by two election judges of different parties, a Republican judge could be legitimately discharged solely for changing his party registration.”5 As applied to Adams, however, that exemption at most might save the bare majority rule. It does not speak to the major party rule.

Second, “if an employee’s private political beliefs would interfere with the discharge of his public duties, his First Amendment rights may be required to yield to the State’s vital interest in maintaining governmental effectiveness and efficiency.”6 Positions whose jobs entail policymaking fall squarely within this exception.7

In Adams, the Third Circuit rejected Delaware’s argument that judges fall squarely within that exception. The Court acknowledged that in doing so it was creating a circuit split:

In Kurowski v. Krajewski, the Seventh Circuit determined that the guiding question in political affiliation cases was ‘whether there may be genuine debate about how best to carry out the duties of the office in question, and a corresponding need for an employee committed to the objectives of the reigning faction,’ and answered that question in the affirmative with respect to judges and judges pro tempore. In Newman v. Voinovich, the Sixth Circuit similarly concluded that judges were policymakers who could be appointed on the basis of their partisan affiliation.8

In rejecting those decisions, the Third Circuit held that, to the extent judges make policy, they must do so without being swayed by partisan interests. As the court explained, “the question before us is not whether judges make policy, it is whether they make policies that necessarily reflect the political will and partisan goals of the party in power.”9 The court denied that Delaware judges could or should do so.

In an ideal world, the Third Circuit’s view of judges as independent, non-partisan decision makers would be correct.10 In the real world, the judicial confirmation wars would not be so fraught if judges were not increasingly perceived as partisan players. Indeed, as Professor Michael Dorff explained, in today’s reality “party affiliation is a fair proxy for policy views, which play a substantial role in a judge’s decision in the sorts of contested cases that lead to appellate litigation.” Even though many judges “may sincerely believe that their decisions are governed by the law, their political views subtly color their legal decisions—either knowingly or via cognitive biases, motivated reasoning, or some other mechanism—according to political scientists.”11

Although Delaware’s mode of judicial selection is unique, in many states, judges are elected by popular vote. In some, judicial elections are explicitly partisan. Even in states where judicial elections are nominally non-partisan, as Justice Sandra Day O’Connor observed, they are “becoming political prizefights where partisans and special interests seek to install judges who will answer to them instead of the law and the constitution.”12 It is thus hard to see how the Third Circuit’s quaint view of the judicial role can be limited to Delaware. Instead, it calls into question the validity of judicial elections across the board.

Let us suppose, however, that the Supreme Court manages to find a way to uphold the Third Circuit’s decision, while preserving elected state judiciaries in general. Would anyone outside Delaware care?

Delaware argues that the nation as a whole has a strong interest in preserving the current mode by which the state selects judges. The state correctly points out that Delaware is the dominant source of corporate law in this country. Sixty percent of the Fortune 500 and more than half of the corporations listed on the New York Stock Exchange are incorporated in Delaware, which means corporate governance disputes involving these economically vital companies are governed by Delaware law. Delaware has a larger body of corporate law than that of any other state, moreover, which is widely regarded as authoritative by both federal courts and courts of other states.

Delaware contends that the major party and bare majority rules promote partisan balance, which lessens the risk that judicial decisions will consistently skew in favor of one party or the other. The state further contends that the high degree of consensus found in Delaware supreme court decisions—which are usually unanimous—likewise results from maintaining a strict partisan balance. As former Delaware Chief Justice Veasey argued, the partisan balance required by the state constitution “has served well to provide Delaware with an independent and depoliticized judiciary and has led, in my opinion, to Delaware’s international attractiveness as the incorporation domicile of choice.”13

It nevertheless seems implausible that the quality of Delaware corporate law would suffer significantly were the constitutional provisions in question to be struck down. As I have observed elsewhere:

Delaware benefits greatly from its dominance. Delaware gets a significant percentage of state revenues from incorporation fees and franchise taxes, typically over 20% of the State’s budget. Delaware’s government thus has a very strong interest in maintaining Delaware’s dominant position.14

Delaware’s judges have just as much of an incentive to maintain that position as does the state legislature. It is well known that the “Delaware bar plays a central role in selecting justices, and it can be expected to recommend individuals who have a natural affinity to the corporate bar.”15 The Delaware bar’s prominent role and its preference for centrist judges who can be depended upon to make sound corporate law is highly unlikely to change even if the Supreme Court was to side with Mr. Adams.

Once they are elevated to the bench, moreover, Delaware jurists have strong reputational incentives to avoid radical changes in the direction of Delaware law. The Delaware judiciary has achieved a well-deserved “reputation as elite, national arbiters of corporate law.”16 They therefore receive a level of media attention to which few other state court judges—especially trial court judges—can aspire. They routinely get invited to headline high-profile academic and professional conferences to which other state court judges—especially at the trial court level—rarely receive. Indeed, some argue that the Delaware courts have achieved “a reputation that is unmatched by any other state or federal court.”17 Having achieved that status, it would be surprising if the Delaware judiciary did not seek to preserve it.

In sum, judges are lawmakers and policymakers whose preferences doubtless reflect their partisan allegiances at least at a subconscious level. The Supreme Court thus should reverse the Third Circuit. As a practical matter, however, it is doubtful that an affirmance would do much to change that part of Delaware law about which the country as a whole cares most.

Notes

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WLF Urges Supreme Court to Reject Multi-Billion-Dollar Privacy Class Action

WLF Legal Pulse - Fri, 12/13/2019 - 9:48am

“An injury in law is not automatically an injury in fact.”
Cory Andrews, Vice President of Litigation

Click here for WLFs brief.

(Washington, D.C.)—Washington Legal Foundation (WLF) today filed an amicus curiae brief in the U.S. Supreme Court, urging it to grant Facebook, Inc’s petition for certiorari. WLF’s brief is highly critical of a Ninth Circuit decision that threatens to permit large, no-harm class actions whenever plaintiffs can label the alleged statutory violation an “invasion of privacy.”

The case arises under the Illinois Biometric Privacy Information Act (BIPA), a 2008 law that requires companies to obtain written consent before collecting a person’s biometric information. It provides a private right of action allowing a plaintiff to recover up to $5,000 for a single violation. Seeking to represent a class of six million Illinois Facebook users, the plaintiffs sued Facebook claiming that its Tag Suggestions feature—which uses facial-recognition software to suggest that Facebook users tag their friends in photos they upload to Facebook—violates BIPA.

As WLF’s brief explains, the panel’s certification ruling all but eliminates Article III’s standing requirement in “privacy” cases and throws open the door to class claims threatening draconian liability, creating irresistible pressure to settle even dubious claims. Such hydraulic settlement pressure—leveraging many billions of dollars in potential recovery—is corrosive to our civil justice system.

Celebrating its 42nd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.

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CMS’s “International Pricing Index” for Medicare-Covered Drug Payment Ill-Conceived and Illegal

WLF Legal Pulse - Thu, 12/12/2019 - 4:55pm

By Howard L. Dorfman, Adjunct Professor at Seton Hall University School of Law who previously served as general counsel or chief legal officer for several pharmaceutical manufacturers.

Last fall, the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) proposed a new payment model for most drugs covered under Medicare Part B designed to reduce prescription drug costs. The plan would replace CMS’s current process for obtaining the covered drugs with government-imposed price controls in the form of an International Pricing Index (IPI) based on prices currently set by foreign governments. In announcing the proposal, various government officials, including HHS Secretary Alex Azar and CMS Administrator Seema Verma, as well as the President, stressed that the resulting cost reductions would address the disparity between drug costs in other countries and the United States.

Healthcare cost concerns in general, and prescription drug prices in particular, have become predominant issues for the overwhelming majority of Americans as the country enters the 2020 elections. While the goal of cost-containment is laudable, the International Pricing Index model presents significant public-health problems by disrupting distribution of potentially life-saving therapies, chilling pharmaceutical research and development in rare diseases and other indications, and negatively affecting government initiatives such as the 21st Century Cures Act. In addition to the potentially devastating societal impact, the proposed IPI model exceeds CMS’ statutory authority and raises several constitutional issues, including possible violations of the separation of powers and the Foreign Commerce Clause, among others.

IPI-Based Process Would Harm U.S. Healthcare System while Failing to Reduce Prescription-Drug Prices

If CMS issues a final rule consistent with the details found in the Advance Notice of Proposed Rulemaking (ANPRM), a cascade of negative developments can be expected with adverse consequences affecting particularly vulnerable patient populations. For example, the Community Oncology Alliance (COA), a non-profit organization supporting the needs and interests of independent community oncology practices, filed comments on the ANPRM expressing concern over the IPI Model’s potential impact on community oncology practices and their patients. COA noted it was “very concerned that the IPI Model as proposed will totally upend how cancer care is delivered under Part B…” as well as the likelihood that a precipitous change in Medicare reimbursement on a national basis, without sufficient research and analysis as to its potential impact, “could accelerate the shift in the site of cancer care from independent community cancer clinics to much more expensive hospital systems.” The impact would be particularly harmful to cancer patients in rural or underserved areas.

The very mechanics of the IPI Model could cause prescription-drug shortages—a serious threat to the overall healthcare system. The ANPRM proposes to replace the current reimbursement system of Average Sales Price (ASP) plus 4.3% (intended to cover costs related to processing, handling, and storage) with vendors who would purchase the drugs and distribute them to providers. The vendors would thereafter be reimbursed based on the IPI calculation consistent with the lower prices in place in international markets. Given that prices outside of the U.S. are generally subject to government price controls, CMS would be unilaterally imposing these controls on Part B drugs. Mandatory price controls distort market dynamics and result in drug shortages, further complicating treatment as well as the physician-patient relationship as clinical decisions are increasingly based on availability in place of sound medical judgment.

Pharmaceutical research may also suffer a slowdown under the weight of a new, untested reimbursement model for prescription drugs. Biotech venture capitalists have expressed concern that artificial drug pricing would constrain investment in biomedical research and innovation, depriving seriously ill patients access to clinical trials and potentially breakthrough therapies as pricing limits distort research priorities. In fact, the IPI proposal would effectively stifle much of the progress Congress’s 2016 passage of the passage of the 21st Century Cures Act inspired. In the past three years, pharmaceutical and biotech companies have prioritized research on novel therapies for unmet medical needs. FDA has issued a record number approvals for both innovator and generic drugs that have lowered healthcare and improved patients’ quality of life. The IPA Model threatens to shut off that pipeline.

IPI Model’s Implementation Faces Strong Legal Headwinds

Regulated entities would almost certainly challenge a finalized IPI rule as exceeding CMS’s statutory and constitutional authority. Plaintiffs would have a strong Administrative Procedure Act claims that CMS lacks the statutory authority to replace the congressionally mandated reimbursement system with price controls adopted through rulemaking. CMS argues in the ANPRM that Section 1115A of the Social Security Act authorizes its IPI action. Section 115A empowers CMS to develop test models to improve the Medicare program. The provision also allows CMS to waive statutory requirements where doing so is necessary for a model’s implementation. A careful reading of Section 1115A, however, reveals that the provision’s focus is on patient care, not drug pricing. The statutory section references a list of 23 potential models, all of which address patient care.

A final rule implementing the IPI Model would also be vulnerable to constitutional challenge. As noted above, the IPI Model would supplant the prescription-drug reimbursement formula dictated by federal law. That type of Executive action is akin to the selective budget-cutting authority Congress granted to the President in the Line Item Veto Act. The Supreme Court held in Clinton v. New York, 524 U.S. 417 (1998), that the Executive cannot unilaterally nullify a legislative action.

Plaintiffs in a constitutional challenge could also argue that CMS’s action violates the Foreign Commerce Clause, which grants Congress the power to “regulate Commerce with foreign nations.” White House statements reflect that the administration is aiming policy tools such as the IPI Model at ending “global freeloading” in drug pricing which cause “Americans [to] pay more so other countries can pay less.” If the IPI Model pressures American drug manufacturers to increase prices to oversees purchasers, plaintiffs challenging the CMS action could argue that the agency usurps congressional authority to regulate foreign commerce contrary to the Foreign Commerce Clause.

Finally, the plaintiffs may claim that CMS is intruding on Congress’s authority to define patent rights. Article I, Section 8, Clause 8 of the Constitution grant Congress the power to award patents. Some of the foreign prices that the IPI Model would utilize in a drug pricing model for Medicare Part B reimbursement result from government compulsory licensing and other policies that weaken patent rights. The IPI Model imports those policies into U.S. law, and in the process dictates patent standards that differ from those defined by Congress.

Conclusion

With the IPI Model, CMS attempts to address the very complex issue of drug pricing with a poorly designed blunt instrument. The policy’s implementation would decelerate emerging research to develop new modalities for unmet medical needs, particularly for rare orphan diseases. The Model would undercut statutory initiatives meant to promote societal health without effectively addressing the various factors that affect drug pricing. Finally, the concept is fatally flawed from a legal perspective with little to no chance of surviving judicial review. Instead of contemplating reforms based on a careful review of market realities that can produce tangible benefits to patient populations, policymakers appear more interested in sound bites on the evening news that are “full of sound and fury, signifying nothing.”

The post CMS’s “International Pricing Index” for Medicare-Covered Drug Payment Ill-Conceived and Illegal appeared first on Washington Legal Foundation.

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Oklahoma Opioid Ruling: Another Instance of Improper Judicial Governance through Public Nuisance Litigation

WLF Legal Pulse - Thu, 12/12/2019 - 4:54pm

By Eric G. Lasker, a Partner, and Jessica L. Lu, an Associate, with Hollingsworth LLP in Washington, DC.

Plaintiffs have long utilized the doctrine of public nuisance as a judicial avenue to force corporations to bear the costs of addressing social harms.  In recent years, however, such claims have proliferated as a result of high-profile cases and plaintiffs’ success in the courtroom.  This success will likely spur additional litigation and solidify the doctrine’s place in the plaintiffs’ litigation toolbox.  This Legal Backgrounder first presents an overview of the public nuisance doctrine and its ongoing development.  It next examines how the Oklahoma opioid case—the first case in which an opioid defendant was held liable for creating a public nuisance—failed to examine the doctrine’s history, a shortcoming that should doom the decision on appeal.  The article also provides insight into how this high-profile ruling may give rise to additional public nuisance litigation.

History of the Doctrine of Public Nuisance                                                         

The public nuisance doctrine has undergone a bizarre evolution from its humble beginnings as a theory bound in public-property harm to one that now permits plaintiffs—typically states or local governments aided by contingent-fee private attorneys—to bring suits for societal harms like the opioid addiction crisis or climate change.  A cause of action for “public nuisance” originated in medieval England as a judicial response to a disruption to the king’s land, a common road, or a public water source.1  Initially, the only remedy was a criminal writ brought by the Crown; over time, the doctrine evolved to permit suits by private citizens for equitable remedies.2  In America, public nuisance law developed similarly, with the doctrine’s application limited primarily to criminal situations that infringed upon a public right (commonly involving the use of land), for which the remedy was limited to injunctive relief and/or abatement for governmental plaintiffs.3  National and state legislation served the primary function of “solving” societal ills, and the doctrine was not even included in the First Restatement of Torts.4

Today, the Restatement (Second) of Torts § 821B defines a public nuisance as “an unreasonable interference with a right common to the general public.”  An interference may be “unreasonable” depending on: “(a) Whether the conduct involves a significant interference with the public health, the public safety, the public peace, the public comfort or the public convenience, or (b) whether the conduct is proscribed by a statute, ordinance or administrative regulation, or (c) whether the conduct is of a continuing nature or has produced a permanent or long-lasting effect, and, as the actor knows or has reason to know, has a significant effect upon the public right.”5  Since the 1980s, plaintiffs have used the doctrine against manufacturers of products alleged to have cause public health crises—such as lead paint and tobacco—and the practice has spanned through the twenty-first century.6

The claims are gaining both media attention and more success.  In the era of tobacco litigation, the only court to review the viability of a public nuisance claim against tobacco companies dismissed it because, under Texas law, the court was “unwilling to accept the state’s invitation to expand a claim for public nuisance beyond its ground in real property.”7  In addition to courts’ reliance on precedent and the common law to prevent expansion of the doctrine, its application has in the past been limited by statute as well.  For instance, governmental entities began suing firearm manufacturers for causing a public nuisance dating in the early 2000s.  Most of those cases fizzled to an end in 2005, however, when Congress passed the Protection of Lawful Commerce in Arms Act.  The statute “effectively foreclosed nearly all municipal civil suits against the gun industry.” 8  Recently, though, plaintiffs have been more successful.  Earlier this year, for example, after a California state court concluded that various paint manufacturers had created a public nuisance by producing lead paint, defendants The Sherwin-Williams Company, ConAgra Grocery Products Company, and NL Industries, Inc. agreed to pay $305 million to various California counties and cities “to address lead paint-related hazards.”9

Thus, the doctrine has been recognized as “surviv[ing] today amid apparently comprehensive federal and state environmental regulations because of its nearly infinite flexibility and adaptability and its inherent capacity to fill gaps in statutory controls.”10  The public nuisance doctrine is therefore not “new,” but has been applied more frequently in the tort context and will potentially create new precedent distancing it from its history of applying to real property and only authorizing equitable remedies.

Oklahoma State Public Nuisance Opioid Lawsuit

In August 2019, Judge Thad Balkman became the first judge to hold an opioid defendant liable for creating a public nuisance under Oklahoma’s public nuisance statute, 50 O.S. 1981 § I et seq. 11  Plaintiff, the State of Oklahoma, brought the sole claim of public nuisance for Johnson & Johnson’s and two of its subsidiaries’ contributions to the opioid addiction epidemic. 12  The case was originally brought against Purdue, Teva, and Johnson & Johnson, but the state settled with other defendants before the case went to trial in May.13  Oklahoma sought over $17 billion for three years of abatement costs, but Judge Balkman instead ordered that Johnson & Johnson pay the state over $572 million, which he calculated to be the cost of the first year of a plan to abate the public nuisance caused by the opioid crisis (a number he later reduced due to a multi-million-dollar math error).14  On September 25, 2019, Johnson & Johnson appealed to the Oklahoma Supreme Court, arguing that the ruling “disregard[ed] a century of precedent.”15  As of December 2019, the appeal remains pending.

Judge Balkman’s ruling, as Johnson & Johnson pointed out in its Motion to Appeal to the Supreme Court of Oklahoma, is an “unprecedented interpretation of Oklahoma public nuisance law,” which historically tied nuisance law to property use.16  Furthermore, it undermines product liability law and violates the separation of powers by requiring Johnson & Johnson to pay millions of dollars to government programs, essentially taxing the corporation to support the government through a remedy of damages couched as an “abatement plan.”17

In his ruling, Judge Balkman provided a detailed factual history of the “opioid crisis and epidemic,” focusing in large part on the epidemic’s public health impact and the government’s failure to act.  Judge Balkman explained that Johnson & Johnson and two wholly owned subsidiaries were responsible for supplying other opioid manufacturers with active pharmaceutical ingredients to be used in opioid drugs, such as fentanyl, oxycodone, hydrocodone, morphine, codeine, sufentanil, buprenorphine, hyromorphone, and naloxone.18  But the supply alone was not what led to the nuisance: Judge Balkman also found that the defendants “embarked on a major campaign in which they used branded and unbranded marketing to disseminate the messages that pain was being undertreated and ‘there was a low risk and low danger’ of prescribing opioids to treat chronic, non-malignant pain and overstating the efficacy of opioids as a class of drug.”19  The defendant allegedly designed this campaign to target doctors and government agencies with false and misleading statements regarding opioids’ efficacy and risk of addiction in an effort to increase opioid use.20  Judge Balkman spent little time on the omission aspect of public nuisance, noting only that defendants did not train sales representatives to look for “red flags” associated with pill mills, such as long lines and people passed out in the waiting area.21

Judge Balkman’s order focused on statutory interpretation as opposed to any analysis of the common law history of public nuisance law, which was traditionally limited to interference with a plaintiff’s property.  Under the plain text of the Oklahoma statute, “a nuisance consists in unlawfully doing an act, or omitting to perform a duty, which act or omission . . . annoys, injures, or endangers the comfort, repose, health, or safety of others.”22  A nuisance “is one which affects at the same time an entire community or neighborhood, or any considerable number of persons, although the extent of the annoyance or damage inflicted upon the individuals may be unequal.”23  Judge Balkman concluded that the Oklahoma statute defining public nuisance did not contain any property-related limitation for its application.  Although Judge Balkman noted that his analysis was supported by Oklahoma Supreme Court precedent stating that “Oklahoma’s nuisance law extends beyond the regulation of real property and encompasses the corporate activity complained of here,”24 he supported his novel application of the statute with reliance on a simplistic textualist analysis, stating that “there is nothing in this text that suggests an actionable nuisance requires the use of or a connection to real or personal property.”25  Ignoring Oklahoma precedent and historic interpretation of the doctrine, Judge Balkman stated, in the alternative, that if a nuisance does require use of property, defendants had pervasively, systemically, and substantially used real and personal property, both public and private, by spreading misleading messages in homes and offices and by sales reps using the public roadways, as well as transmitting messages via cell phone and computer to invade the property of others and exacerbate the nuisance.26

Judge Balkman performed no causation analysis; the Order simply stated the defendants were a “cause in fact” of the nuisance and that there was no intervening or superseding cause.27  Given recent cases similarly invoking the doctrine in other jurisdictions, Judge Balkman’s ruling is not unprecedented, but is unlikely to survive on appeal unless the Supreme Court abandons conflicting precedent.  Furthermore, he provided no analysis as to how the “abatement” payments would be used to address the nuisance; rather, the order simply forces Johnson & Johnson to funnel various amounts of money into various government programs to be used in any manner the government chooses.

Future Applications of the Doctrine

Government plaintiffs will continue to pursue public nuisance claims to address perceived health or safety crises that the federal, state, or local governments have been unable or unwilling to solve through traditional means.  This is problematic for a number of reasons.  Courts are more readily abandoning the limits that judges in the past imposed on the doctrine’s application.  Perhaps more importantly, the recent trend in public nuisance litigation may encourage the judiciary to “solve” societal problems by usurping government responsibilities where they view the government as ineffective.  As the judge presiding over the opioid multi-district litigation pending in the U.S. District Court for the Northern District of Ohio stated, “developing solutions to combat a social crisis such as the opioid epidemic should not be the task of our judicial branch.  It’s the job of the executive and legislative branches, but like it or not we have these cases.”28  Faced with very real societal harms, the temptation to provide even legally unfounded judicial solutions is often too difficult to resist.

Notes

The post Oklahoma Opioid Ruling: Another Instance of Improper Judicial Governance through Public Nuisance Litigation appeared first on Washington Legal Foundation.

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Taking the Granston Memo to the Next Level: Early and Close Coordination with Agencies on FCA Qui Tam Actions

WLF Legal Pulse - Thu, 12/12/2019 - 4:52pm

By Jeffrey S. Bucholtz, Naana A. Frimpong, and Bethany L. Rupert. Mr. Bucholtz is a Partner with King & Spalding LLP in its Washington, DC office who, prior to joining the firm, held several senior positions in the Civil Division of the U.S. Department of Justice. Ms. Frimpong is Counsel, and Ms.Rupert is an Associate, in the firm’s Atlanta, GA office.

Under the False Claims Act (FCA), in addition to the government’s powers to intervene and take over the litigation of a qui tam action and to settle such an action, the government has the power to unilaterally “dismiss [a qui tam] action notwithstanding the objections” of a relator.  31 U.S.C. § 3730(c)(2)(A).  In early 2018, Michael Granston, a longtime career DOJ lawyer who at the time was the Director of the Main DOJ office in Washington that supervises FCA investigations and litigation nationwide, issued a memorandum to DOJ lawyers handling FCA matters that described factors for evaluating whether to exercise the government’s unilateral dismissal authority.1  Most observers understood the Granston Memo as encouraging DOJ lawyers to consider dismissal more often than DOJ generally had done in the past.  And in the nearly two years since the Granston Memo was issued, DOJ has made greater use of its dismissal authority, moving to dismiss a few dozen qui tam actions in that timeframe.

The increased use of DOJ’s dismissal authority is a welcome development not only for companies facing meritless qui tam actions but also for courts facing crowded dockets and for DOJ itself, as well as all of its client agencies throughout the government.  The impetus for the Granston Memo, in fact, was concern with the government’s own interests.  The Memo opens by noting the “record increases” in the number of qui tam actions filed in recent years—and the lack of a corresponding increase in the rate of government intervention—and laments that “[e]ven in non-intervened cases, the government expends significant resources in monitoring these cases and sometimes must produce discovery or otherwise participate.” Memo at 1.  Dismissing more cases is a way for DOJ to reduce the backlog of cases and devote its resources to those it believes are deserving.

But while the Granston Memo was a step in the right direction, the lessons of the past two years point to refinements that would further the public interest while helping the government protect its own interests.  Most notably, it has become clear that the federal agencies whose regulatory programs or contracts are at issue in qui tam actions—DOJ’s clients—have a strong stake in the appropriate use of the government’s dismissal authority because it is those agencies that will get dragged into discovery in declined actions.  To be sure, DOJ attorneys will have to devote resources to litigating those discovery issues, but discovery consumes even more client agency resources, as it’s the agency’s documents that need to be searched and produced and the agency’s personnel who need to be deposed.  And it’s the agency’s equities that are at stake when sensitive information is produced and important programs are disrupted.

The Granston Memo recognizes these client-agency equities and encourages DOJ attorneys to “consult closely with the affected agency as to whether dismissal is warranted.”  Memo at 8.  But the Memo does not specify when or how that consultation should occur.  And recent litigation involving the government’s dismissal authority has reinforced the importance of early and thorough consultation.

The Supreme Court’s 2016 Escobar decision clarified that the FCA’s materiality requirement turns on factual questions—such as how the agency responded to the defendant’s alleged violations and how that agency typically responds in similar situations.  Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 2003-04 (2016).  If a qui tam action gets past the pleading stage, answering those questions requires discovery from the agency.  There is no way to find out whether the agency knew about the underlying conduct at the time and continued paying the defendant’s claims—presumably because it believed it was receiving the benefit of its bargain notwithstanding the alleged violation—except to take discovery of the knowledgeable agency personnel.  Likewise, there is no way to know whether the agency normally denies payment in similar circumstances without taking discovery about the circumstances the agency has confronted and how it has responded.

In addition, all agree that the FCA, with its draconian remedies, is not a vehicle to litigate ordinary breach of contract claims.  See, e.g., U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 378 (4th Cir. 2008) (FCA’s reference to “false or fraudulent claim” “surely cannot be construed to include a run-of-the-mill breach of contract action that is devoid of any objective falsehood. . . . To hold otherwise would render meaningless the fundamental distinction between actions for fraud and breach of contract.”) (internal citation omitted).  In contracts for complex goods or services, conflicts routinely arise.  Experts may disagree about how best to test whether a part satisfies contractual specifications.  The contracting agency may prioritize timely delivery and may be unconcerned about a slight departure from specifications or may view an additional layer of confirmatory testing as causing delay for no good reason.  And the contracting agency often has extensive expertise and involvement in the design or production process.  If the agency views the issue as the kind of routine disagreement or debate that contracting parties work through cooperatively, that fact will come out in discovery and the qui tam action will fail.

DOJ therefore needs to engage with its client agency at the outset of its investigation to learn what the agency knew at the time about the alleged conduct at issue, how the agency views that conduct, what if any action the agency has taken in response to that conduct, and how the agency has addressed similar conduct in the past.  Before Escobar, some thought that materiality was a legal question that turned on whether, as a matter of law, the agency would have the authority to deny payment based on the alleged violation.  In that world, discovery would rarely be needed on materiality.  But Escobar holds with crystal clarity that being legally capable of influencing the agency’s payment decision is insufficient and that materiality turns on real-world facts—facts that, as such, require discovery.  See 136 S. Ct. at 2003-04.

Recent litigation confirms that proving—and defending as to—materiality will often require extensive discovery from the agency.  In U.S. ex rel. Polansky v. Executive Health Resources, Inc., No. 12-CV-4239-MMB (E.D. Pa.), the government’s decision to decline intervention did not protect it from discovery.  The government was ordered to produce over 42,000 pages of documents, including some the government had sought to withhold as privileged, and had to devote resources to litigating numerous discovery disputes with both the relator and the defendant.  Eventually, the burdens and risks of discovery led the government to exercise its dismissal authority.  See 2019 WL 5790061 (E.D. Pa. Nov. 5, 2019); see also, e.g., U.S. ex rel. Simpson v. Bayer Corp., 376 F. Supp. 3d 392 (D.N.J. 2019) (noting that “discovery remains substantially incomplete” despite three years of discovery in which government was heavily involved).

Escobar has made it much more difficult for the government to avoid intrusive and burdensome discovery by using the Touhy process.  Under agencies’ Touhy regulations, agencies claim discretion concerning whether or to what extent to provide information in response to discovery requests when the agency is a non-party.  See U.S. ex rel. Touhy v. Ragen, 340 U.S. 462 (1951).  Even before Escobar, courts rejected agencies’ assertions of discretion to decline to produce and granted motions to compel against the government in cases where the information at issue was germane to the defendant’s defense.  Although the United States is technically a non-party when it declines to intervene in a qui tam action, see U.S. ex rel. Eisenstein v. City of New York, 556 U.S. 928 (2009), courts have recognized that in such cases the government is not a typical non-party but in fact stands to benefit directly and most substantially from any recovery.  Thus, in granting motions to compel in these pre-Escobar cases, courts were clear that the government was the real party in interest and could not decline to produce documents germane to the defense while simultaneously standing to benefit from the action.  See, e.g., U.S. ex rel. Lewis v. Walker, No. 3:06-CV-16, 2009 WL 2611522, at *4 (M.D. Ga. Aug. 21, 2009); Williams v. C. Martin Co. Inc., No. 07-6592, 2014 WL 3095161, at *4 (E.D. La. July 7, 2014).

Now, after Escobar clarified the centrality of facts that will usually be uniquely in the agency’s possession, government efforts to avoid discovery should be even more resoundingly rejected.  The government, as guardian of the public interest and not just a self-interested litigant, should not try to seek treble damages and penalties from a defendant while withholding information the Supreme Court has held is central to the case.  And if the government does try, courts will likely have little patience for such efforts.  See, e.g., U.S. ex rel. Hartpence v. Kinetic Concepts Inc., No. 18-1885, 2018 WL 7568578, at *3 (C.D. Cal. July 30, 2018); Kinetic Concepts Inc. v. Noridian Healthcare Sols., LLC, No. 18-00053, 2018 WL 5905395, at *3 (C.D. Cal. June 29, 2018) (“Allowing the Government to use the deliberative process privilege to shield documents that may be directly relevant to materiality and damages would potentially permit the Government to benefit financially from a Relator’s pursuit of a False Claims Act case even when the Government itself decided to pay certain categories of claims, or was aware of the Defendant’s billing practices and knowingly paid the claims anyway.”).

In short, after Escobar, the concern about preserving government resources applies at least as much, if not more, to DOJ’s client agencies than to DOJ itself.  Agencies do not want their resources tied up with discovery in cases they believe are meritless.  And yet the Granston Memo—a document written by DOJ for a DOJ audience—does not focus on the client agency’s equities.  And the Memo does not even mention Escobar.  But if Escobar’s impact on the need for discovery from agencies in declined qui tam actions was not yet clear two years ago, it is clear now.

With the benefit of nearly two years of experience under Escobar and the Granston Memo, the time is ripe for DOJ to refine the Memo to reflect agencies’ direct stake in whether the government dismisses or merely declines, as well as agencies’ unique knowledge about what allowing the relator to proceed with the action would likely entail.  The fact that the agency whose contract or program is at issue is in the best position to know whether it believes it has been defrauded and how it has dealt with similar circumstances in the past means that the agency’s view of the merits of a qui tam action should receive deference from DOJ.  But it also means that the agency will know better than anyone what discovery would entail—what its files contain, what its personnel would say if deposed, and how burdensome, distracting, and problematic discovery would be.  As a result, DOJ should seek the agency’s input and give it great weight.

Recent litigation over the government’s dismissal authority has shown that there is virtue in making a dismissal decision early in the case.  The Granston Memo noted that a decision to dismiss would often be made at the time of declination but that “there may be cases where dismissal is warranted at a later stage.”  Memo at 8.  And in some cases, the government has drawn the ire of the court by invoking its dismissal authority later, after allowing extensive litigation to occur.  See, e.g., Polansky, No. 12-CV-4239-MMB (E.D. Pa. Sept. 25, 2019) (court scolded the government for telling the court it intended to dismiss the case, withdrawing that intention after the relator narrowed his claims, and then renewing its intent to dismiss after the relator’s narrowing proved less significant than advertised); cf. Gilead Sci., Inc. v. U.S. ex rel. Campie, No. 17-936 (Nov. 30, 2018) (after qui tam action had been in active litigation for years, government told Supreme Court, in brief opposing certiorari, that it would move to dismiss the action if certiorari was denied).  To avoid a repeat of the awkward situation the government has faced when choosing to dismiss a case later, DOJ should consult early and deeply with its client agency—both to learn whether the agency believes that the qui tam action is meritorious and to learn whether allowing the case to go forward after a declination would likely entangle the government in substantial discovery that the agency views as problematic.  Waiting until discovery has already become problematic and then trying to dismiss the case to stop the bleeding is a risky and inefficient approach for the government itself as well as for the court and for the parties.

The recent HUD-DOJ Memorandum of Understanding (MOU) on Inter-Agency Coordination in FCA matters offers a good exemplar of how things should work.2  The MOU states that “DOJ will confer with HUD in the event a party other than HUD, such as a qui tam relator . . . refers a matter to DOJ for potential FCA litigation,” specifying that such consultation will occur early, during the “investigative” phase.  MOU at 3.  And the MOU makes clear that “HUD will make known to DOJ whether and to what extent any alleged defects or violations . . . are material or not material to the agency” and that “HUD may recommend that DOJ seek dismissal of the case if HUD does not support the FCA litigation.”  Id.  The close partnership described by this MOU should be a model for other agencies and for DOJ.

The government’s job is to pursue justice and the public interest.  It’s hard to see how the public interest is served when relators clog the courts and force companies to spend millions of dollars defending cases that the government has investigated and found to lack merit.  It may have taken the government’s own ox being gored through intrusive discovery in meritless declined cases for the government to see the virtue of dismissing such cases, but this is a happy situation where the government can further the public interest while also protecting its own interests.

Notes

The post Taking the Granston Memo to the Next Level: Early and Close Coordination with Agencies on FCA <em>Qui Tam</em> Actions appeared first on Washington Legal Foundation.

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