False Claims Act Litigation Update: Bayer Decision Sheds Light on Pleading in False Claims Act Cases

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A recent win for a large company in a False Claims Act suit (a seeming rarity as of late) alleging illegal off-label promotion could provide some helpful insight to similarly situated manufacturers and support dismissals of similarly defective lawsuits. Laurie Simpson, the relator and an employee at Bayer Corporation for seven years, helped market and promote Trasylol, a prescription drug approved by the FDA for patients undergoing coronary artery bypass graft using a cardiopulmonary bypass pump to prevent excess bleeding. In Simpson’s 131-page complaint containing 30 causes of action, she alleged that Bayer violated the False Claims Act by “engaging in a campaign of concealment and disinformation concerning Trasylol’s safety and efficacy.” Specifically, Simpson’s complaint alleged that Bayer promoted Trasylol for other types of surgeries and failed to provide safety and efficacy information about those other uses. Simpson alleged that such omissions resulted in the misbranding of Trasylol under the Federal Food, Drug, and Cosmetic Act (“FDCA”).

Generally, the False Claims Act is a federal law that imposes liability on corporations who defraud governmental programs. Notably, the Act includes a “qui tam” provision, which allows individuals not affiliated with the government to file actions on behalf of the government. There are two categories of false claims upon which a relator can base a qui tam complaint: factually false claims and legally false claims. While factually false claims are false as to a matter of fact, legally false claims involve false certifications of compliance with laws or regulations that are prerequisites to payment.

The allegations Simpson presented were legally false claims because they were based on the alleged misbranding of Trayslol in violation of the FDCA. In response to Simpson’s allegations, Bayer filed a motion to dismiss Simpson’s complaint. In its motion, Bayer argued that Simpson failed to adequately plead a false claim for payment, a critical element of a False Claims Act violation. Under the False Claims Act, to adequately plead a legally false claim, Simpson had to establish that Bayer made an implied certification that Trasylol complied with the FDCA restriction against misbranding, and that such compliance with the FDCA was a “condition of payment” from the government.

The U.S. District Court for the District of New Jersey reviewed each of the government programs that Bayer allegedly defrauded (i.e., Medicare, DOD, Tricare) to determine whether the government conditioned its payments for Trasylol on the limited on-label use of the drug.  On April 11, 2014, the court granted Bayer’s motion to dismiss Simpson’s complaint concluding that Simpson’s “bare legal conclusions” did not adequately plead the existence of a condition of payment. In other words, even assuming that Bayer marketed Trasylol for purposes other than those included on Trasylol’s FDA approved label, the District Court ruled that Simpson needed to allege more to properly state a claim under the False Claims Act. The court noted that the purpose of the False Claims Act “was not designed for use as a blunt instrument to enforce compliance with all medical regulations, but rather only those regulations that are a precondition to payment.” The court’s decision can be read here. This statement by the court will surely support dismissals of other complaints with similarly defective allegations.

The attorneys at Fuerst Ittleman David & Joseph, PL will continue to monitor developments in this and similar cases. Our attorneys have extensive experience in the areas of food and drug, administrative law, qui tam, regulatory compliance, and white-collar criminal defense.  If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling (305) 350-5690. Let FIDJ show you how we can help today.

Florida Supreme Court Holds Statutory Cap on Non-Economic Wrongful Death Damages in Medical Malpractice Actions Violates the Equal Protection Clause of the Florida Constitution

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In Estate of Michelle Evette McCall, et. al. v. United States of America, SC11-1148 (Fla. 2014), the Florida Supreme Court decided the following certified question:

DOES THE STATUTORY CAP ON WRONGFUL DEATH NONECONOMIC DAMAGES, FLA. STAT. §766.118, VIOLATE THE RIGHT TO EQUAL PROTECTION UNDER ARTICLE I, SECTION 2 OF THE FLORIDA CONSTITUTION?

Between 2005 and 2006, Michelle McCall received prenatal medical care at a U.S. Air Force clinic as an Air Force dependent.  She had a healthy and normal pregnancy until the last trimester.  On February 21, 2006, Ms. McCall’s medical condition required that labor be induced immediately. During delivery, Ms. McCall lost a significant amount of blood.  Following delivery, her blood pressure began to drop rapidly and remained dangerously low.  The attending physician never checked her vital signs and instead relied exclusively on inaccurate and/or incomplete information from the attending nurse. When the treating physician finished treating Ms. McCall, he ordered an immediate blood count and, if necessary a blood transfusion.  An hour after the physician’s order, a nurse presented to draw blood. The nurse found Ms. McCall unresponsive.  Ms. McCall never regained consciousness and subsequently passed away.

The Estate of Michelle E. McCall filed a lawsuit alleging medical malpractice against the United States of America under the Federal Tort Claims Act (“FTCA”).  In its simplest form, the FTCA constitutes a limited waiver of sovereign immunity and permits a private citizen to sue the United States in federal court for torts committed by persons acting on behalf of the United States.  See 28 U.S.C. §1346(b)

(…the district courts…shall have exclusive jurisdiction of civil actions on claims against the United State,, for money damages, accruing on and after January 1, 1945, for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.).

The application of Florida Statute §766.118 (“Determination of noneconomic damages”) was triggered because FTCA “damages are determined by the law of the State where the tortious act was committed…, subject to the limitations that the United States shall not be liable for ‘interest prior to judgment or for punitive damages.’” Hatahley v. United States, 351 U.S. 173, 182 (1956).

Florida Statute §766.118 places a cap on noneconomic damages in personal injury claims arising out of medical malpractice.  For practitioners, noneconomic damages are limited to $500,000, unless the negligence results in a permanent vegetative state or death, in which case the total noneconomic damages are limited to $1,000,000.

At trial, the United States District Court for the Northern District of Florida determined that Petitioners’ economic damages totaled $980,462.40, while the noneconomic damages totaled $2,000,000 ($500,000 for Ms. McCall’s son and $750,000 for each of her parents).  Applying Fla. Stat. §766.118(2), the district court then limited the Petitioners’ recovery of wrongful death noneconomic damages to $1,000,000.

On appeal to the Eleventh Circuit, the Petitioners launched a constitutional challenge against Fla. Stat. §766.118(2) both on a state and federal level. While the Eleventh Circuit affirmed application of the statutory cap on noneconomic damages, it granted a motion filed by the Petitioners to certify four (4) questions to the Florida Supreme Court regarding Florida’s cap on noneconomic wrongful death damages in medical malpractice actions.  The Florida Supreme Court rephrased the first question as noted above and embarked on a constitutional analysis The court ultimately concluded that the remaining three (3) certified questions need not be addressed..

First, a brush up on the Equal Protection Clause.  Article I, Section 2 of the Florida Constitution states as follows:

Basic rights.—All natural persons, female and male alike, are equal before the law and have inalienable rights, among which are the right to enjoy and defend life and liberty, to pursue happiness, to be rewarded for industry, and to acquire, possess and protect property; except that the ownership, inheritance, disposition and possession of real property by aliens ineligible for citizenship may be regulated or prohibited by law. No person shall be deprived of any right because of race, religion, national origin, or physical disability.

In other words, “everyone is entitled to stand before the law on equal terms, with, to enjoy the same rights as belong to, and to bear the same burden as are imposed upon others in a like situation.”  Caldwall v. Mann, 26 So. 2d 788, 790 (Fla. 1946).

Next, the Court moved its analysis towards the rational basis test. In order to satisfy the rational basis test, a statute must “bear a rational and reasonable relationship to a legitimate state objective, and it cannot be arbitrary or capriciously imposed.”  Dep’t of Corr. v. Florida Nurses Ass’n, 508 So. 2d 317, 319 (Fla. 1987).

Ultimately, the Florida Supreme Court held that the “cap on wrongful death noneconomic damages provided in section 766.118, Florida Statute, violates the Equal Protection Clause of the Florida Constitution.”

In reaching its conclusion, the Court engaged in a detailed analysis of the alleged facts and circumstances which warranted implementation of Fla. Stat. §766.118, namely, the alleged medical malpractice insurance crisis in Florida.  The Court found that the so-called “crisis” was not, in fact, a crisis and that the alleged facts supporting such a crisis were either readily contradicted or questionable, at best. The Court stated that the available evidence failed to establish a rational relationship between a cap on noneconomic damages and the alleviation of the purported crisis.  In other words, the rational basis test had not been satisfied.  Instead, the Court noted that the cap on noneconomic damages served no purpose other than to arbitrarily punish the most grievously injured or their surviving family members.  The result:  Fla. Stat. 766.118 has now been ruled unconstitutional.

Health care providers must remain knowledgeable of the ever-changing landscape of laws and regulations affecting the field of medicine.  FIDJ, P.L. has extensive experience not only defending health care providers in negligence lawsuits, but also keeping them apprised of such changes in the law.  If we can be of assistance to you, email us at contact@fidjlaw.com  or call 305.350.5690.

Your Expectation of Privacy in Your Cell Phone is Currently Governed by the Law of the State in Which You are Arrested

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Last year the Washington State Supreme Court considered two cases addressing the expectation of privacy one has when sending a text message. On February 27, 2014, the Washington State Supreme Court ruled in two parallel 5-4 decisions that text messages are private and that law enforcement agencies must obtain a search warrant prior to reading them. The decisions can be read here and here.

The decisions stem from the arrest of two men in 2009 by Longview police after a third man, Daniel Lee, was arrested for possession of heroin. After his arrest, Police seized Lee’s cell phone and, without consent or a search warrant supported by probable cause, read an incoming text message from Shawn Hilton that read: “Hey whats up dogg can you call me i need to talk to you.” The police detective, pretending to be Lee, replied and arranged a drug deal in a parking lot. When Hilton arrived at the meeting location, police arrested and charged Hilton with attempted possession of heroin.

Police also found old text messages from another man, Jonathan Roden, on Lee’s cell phone. Again, pretending to be Lee, a Longview police detective started a new text message conversation and arranged a drug deal with Roden in a parking lot. When Roden arrived, he was arrested and charged with attempted possession of heroin. Both Hilton and Roden were ultimately convicted.

On appeal, Hilton claimed that the detectives violated his rights under Article I, section 7 of the Washington State Constitution and his Fourth Amendment right against unreasonable searches and seizures. Roden further argued that Washington’s privacy act was violated by his conviction when the police searched the text messages without a warrant. Hilton argued that text messages are the equivalent of letters, which are protected by the Fourth Amendment. In response, the State argued that there is an “inherent risk in a text message” that someone else might read it after the text message is sent. The State continued and exclaimed that privacy ends the moment the letter is delivered””the sender has no control over what happens next. The State further argued that the text messages were in “plain view” of the detective and thus qualified as an exception to Hilton’s Fourth Amendment protections.

The Washington State Supreme Court vacated Hilton’s and Roden’s convictions. Whether individuals have an expectation of privacy in the contents of the text messages under state law was an issue of first impression in Washington. Justice Gonzalez resolved these cases under the Washington State constitution, which provides broader privacy protections than the Fourth Amendment. Specifically, the Washington State Constitution “protects citizens from government intrusion into their private affairs without the authority of law.” Justice Gonzales explained that text messages can enclose the same intimate subjects as phone calls or sealed letters and even though text messages make communication “more vulnerable to invasion, technology advancements do not extinguish privacy interests that Washington citizens are entitled to hold.”

This determination by the Washington State Supreme Court is the latest in a series of rulings that have extended privacy expectations in cell phones and the content stored on them. Courts in Texas, Massachusetts, New Jersey, and Rhode Island, which have been presented with the issue of the right to privacy surrounding technology advancements, have ruled in the same fashion as the Washington State Supreme Court. Moreover, on April 29, 2014, in United States v. Wurie, the Supreme Court of the United States is due to hear arguments about whether police are allowed under the United States Constitution to search a suspect’s cell phone without a warrant while making an arrest or soon thereafter. This is a critical question. Indeed, today’s cell phones have the potential to reveal an unprecedented level of detail about an individual’s “familial, political, professional, religious, and sexual associations” because the cell phone is often carried everywhere, at all times. See United States v. Jones, 132 S. Ct. 945, 955 (2012).

Under current Florida law, during a lawful arrest police are permitted to confiscate and search a suspect’s cell phone. Florida’s Fifth District Court of Appeal held in Florida v. Glasco, 90 So. 3d 905 (Fla. 5th DCA 2012), that a cell phone is the same as a container or piece of property on the suspect, which can be searched incident to a lawful arrest. However, given these recent decisions from other states, Florida judges may reexamine the issue. Like Washington State’s Constitution, the Florida Constitution’s right to privacy provision provides greater protections than the Fourth Amendment. Specifically, Article I, section 23 of the Florida Constitution states in part that “every natural person has the right to be let alone and free from governmental intrusion into the person’s private life except as otherwise provided herein.” The Supreme Court of the United States will soon provide courts a binding answer to whether the Fourth Amendment permits the police, without obtaining a warrant or consent, to search a cell phone found on a person who has been lawfully arrested. But states, like Florida, could always provide greater protections under their respective state laws regardless of the Supreme Court’s decision in United States v. Wurie.

The attorneys at Fuerst Ittleman David & Joseph, PL will continue to monitor developments in this and similar cases. Our attorneys have extensive experience in the areas of tax, tax litigation, administrative law, regulatory compliance, and white collar criminal defense.  If you have any questions, an attorney can be reached by emailing us atcontact@fidjlaw.com or by calling 305.350.5690.

 

Complex Litigation Update: SCOTUS Allows Plaintiffs’ State-Law Class Actions Against Law Firms, Financial Firms, and Others to Proceed

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On Wednesday of last week, the Supreme Court of the United States issued a 7-2 decision affirming a Fifth Circuit ruling permitting four state-law class actions to proceed against two New York law firms and others in a matter stemming from a $7 billion Ponzi scheme orchestrated by Allen Stanford. The scheme involved the sale of bogus certificates of deposit by Stanford’s bank, Stanford International Bank, based in Antigua. Stanford was sentenced in 2012 and is serving 110 years in prison.

Investors in this scheme brought suit against two law firms, Chadbourne & Parke LLP and Proskauer Rose LLP, an insurance brokerage, Willis Group Holdings Plc, a financial services firm, SEI Investments Co, and an insurance company, Bowen, Miclette & Britt. The investors, as four sets of plaintiffs, filed civil class actions under state law contending that these defendants assisted Stanford in perpetrating the Ponzi scheme by falsely representing that uncovered securities (the bogus certificates of deposit) that plaintiffs were purchasing were backed by covered securities. The District Court dismissed these four cases under the Securities Litigation Uniform Standards Act of 1998 (the “Litigation Act” or “Act”).

The Litigation Act prohibits plaintiffs from bringing securities class actions under state law in matters in which plaintiffs claim “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 15 U.S.C. 78bb(f)(1). The Litigation Act defines a “covered security” to mean “only securities traded on a national exchange.” 78bb(f)(5)(E). The District Court held that the “Bank’s misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite ”˜connection’ (under the Litigation Act) between the plaintiffs’ state-law actions and transactions in covered securities.” The Fifth Circuit reversed that decision determining that the connection between the Bank’s misrepresentations regarding its holdings in covered securities and the fraud was too tenuous to trigger the Litigation Act. The Supreme Court agreed with the Fifth Circuit holding that the plaintiffs are not precluded for their state-law class actions under the Litigation Act.

Because the Supreme Court has previously held that “aiding and abetting” claims cannot be made under federal law, the plaintiffs in these class action suits are eager to pursue state law remedies against these law firms and other companies that had secondary roles in their transactions with Stanford. In Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), the Supreme Court held that “Section 10(b) [of the Securities Exchange Act of 1934 (”˜Exchange Act’)] does not support aiding and abetting liability stating that the “the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative or deceptive act.” The Court would not impose Section 10(b) liability on a third party that did not itself commit a deceptive act. The Court decided that knowing about the primary violation was not enough to turn a third party (like a law firm) into a violator. Further, more recently, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 153, 155, 166 (2008), the Court held that a private right of action does not apply to suits against “secondary actors” who had no “role in preparing or disseminating” a stock issuers fraudulent “financial statements.” Based on the holdings of Central Bank and Stoneridge, if the defendants in the four class actions were able to block the plaintiffs’ state-law claims, the defendants could not be held liable for their roles in Stanford’s fraudulent transactions.

The Supreme Court’s Conclusion 

Writing for the majority, Justice Breyer stated that the Court based its conclusion on five factors that it deemed supportive of the contention that “misrepresentation of a material in fact in connection with the purchase or sale of a covered security” only extends to misrepresentations that are material to the decision-making of those (other than the fraudsters) to purchase or sell a covered security (as opposed to an uncovered secured). The factors cited by the Supreme Court supporting this conclusion are:

  1. This is “consistent with the Act’s basic focus on transactions in covered, not uncovered securities.” The plain language of the Act supports this conclusion. The Act states a “material fact in connection with the purchase or sale” and the Court interprets that the “connection” here between the material fact and the purchase or sale is a “connection that matters.” There must be an impact on an individual’s choice to buy or sell a covered security, not an uncovered security.
  2. In securities cases where the Supreme Court has found there to be the requisite connection between the fraud and the purchase or sale under the Act, there have been “victims who took, who tried to take, who divested themselves of, who tried to divest themselves of, or who maintained an ownership interest in financial instruments that fall within the relevant statutory definition.”
  3. The Supreme Court viewed the Act in light of the Securities Exchange Act of 1934 and the Securities Act of 1933 regarding those engaged in securities transactions that result in the taking of ownership positions and which make it illegal to deceive an individual when she is doing so. The Court recognized that the purpose of these statutes is to protect investor confidence. Nothing in any of these statutes endeavors to protect those “whose connection with the statutorily defined securities is more remote than buying or selling.”
  4. The Supreme Court expressed wariness in applying a broader statutory interpretation than necessary as such broad interpretation of the “connection” could interfere with the various states’ efforts “to provide remedies for victims of ordinary state-law frauds.” The Court recognizes that the Litigation Act seeks to avoid that outcome, allowing the individual states authority over matters primarily of state concern.

The Defendants’ and Government’s Argument for Broad Interpretation

First, the defendants and the Government staged a precedence argument, pointing out that the Supreme Court has suggested that the phrase “in connection with” be given broad interpretation. However, the Court disagreed stating that in all cases in which the Court found the requisite connection between the misrepresentation and the sale or purchase, the security involved was “a statutorily defined ”˜security” or “covered security.’” The Court states that is could not find any case in which it ruled involving “a fraud ”˜in connection with’ the purchase or sale of a statutorily defined security in which the victims did not fit” into the relevant statutory definition.

Next, the Government expressed concern that narrowly interpreting the Litigation Act would diminish the SEC’s authority under the Securities Exchange Act, which uses the same “in connection with the purchase or sale” language. The Supreme Court disposed of this contention by stating that the authority of the SEC and Department of Justice covers all “securities,” not just those traded on national exchanges. The Court pointed out that the SEC successfully prosecuted Stanford based on his Bank’s fraudulent sales of certificates of deposit, which are “securities” even if they are not “covered securities.”

Two Justices Dissent 

Joined by Justice Alito, Justice Kennedy wrote the dissent, stating that because these investors purchased the certificates of deposit based on the false statements that these certificates of deposit were backed by covered securities there was requisite connection between the misrepresentation and the purchase or sale of a covered security. The dissent stresses that, in light of the precedent, even though those cases dealt with much less complex transactions, if the fraud depends on the purchase or sale of securities or the promise to do so, the connection is made. Therefore, these class actions under state law must be precluded by the Litigation Act. The dissent cautions that the majority opinion creates a new rule that departs from the precedent. Furthermore, agreeing with the Government, Justice Kennedy wrote that the Court’s decision will negatively impact the SEC’s enforcement authority as it is inconsistent with Congress’s intent and “casts doubt on the applicability of federal securities law to cases of serious securities fraud.”

Conclusion and Consequences

The Supreme Court held that the requisite “connection” between the materiality of the misrepresentations and the required “purchase or sale of a covered security” was not made in this case. Therefore the Litigation Act did not preclude the plaintiffs’ class action suits under state law. There is no allegation that the material misrepresentations were “in connection with” the buying or selling of covered securities. The Court held that “at most, they allege misrepresentations about the Bank’s ownership of covered securities. But the Bank is the fraudster, not the fraudster’s victim; nor is it some other person transacting in covered securities.”

The holding of this case allows these class actions based on state law against various law firms and others to go forward, widening the net of those potentially liable for the consequences of Stanford’s Ponzi scheme. Furthermore, this decision leaves questions as to the purported narrowness of the interpretation of the Litigation Act. As Ponzi schemes become more sophisticated and complex, involving varying schemes and players, it will be interesting to see how courts apply the Court’s interpretation.

Fuerst Ittleman David & Joseph, PL will be monitoring this case as it returns to the lower court, as well as the effects of this decision on subsequent cases. Our attorneys are experienced in complex litigation and would be happy to address any questions about these or similar legal issues. Please do not hesitate to contact us via email at contact@fidjlaw.com or by telephone at (305) 350-5690.

Florida Business Litigation Update: Confidential Settlements Really Need to Remain Confidential

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The vast majority of bona fide commercial cases end in settlement.  It has become a generally accepted practice in commercial practices to include a confidentiality provision in settlements so as to ensure that the parties will not discuss the contents of the settlement with anyone.  The provision is designed to truly end the dispute, preclude boasting of success, and avoid having competitors or other similarly situated litigants know the extent of the negotiated bargain.

The clauses have become so common that they are sometimes glossed over by a lawyers who then fail to counsel their clients regarding the ramifications of the agreements, or ignored by the clients in their quest to pocket the long-awaited results.  The case of Gulliver Schools, Inc. v. Snay, decided on February 26, 2014 by Florida’s Third District Court of Appeals, demonstrates the catastrophe of such a callous review. A copy of the decision is available here.

Mr. Snay brought an action against Gulliver for wrongful termination due to unlawful age discrimination.  After a year of litigation, the parties settled the dispute whereby Gulliver agreed to pay Mr. Snay back pay and damages in the total amount $90,000, plus pay for his attorneys’ fees.  The settlement agreement included a provision stating:

13. Confidentiality. . . The plaintiff shall not either directly or indirectly, disclose, discuss or communicate to any entity or person, except his attorneys or other professional advisors or spouse any information whatsoever regarding the existence or terms of this Agreement. . . A breach . . .will result in disgorgement of the Plaintiffs portion of the settlement Payments.

Not unexpectedly, Mr. Snay shared with his family that the case had been settled.  Excited for her father and unable to restrain her disdain for Gulliver, Mr. Snay’s daughter turned to Facebook and made the following post:

Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.

Gulliver did not “suck it.”  Instead, Gulliver took the steps to disgorge the payments made to “Papa Snay.”  Mr. Snay defended against the disgorgement claim by asserting that he did not disclose the terms of the agreement, rather, “[m]y conversation with my daughter was that it was settled and we were happy with the results.”  The Third District found that such a “disclosure” was a material breach of the settlement agreement:

The plain, unambiguous meaning of paragraph 13 of the agreement between Snay and the school is that neither Snay nor his wife would “either directly or indirectly” disclose to anyone (other than their lawyers or other professionals) “any information” regarding the existence or the terms of the parties’ agreement.

Gulliver Schools, Inc. v. Snay, 39 Fla. L. Weekly D457a (Fla. 3d DCA Feb. 26, 2014).

The implications of the Gulliver case are far-reaching, and the moral of the story is quite clear.  A settlement agreement will not be treated differently than any other agreement.  Confidentiality clauses should be carefully crafted to include language that the parties will be able to understand and accept.  The inclusion, scope and remedy for such a breach are all negotiated terms, and counsel should not hesitate to strike or edit unacceptable language.  Then, particular attention should be given by counsel to explain the reach of each provision of the settlement agreement.

The lawyers of Fuerst Ittleman David & Joseph, PL stand ready to answer your questions.

Florida Criminal Law Update: Florida Appeals Court Declares Strict Liability Statute Unconstitutional

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On February 16, 2014, Florida’s Fifth District Court of Appeal issued its opinion in Florida v. Thomas, affirming the decision of the Circuit Court of Orange County declaring a portion of Florida’s “Counterfeiting a Payment Instrument” statute unconstitutional as an improper strict liability statute. A copy of the Court’s decision can be read here.

The Thomas case centered around the constitutionality of a portion of Florida Statute 831.28(2)(a) which makes it a crime to merely possess, without intent, a counterfeit payment instrument. Section 831.28(2)(a) states:

It is unlawful to counterfeit a payment instrument with the intent to defraud a financial institution, account holder, or any other person or organization or for a person to have any counterfeit payment instrument in such person’s possession. Any person who violates this subsection commits a felony of the third degree, punishable as provided in s.  775.082, s. 775.083, or s. 775.084.

As the District Court explained, § 831.28(2)(a) consists of two subparts: “the first makes it unlawful for a person to counterfeit a payment instrument with intent to defraud, but the second makes it unlawful for a person simply to possess any counterfeit payment instrument.” It was this second subpart that Thomas challenged as a facially unconstitutional strict liability statute.

On appeal, the State argued that in creating the “possession” portion of the statute, it was the Legislature’s intent to make it unlawful for a person to possess a counterfeit payment instrument with the intent to defraud. However, the District Court found that such an argument was belied by the plain language of the statute. As explained by the District Court, “it may be true that the Legislature meant to include ”˜intent to defraud’ as an element of the possession offense but did not pay close enough attention to the manner in which the statute was drafted.” The District Court noted that the statute as written not only criminalizes possession with intent to defraud but also the innocent possession of a counterfeit payment instrument. Therefore, the District Court found that “[c]riminalizing the mere possession of counterfeit payment instruments criminalizes behavior that is otherwise inherently innocent and thus violates substantive due process.” However, the District Court concluded its opinion by explaining how the Legislature could correct its error: “Simply by drafting the statute to include an intent to defraud, the Legislature can accomplish its purpose without infringing on innocent or protected conduct.”

While the District Court’s decision will not ring the death knell for all strict liability offenses, the decision did reemphasize the limits placed on the Legislature by the Florida Constitution in interfering with the individual rights of Florida residents. As explained, “[w]here the individual rights at issue are not fundamental rights, the test for the constitutionality of a legislative enactment is whether the means selected by the Legislature have a reasonable and substantial relation to the object sought to be attained and shall not be unreasonable, arbitrary, or capricious.” Citing State v. Saiez, 489 So.2d 1125, 1128 (Fla. 1986). In declaring the possession portion of the statute unconstitutional, the District Court found that criminalization of the mere possession of a counterfeit check regardless of intent was an unreasonable “prohibition of innocent acts in order to reach and secure enforcement of law against evil acts.”

Fuerst Ittleman David & Joseph, PL will continue to watch for the latest developments regarding this matter. Our attorneys have extensive experience in the areas of anti-money laundering, constitutional law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Florida Business Litigation Update: Prevailing Party Attorneys’ Fees

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Contracts are negotiated to establish clear rules to govern the parties’ working relationship, and to cast foreseeability for damages resulting from a breach of these rules.  Transactional counsel are paid handsomely to scrupulously scribe the details of the parties’ agreement and to ensure the contract adequately documents the complete understanding of the parties.  Typically, contracts today include prevailing party attorneys’ fees provisions.  Thus, when the relationship sours, the parties fully appreciate the exposure of paying their own attorneys’ fees as well as their opponent if a lawsuit arising under the contract is unsuccessful.

Enter the trial lawyer and all semblance of clarity transmutes to chaos.  A breach of contract claim becomes a multi-count pleading bolstered by theories of tort, statutory violations, and common law.  Forgetting the underlying exposure for the breach of contract claim, which holds a predictable calculation, the expectation of attorneys’ fees calculations become rightfully frightening.

The recent case of Effective Teleservices, Inc. v. Smith, 39 Fla.L.Weekly D234a (Fla. 4th DCA January 29, 2014), however, returns the chaos to a blurred clarity.  In Smith, the plaintiff sued for breach of contract, statutory violations, and under a sundry of common law theories.  Only the contract and statutory theories provided for fee-shifting events.  The plaintiff prevailed on all counts and sought his fees.  At the fee hearing, the plaintiff failed to differentiate the time spent on the “fee-enabled” claims from the common law claims.  Still, over the defendant’s objection, the trial court found that the plaintiff was entitled to all of his fees because the claims were bound by common facts.

Florida’s Fourth District Court of Appeal reversed, holding, “[T]he party seeking fees has the burden to allocate them to the issues for which fees are awardable or to show that the issues were so intertwined that allocation is not feasible.”  The Smith Court then explained the concept of “inextricably intertwined”:

Claims are “inextricably intertwined” when a determination of the issues in one action would necessarily be dispositive of the issues raised in the other. Conversely, claims are separate and distinct when they could support an independent action and are not simply alternative theories of liability for the same wrong. … [T]he court must evaluate the relationship between the claims and where the claims involve a common core of facts and are based on related legal theories, a full fee may be awarded. But, where the claims are separate and distinct, fees should be apportioned accordingly. The burden remains on the movant to apportion time attributable to claims for which either contractual or statutory basis for fees exist.

Id. (internal citations omitted). A copy of the Smith decision is available here.

The lessons to be gleaned from Smith are two-fold.  First, trial lawyers need to take pains to document their time in such a manner as to enable the differentiation of time expended on each count.  Second, transactional lawyers need to be cognizant of the issue and creatively draft language to encompass all “related” causes of action, not merely causes of action for the breach of such agreement, within the prevailing party fee provision.  Stated a little differently, there remains a solid, value-added place for lawyers throughout the entire spectrum of the relationship.

For more information, please contact us at contact@fidjlaw.com or call us directly at 305-350-5690.

 

Raminfard Guilty Plea Highlights Complexity Of International Tax Compliance, Seriousness Of Violations, Importance Of Irs Offshore Voluntary Disclosure Program

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Los Angeles Businessman, David Raminfard, pleaded guilty on November 4th, 2013 in the Federal District Court in Los Angeles to conspiring to defraud the United States, the Justice Department and Internal Revenue Service-Criminal Investigation (IRS-CI) announced.

Raminfard, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel, identified in court documents only as Bank A.  The accounts were held in the names of nominees in order to keep them secret from the U.S. government.  One of the accounts was held in the name of Westrose Limited, a nominee entity formed in the Turks and Caicos Islands.  To further ensure that his undeclared accounts remained secret, Raminfard placed a mail hold on his accounts.  Rather than having his account statements mailed directly to him, Raminfard would receive them from an international accounts manager with Bank A in Israel, who brought them to Los Angeles to review them with Raminfard during meetings at a hotel.

In 2000, Raminfard began secretly using the funds in his undeclared accounts as collateral for back-to-back loans obtained from the Los Angeles branch of Bank A.  A “back-to-back” loan is a two party arrangement in which a bank advances a loan on the basis of a loan advanced by another bank in another country. In this particular case, the “back-to-back loan” was taken out at Bank A’s Los Angeles Branch secured by funds in an account located at Bank A’s Israel Branch (the “pledged account”). The pledged account in Israel was held in a certificate of deposit, and there was usually a 1% to 2% spread between the interest earned on the certificate of deposit and the interest charged on the back-to-back loan.

Raminfard used the loan money to purchase commercial real estate in Los Angeles.  By using back-to-back loans, Raminfard was able to access his funds in Israel without the U.S. Government learning about his undeclared accounts.  These loans also enabled Raminfard to claim the interest paid on the loans as a business expense on his companies’ business tax returns, while not reporting the interest earned in Israel as income on his individual income tax returns filed with the IRS.  For tax years 2005 through 2010, Raminfard failed to report approximately $521,000 in income.  The highest balance in Raminfard’s undeclared accounts was approximately $3 million.

As we have previously explained , and , federal law requires all United States persons with a financial interest in or signature authority over at least one financial account located outside of the United States, the aggregate value of which exceeded $10,000 at any time during the calendar year, to be reported to the U.S. Treasury by filing an FBAR. Failure to disclose these accounts can result in both civil and criminal liabilities. As we have further explained, the IRS has established a voluntary disclosure initiative for taxpayers who want to disclose previously undisclosed accounts and avoid being criminally prosecuted.

Consequently, using the money in an undeclared bank account exposes a person to various forms of liability, and it therefore becomes highly difficult for the U.S. person to access it from within the United States.  Back-to-back loans, then, come into the picture as a vehicle to allow the account holder in the U.S. to access the account without the federal government discovering it. However, as the Raminfard case makes clear, the United States perceives this as tax evasion and will prosecute it as such.

Raminfard is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with conspiring to defraud the United States in connection with using undeclared bank accounts in Israel to obtain back-to-back loans in the United States. He faces a potential maximum prison term of five years and a maximum fine of $250,000.  In addition, he has agreed to pay a civil penalty to the IRS in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of international tax compliance and tax litigation.  They will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.comor by calling 305.350.5690.

Florida Business Litigation Update: The Carmack Amendment Preempts Virtually Everything

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The Carmack Amendment to the Interstate Commerce Act established a uniform national policy for interstate carriers’ liability for property loss. 49 U.S.C. § 14706. Under Carmack, while a carrier is generally liable for the actual loss or injury to the property, the carrier may limit its liability to an agreed value established by a written shipper’s declaration or agreement between the carrier and shipper. In practice, virtually all goods shipped through common carrier are typically expressly valued at a price substantially less than the real fair market value of the goods shipped.

Carmack preempts otherwise available state and common law.  Like any preemption statute, the scope of what is preempted has been the subject of a great deal of litigation since Carmack’s enactment in 1906.  Early Supreme Court precedent found that Carmack’s “preemptive scope supersedes all the regulations and policies of a particular state upon the same subject … [and its] preemption embraces all losses resulting from any failure to discharge a carrier’s duty as to any part of the agreed transportation.”  Conversely, the 11th Circuit holds that claims that are “based on conduct separate and distinct from the delivery, loss of, or damage to goods escape preemption.”

Yet, consider the following scenario:  Shipper is an internationally renowned artist.  Shipper ships several original works of art, each appraised at tens of thousands of dollars, through Carrier, who declares the total shipment to be valued at $100.00.  Shipper does not receive goods. Carrier responds that the shipment was lost, and compensates Shipper for $100.00.  Carrier then internally declares the works of art to be “lost goods,” and sells the goods to a third party, who then sells the works of art to the public for its appraised value.  Shipper sues Carrier for conversion, deceptive and unfair trade practices, civil theft, and misappropriation of Shipper’s name and likeness.  Carrier argues that the lawsuit is preempted by Carmack’ limitations of liability provisions.  The question is whether Carrier’s conduct is legally “separate and distinct” from the losses to the goods covered by Carmack.

This is the fact pattern faced by Florida’s Fourth District Court of Appeals in Mlinar v. United Parcel Service, Inc., 38 Fla. L. Weekly D2542 (Fla. 4th DCA Dec. 4, 2013), a copy of which is available here. The Mlinar court analyzed a survey of Carmack cases across the federal circuits, and held that the test for determining whether the conduct is legally “separate and distinct” is “whether the claims are based on conduct separate and distinct from the delivery, loss of, or damage to goods. In other words, separate and distinct conduct rather than injury must exist for a claim to fall outside the preemptive scope of the Carmack Amendment.” Id. (emphasis in original).  The court determined that the conduct of “non-delivery of the goods,” regardless of whether that non-delivery arose from an intentional act of theft or simple negligence, is inseparable, and thus Carmack preempted the claims sounding in conversion and civil theft.  Likewise, the court found that the claim of misappropriation of Shipper’s name and likeness was preempted, because the injury, or damages, arose from the non-delivery of the goods, and thus the conduct again fell within the purview of Carmack.  Finally, the court found that the allegations of deceptive and unfair trade practices, were too “closely related to the performance of the contract,” and thus found those claims were also preempted.  The Mlinar court notes that it was compelled to find preemption because, “To hold otherwise would undermine the Carmack Amendment’s goal of creating a uniform national policy on a carrier’s liability for property loss.”

At first glance, it may appear that Carmack creates an unbalanced and unfair transactional environment between the carrier and the shipper.  However, Carmack enables the shipping industry to offer competitive pricing to enable the free-flow of interstate commerce, without fear of budgeting for unknown litigation risks typically associated with the shipment of goods.  Conversely, armed with the knowledge and predictability that the carrier has an explicit limitation of liability, the shipper may duly protect its interest by purchasing shipper’s insurance for the true value of the goods.  This essentially allows a risk-adverse shipper to pay a different, itemized price for shipping its goods. It provides for a more robust, competitive market.

It should be noted that the Mlinar court did certify a potential conflict with another decision, Braid Sales & Mktg., Inc. v. R & L Carriers, Inc., 838 So. 2d 590, 593 (Fla. 5th DCA 2003), which found that a claim of an alleged oral contract between the parties for payment of repairs, entered into after the shipment was completed, constituted a separate harm which was legally “separate and distinct” from the loss or damage to goods, and thus not preempted.  However, whether the Florida Supreme Court will accept the certification, or find that there is any conflict, is far from certain.  Still, regardless of whether the case is eventually reversed, the lessons to be gleaned from Mlinar are clear.  A shipper needs to appreciate that absent insurance, its goods are only nominally protected against a carrier’s duty to deliver the goods.  Shipper’s insurance should be carefully considered and analyzed before placing the goods in the care of a carrier.  Indeed, the added expense, which may be passed on to the end consumer, may prove to be the difference between a recoverable loss and a catastrophic loss.

For more information, please contact us at contact@fidjlaw.com or call us directly at 305-350-5690.

Litigation Update – The Electronic Loss of Privilege

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The art of communication has changed considerably over the past few years.  Rather than in-person or telephonic, the majority of communications in today’s business world are electronically transmitted.  Likewise, professional advice, such as legal or accountant-related services, is often sought and rendered electronically.

The rise of technological advances has caused a clash with foundational legal cornerstones that have been established through decades of jurisprudence.  Amongst those principles is the inviolate protection of the confidentiality between the attorney and client.  Generally speaking, as long as a client reasonably expects that the communication with his/her lawyer is made in confidence, meaning that it will not be shared with third parties, for the purposes of receiving legal advice, the communication is privileged.

With the advent of electronic communications, the question arises as to whether the client should reasonably expect that an electronic communication be free from peering third party eyes.  The question is compounded when the electronic communication is sent from a device owned or controlled by a third party, such as an employer, with no password protections or which may otherwise be monitored by a third party.  Further complicating matters is a situation where an employee communicates with his/her private counsel, on a company computer, for matters pertaining to a dispute with the company.  The courts are routinely tasked with  deciding the expectation of confidentiality in these complex cases.

This is the situation addressed by the Delaware Court in In re Info. Mgmt. Services, Inc. Derivative Litig., 2013 WL 5426157 (Del. Ch. 2013).  Drawing on the Supreme Court’s test of an employee’s expectation of privacy, the court found:

[A]n employee can have reasonable expectation of privacy in areas such as the employee’s office, desk, and files, but that the “employee’s expectation of privacy … may be reduced by virtue of actual office practices and procedures, or by legitimate regulation. … Although e-mail communication, like any other form of communication, carries the risk of unauthorized disclosure, the prevailing view is that lawyers and clients may communicate confidential information through unencrypted e-mail with a reasonable expectation of confidentiality.” [internal citations omitted].

The question thus turns to whether the client has “a reasonable expectation” to confidentiality. The court adopted the four factor test promulgated in the oft-cited In Re Asia Global Crossing, Ltd., 322 B.R. 247, 259 (S.D.N.Y.2005) decision, The Southern District of Florida has applied this test.  See Leor Exploration & Prod. LLC v. Aguiar, 2009 WL 3097207 (S.D. Fla. 2009).

to determine whether there is an expectation of confidentiality:

(1) does the corporation maintain a policy banning personal or other objectionable use, (2) does the company monitor the use of the employee’s computer or e-mail, (3) do third parties have a right of access to the computer or e-mails, and (4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies?

While no one factor is dispositive, “The question of privilege comes down to whether the [employee’s] intent to communicate in confidence was objectively reasonable.”

Courts throughout the country have applied this test, or a derivation thereof, but generally center the analysis on the company’s explicit policies on electronic communications (or lack thereof), the manner in which this policy is communicated to the employees, and enforcement of such policies.  Put simply, when the courts find an absence of corporate policies (or an absence of explicit communication of such policies), the courts will infer an expectation of confidentiality.  However, where there is an explicit corporate policy duly communicated to the employee that provides that all emails (or other electronic data) used on company computers or stored on company servers may be monitored by the corporation, there can be no reasonable expectation of privacy.

In our ever-changing world, it is critical that every corporation ensure that it has a sound and clear policy on the rights to electronic information stored or transmitted on company computers and servers.  The clarity of such a policy, duly communicated to the employees, may very well have far-reaching implications, from serving as the key to discovering, or concealing, the “smoking gun” in litigation, or perhaps uncovering, and preventing, an employee’s plan to misappropriate proprietary data to be used as a means of future competition.  Regardless, corporate policies are becoming increasingly critical to ensure compliance with corporate goals and functions.

For more information, please contact us at contact@fidjlaw.com or call us directly at 305-350-5690.