Eleventh Circuit Upholds Florida’s “Patient Self-Referral Act of 1992” as Constitutional

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On January 10, 2013, the United States Court of Appeals, Eleventh Circuit, issued a ruling upholding Floridas “Patient Self-Referral Act of 1992” (Fla. Stat. §456.05) as constitutional. The full text of the Courts ruling in Fresenius Medical Care Holdings, Inc., et. al. v. Florida Department of Health, et. al., 11-14192 (11th Cir. 2013) may be found here.

The “Patient Self-Referral Act of 1992” (the “Florida Act”) was enacted in 1992 after the Florida legislature recognized a potential conflict of interest stemming from the referral of patients by one health care provider to another health care provider in which the referring provider maintained an investment interest. Fla. Stat. §456.05(2). The Legislature noted that “these referral practices may limit or eliminate competitive alternatives in the health care services market, may result in overutilization of health care services, may increase costs to the health care system, and may adversely affect the quality of health care.” Id. The Florida Act was, therefore, implemented to regulate physician self-referrals.

Congress had already passed similar legislation. Known as Stark I (passed in 1989) and Stark II (passed in 1993) (collectively “Stark laws”), Congress sought to contain health care costs and reduce conflicts of interest inherent in the referral of Medicare and Medicaid patients to business entities in which the referring physician (or their immediate family members) had a financial interest. See 42 U.S.C. §1395nn.

Both the Florida Act and Stark laws had several exemptions to the physician self-referral bans. One such carve-out found in both the Florida Act and Stark law exempted physicians in the renal dialysis industry from the self-referral prohibition. In 2002, however, the Florida legislature repealed the renal dialysis physician exemption, while the Stark laws retained the exemption.

Following Floridas repeal of the above-noted exemption, the Florida Act was challenged by three kidney care/dialysis providers (“Appellants”) who argued before the United Stated District Court, Northern District of Florida that the Florida Act was unconstitutional because it was “(1) preempted by Federal law, (2) violative of the dormant Commerce Clause and (3) violative of substantive due process.” Appellants reason for filing the action stemmed from their desire “to use a vertically integrated business model in Florida, referring all their [End-Stage Renal Disease] patients blood work to associated laboratories after providing the patients with dialysis treatment at their clinics.”

Appellants first argued for federal preemption. Federal preemption is the principle enumerated by the U.S. Constitution (and its progeny) which states (generally) that Federal law shall trump or “preempt” state law in the event of a conflict. See U.S. Const., Art. VI., cl. 2. While the Appellants argued that the Stark laws preempted the Florida Act, the Eleventh Circuit (along with the district court) rejected the argument concluding that, inter alia, that Federal conflict preemption did not apply to Floridas more restrictive Florida Act.

Appellants next argued that the repeal served to violate the dormant Commerce Clause. The dormant Commerce Clause “empowers Congress to regulate interstate commerce.” Relevant to Appellants argument in the case sub judice, the dormant Commerce Clause serves to, inter alia, prohibit states from implementing laws or measures “designed to benefit in-state interest by burdening out-of-state competitors.” Appellants argued that the Florida Act had the practical effect of discriminating against out-of-state commerce. The Eleventh Circuit, however, found that the “law operates to burden in-state and out-of-state [End Stage Renal Disease] health care providers alike” such that the Florida Act did not violate the dormant Commerce Clause.

Appellants final argument focused on a violation of substantive due process. The Eleventh Circuit noted that, “[u]nder the rational basis standard, the law requires only that the Florida Acts prohibition on physician self-referrals be rationally related to the Florida Legislatures goal of reducing conflicts of interest, lowering health care costs, and improving the quality of health care series.” Here, the Eleventh Circuit agreed with the district court stating, “the Florida Act passes rational basis-scrutiny because, no matter how ineffective the law might actually be, it was not irrational for the Florida Legislature to conclude that the amendments to the law would accomplish the legislative objections identified in Fla. Stat. §456.053(2).”

Based on the Eleventh Circuits reasoning above, the Court affirmed the district courts entry of summary judgment in favor of the State of Florida and against the three (3) kidney care/dialysis providers deeming the Florida Patient Self-Referral Act of 1992 constitutional.

Fuerst Ittleman David & Joseph, PL will continue to monitor developments in both the Stark laws and Florida Patient Self-Referral Act of 1992. For more information, please feel free to contact us via email at contact@fidjlaw.com or via telephone at 305.350.5690.

Diamond Aircraft Piloting a Change in Floridas Attorneys Fees Law

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In Florida, in the absence of a written “prevailing party” clause in a contract or another such contractual basis for fees, prevailing civil litigants generally may recover their attorneys fees from non-prevailing parties pursuant to statutory fee provisions, such as the fees provision of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”), available here,  and Floridas offer of judgment/demand for judgment statute, available here.

Application of these statutory provisions often triggers complicated legal issues.

For example, a prevailing party in “any civil litigation resulting from an act or practice involving a violation” of the FDUTPA may recover its reasonable fees. Fla. Stat. § 501.2105(1) (emphasis added).  Thus, in civil litigation brought under FDUTPA, where the court ultimately decides that no violation of FDUTPA has resulted, because the substantive law of a different state governs the unfair trade claims, not Florida law, then the prevailing party in the action cannot recover its attorneys fees under FDUTPA, right?

Separately, because Floridas offer of judgment statute governs “any civil action for damages,” i.e., monetary relief, then the statute provides a basis for fees whenever the action involves a request for money damages, right? Fla. Stat. § 768.79(1) (emphasis added).

The answer to the foregoing questions, as with many issues within our legal system, is that it depends.

In Diamond Aircraft Industries, Inc. v. Alan Horowitch, No. SC11-1371 (Fla. January 10, 2013), slip opinion available here, upon certification by the U.S. Court of Appeals for the Eleventh Circuit. the Florida Supreme Court recently clarified these and other important attorneys fees questions with no apparent controlling law.

Diamond Aircraft involved a contract dispute between a resident of the State of Arizona (the plaintiff), who contracted to buy a jet aircraft for $850,000 from Diamond Aircraft Industries, Inc. (the defendant, a Florida corporation for jurisdictional purposes).  Diamond Aircraft failed to deliver the aircraft as contracted but offered to complete the transaction for a new purchase price of more than $1.3 million.  The sales contract contained a forum selection clause designating Florida as the exclusive venue for any disputes under the contract.

The plaintiff filed an action in state court seeking specific performance of the contract and asserting breach of contract and breach of the implied covenants of good faith and fair dealing.  The action was removed to federal court.  After removal, the plaintiff amended his complaint to assert four claims:  (1) specific performance of the contract; and, in the alternative, (2) breach of contract; (3) breach of the implied covenants of good faith and fair dealing; and (4) deceptive trade practices under FDUTPA.

Pursuant to Floridas offer of judgment statute, Diamond Aircraft served a general offer of judgment for $40,000 “to resolve all claims that were or could have been asserted . . . in the Amended Complaint.” Diamond Aircraft (slip op.) at 4 (quoting the offer of judgment at issue).  The plaintiff rejected the offer and the parties subsequently moved for summary judgment.  The trial court applied Florida law to the specific performance claims, as well as the claims for breach of contract and breach of implied covenants, finding in favor of Diamond Aircraft on all three of those claims.  With regard to the remaining deceptive trade practices claim, the court permitted the claim to proceed past summary judgment, but held that Arizona law “ not Florida law “ applied, as most of the business contacts at issue occurred in Arizona.  After a non-jury trial, the federal district court entered judgment in favor of Diamond Aircraft, the defendant.

Diamond Aircraft then moved for its attorneys fees as the prevailing party in litigation pursuant to two separate statutory bases:  (1) its offer of judgment, under Fla. Stat. § 768.79; and (2) the fees provision in FDUTPA, Fla. Stat. § 501.2105.

The district court denied the motion for fees, holding that § 768.79 was inapplicable because the amended complaint contained both an equitable claim for non-monetary relief (specific performance) and, in the alterative, a monetary claim based either on breach of contract, breach of implied covenants, or deceptive trade practices under FDUTPA.  The district court also ruled that Diamond Aircraft was not entitled to fees under FDUTPA, because Arizona law applied to the trade practices claim, but, unlike Florida law, did not contain an applicable statutory attorneys fees provision.

Diamond Aircraft appealed the district courts ruling to the U.S. Eleventh Circuit Court of Appeals. In relevant part, the Eleventh Circuit, whose opinion is available here, concluded that Florida law had not yet squarely addressed certain critical issues in dispute and it thus certified four questions to the Florida Supreme Court, addressed below.

1.      DOES FLA. STAT. § 501.2105 [FDUTPAS FEE PROVISION] ENTITLE A PREVAILING DEFENDANT TO AN ATTORNEYS FEE AWARD IN A CASE IN WHICH A PLAINTIFF BRINGS AN UNFAIR TRADE PRACTICES CLAIM UNDER THE FDUTPA, BUT THE DISTRICT COURT DECIDES THAT THE SUBSTANTIVE LAW OF A DIFFERENT STATE GOVERNS THE UNFAIR TRADE PRACTICES CLAIM, AND THE DEFENDANT ULTIMATELY PREVAILS ON THAT CLAIM?

The Florida Supreme Court in Diamond Aircraft answered this question in the affirmative, holding that the plaintiff invoked FDUTPA by filing the action, even though Florida law ultimately was held not to apply.

Among other reasons supporting its holding, the Florida Supreme Court noted the “well-established” rule that, because a statute awarding attorneys fees is in “derogation” of the common law rule (or the so-called “American Rule”) that each party must pay its own attorneys fees, the statute must be “strictly construed.” Id. (slip op.) at 7 (citation omitted).  For general background regarding the “American Rule,” see here[http://www.justice.gov/usao/eousa/foia_reading_room/usam/title4/civ00220.htm].  In contrast to the American Rule, the so-called “English Rule” for fees provides that a losing party pays the prevailing partys attorneys fees irrespective of any contractual or statutory basis for fees.  The Supreme Court also cited to various authorities, including the plain language of FDUTPA, a legislative summary of the statute, and Florida appellate decisions from the Third District Court of Appeal and the Fourth District Court of Appeal, for its conclusion that FDUTPAs attorneys fee provision applies to claims initially asserted “under” FDUTPA, even upon a subsequent determination that FDUTPA does not apply to those claims. Id. (slip op.) at 10 (citing, among other authority, Rustic Village, Inc. v. Friedman, 417 So. 2d 305 (Fla. 3d DCA 1982) and Brown v. Gardens by the Sea South Condo. Assn, 424 So. 2d 181 (Fla. 4th DCA 1983)).

The Florida Supreme Court specifically held in Diamond Aircraft that, “[b]y invoking FDUTPA and seeking redress under its remedial provisions, [the plaintiff] exposed himself to both the benefits and the possible consequences of that act’s provisions,” even if the application of the law of another jurisdiction ultimately negated the FDUTPA claim. Id. (slip op.) at 11. The court added that, “simply because FDUTPA is ultimately held to have no application and does not provide a plaintiff with a basis for recovery after the provisions of the act have been invoked does not negate a defendants status as a prevailing party in an action filed by a plaintiff under that act.” Id. (slip op.) at 12 (original emphasis) (citing Brown and Rustic Village).  In other words, a plaintiff “cannot assert and invoke the protections of [FDUTPA] by filing a legal action under its provisions, but then rely on the acts ultimate inapplicability as a shield against the application of the acts attorney’s fees provision.” Id. (slip op.) at 13.

2.      IF FLA. STAT. § 501.2105 [FDUTPAS FEE PROVISION] APPLIES UNDER THE CIRCUMSTANCES DESCRIBED IN THE PREVIOUS QUESTION, DOES IT APPLY ONLY TO THE PERIOD OF LITIGATION UP TO THE POINT THAT THE DISTRICT COURT HELD THAT THE PLAINTIFF COULD NOT PURSUE THE FDUTPA CLAIM BECAUSE FLORIDA LAW DID NOT APPLY TO HIS UNFAIR TRADE PRACTICES CLAIM, OR DOES IT APPLY TO THE ENTIRETY OF THE LITIGATION?

Having concluded that FDUTPAs fee provision did apply under the circumstances described in the previous certified question, the Florida Supreme Court concluded next that a prevailing defendant is entitled to fees only for the period of litigation until a court finds that FDUTPA does not apply to the plaintiffs claim.  Such conclusion, as clarified in Diamond Aircraft, was consistent with the decisions of other Florida appellate courts that had interpreted FDUTPA and excluded from any FDUTPA fee award those parts of an action clearly unrelated to or beyond the scope of a FDUTPA violation. Id. (slip op.) at 15-16 (citation omitted).

3.      DOES FLA. STAT. § 768.79 [FLORIDAS OFFER OF JUDGMENT STATUTE] APPLY TO CASES THAT SEEK EQUITABLE RELIEF IN THE ALTERNATIVE TO MONEY DAMAGES; AND, EVEN IF IT DOES NOT GENERALLY APPLY TO SUCH CASES, IS THERE ANY EXCEPTION FOR CIRCUMSTANCES IN WHICH THE CLAIM FOR EQUITABLE RELIEF IS SERIOUSLY LACKING IN MERIT?

The Florida Supreme Court answered both these questions in the negative.

As a threshold matter, the Diamond Aircraft court confirmed that Floridas offer of judgment statute applied in the case, because “there was no conflict of law problem, as the choice-of-law provision required the application of Florida law,” and the trial court in fact had applied the substantive law of Florida to the majority of the plaintiffs claims. Id. (slip op.) at 18.

As to the specific questions presented, the Florida Supreme Court first concluded as a general rule that Floridas offer of judgment statute does not apply to cases in which a plaintiff seeks both equitable and monetary relief and in which the defendant has served a general offer of judgment that seeks a release of all claims. Id. (slip op.) at 24-25.  It also concluded that the statute does not provide an exception to this rule for equitable claims that lack “serious merit,” or for equitable claims that are pleaded in the alternative, as “an equitable claim in the alternative to a monetary claim is still part of the same civil action.” Id. (slip op.) at 26.

In reaching those conclusions, the Florida Supreme Court left unresolved the question of whether a party could utilize the offer of judgment statute in an action involving mixed claims for monetary and non-monetary relief, where the opposing party served an offer directed specifically to the monetary claim only “ as opposed to a general offer directed to all the claims.

4.      UNDER FLA. STAT. § 768.79 [FLORIDAS OFFER OF JUDGMENT STATUTE] AND RULE 1.442 [OF THE FLORIDA RULES OF CIVIL PROCEDURE], IS A DEFENDANTS OFFER OF JUDGMENT VALID IF, IN A CASE IN WHICH THE PLAINTIFF DEMANDS ATTORNEYS FEES, THE OFFER PURPORTS TO SATISFY ALL CLAIMS BUT FAILS TO SPECIFY WHETHER ATTORNEYS FEES ARE INCLUDED AND FAILS TO SPECIFY WHETHER ATTORNEYS FEES ARE PART OF THE LEGAL CLAIM?

The Florida Supreme Court answered this question in the negative.  As noted in Diamond Aircraft, Florida Rule of Civil Procedure 1.442 implements the offer of judgment statute, and rule 1.442 was amended in 1996 to require greater detail in an offer of settlement under the statute.  Thus, as the Florida Supreme Court found in Diamond Aircraft, the procedural rule and the statute both must be strictly construed.  Because the offer of judgment at issue in Diamond Aircraft did not state whether the offer included attorneys fees, as expressly required by rule 1.442, the court found that “the offer would have been invalid and unenforceable,” even if the statute applied. Id.(slip op.) at 32.  The court also distinguished earlier cases that had been decided prior to 1996, involving the less stringent rule 1.442 prior to its amendment.

In sum, as shown in Diamond Aircraft, fee disputes after a resolution on the merits can lead to significant additional litigation between the parties.

The Florida Supreme Courts recent decision in Diamond Aircraft implicates key strategic decisions at all stages of litigation, including, for plaintiffs, whether or not to bring deceptive trade practices claims under FDUTPA, as doing so now exposes those plaintiffs to attorneys fees under Fla. Stat. § 501.2105 if the trade claims fail, especially in actions involving choice-of-law issues; and, for both plaintiffs and defendants, the manner in which demands for judgment and offers of judgment, respectively, are made under Fla. Stat. § 768.79.

Diamond Aircraft also leaves open the possibility that the Florida legislature might amend Floridas attorneys fees statutes, an issue we will continue to monitor.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex civil and criminal litigation, including international and domestic business disputes and trade cases.  Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

Say Today, Pay Tomorrow: Florida Court Refuses to Enjoin Defamation

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Bob and Sue were once passionately in love. Until Bob decided he wasnt. Sue did not like being jilted one bit. So, Sue took her revenge through the social media, publishing fabricated stories and tomes about Bob. Sue was so engrossed with her rejection that she took the liberty of writing a tell-all book about Bobs transgressions, taking great pains to avoid any strain of truth.

When Bob found out about the imminent publication of the phony “tell-all” tale, he demanded that Sue “cease and desist” with her defamatory attacks through the social media and her soon-to-be published book. Hell-bent on revenge, Sue refused.

What can Bob do to put an immediate stop to the vicious attacks on his good name and reputation? The recent Fourth District decision of Vrasic v Leibel, 38 Fla. L.Weekly D106A (Fla. 4th DCA January 9, 2013), answered this very question “ very likely nothing. Succinctly, absent special circumstances, Florida courts will not enjoin defamatory speech. A copy of the decision is available here.

To convince a court to enter the extraordinary remedy of injunctive relief, a party most demonstrate: (a) a clear legal right to the relief sought; (b) a likelihood of immediate and irreparable harm because of the unavailability of an adequate remedy at law; (3) a substantial likelihood of success on the merits of its claims; and (4) that the relief sought herein is in the publics interest. The ironically titled Leibel court explained that injunctive relief is not a remedy available under Florida law to proscribe defamatory speech

The Leibel court reasoned a moving party in a defamation case generally cannot ever meet the necessary elements to enable the court to enter the pre-judgment relief. First, the moving party in a defamation case typically has “an adequate remedy at law.” Specifically, the moving party is seeking an award of “damages,” and thus equitable relief is not available.

More importantly, the Leibel court reiterated that “a temporary injunction directed to speech is a classic example of prior restraint on speech triggering First Amendment concerns,” and that “prior restraints on speech and publication are the most serious and the least tolerable infringement on First Amendment rights … and protection against prior restraints on speech extends to both false statements and to those from which a commercial gain is derived.” Thus, public policy will not allow free speech, regardless of veracity, to be restrained.

All is not lost for Bob. First, like virtually every facet of law, exceptions apply. The Leibel court indicated that under special circumstances, an injunction will issue. Specifically, an injunction may be issued when the defamation “is made in the furtherance of the commission of another tort,” and the movant proves “special harm.” For example, in the context of slanderous words made by a business competitor in the course of competition, which ultimately rose to the level of tortious interference with an advantageous business relationship, the defamed victim may prove that the slanderous or libelous words not only injured the partys reputation, it caused a loss of business which was “incalculable.” Thus, in the limited circumstance of commercial defamation coupled with another tort, such as tortious interference, the courts are more inclined to restrain prior speech in order to save a business from imminent losses caused by the defamatory conduct.

Bob, of course, has yet another option. Proceed with his lawsuit to collect on the money damages caused by Sues defamation. While the Courts will let Sue say what she wants today, she will most certainly pay for her defamatory words tomorrow.

Ninth Circuit Interprets Fifth Amendment’s “Foregone Conclusion” Exception in IRS Summons Enforcement Case

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On January 8, 2013, the United States Court of Appeals for the Ninth Circuit affirmed the decision of the U.S. District Court for the Northern District of California in the case of United States v. Sideman & Bancroft LLP.  A copy of the slip opinion is available here.

The facts of the case are as follows:

A taxpayer was under investigation by the Criminal Investigation Division of the Internal Revenue Service.  As part of that investigation, the IRS obtained a search warrant to locate the taxpayers tax documents. On October 13, 2010, the IRS executed the search warrant, looking for the documents in taxpayers residence, business, and car. The IRS failed to locate the documents while executing the search warrant but did find references to the taxpayers accountant.  The IRS then contacted the accountant who indicated that the taxpayer had given her tax documents.  The accountant explained that she no longer had the documents as she had delivered them to the taxpayers civil tax attorney.  The IRS subsequently contacted the tax attorney who informed the IRS that he had given the documents he received from the accountant to the taxpayers criminal tax attorney.

The IRS then drafted a summons to obtain the records from the taxpayers attorneys. The IRS described the documents based on the detailed description of the documents provided to the IRS by the accountant.  On October 27, 2010, the IRS issued a summons to the taxpayers tax attorneys seeking the tax documents turned by the accountant.

The taxpayers tax attorneys refused to produce the documents because, according to the tax attorneys, the production would violate the taxpayers Fifth Amendment rights. In general, the Fifth Amendment prohibits a criminal defendant from being forced to testify against himself, and it is well settled that that this protection extends not only to oral questioning but also applies to prevent an individual from having to produce documents if the act of production itself would be testimonial. This protection also extends to prevent an individuals attorney from being compelled to produce documents if that production would violate the individuals Fifth Amendment rights.

In response, the IRS filed a petition in the Northern District of California seeking enforcement of the summons. The district court granted the IRSs petition to enforce, finding that the summonsed documents fell within the “foregone conclusion” exception to the Fifth Amendment. This exception generally provides that if it is a “foregone conclusion” that records exist and are possessed by a person, producing them in response to a subpoena is not sufficiently testimonial to merit Fifth Amendment protection.

On appeal, the taxpayer relied on the case of Fisher v. United States, 425 U.S. 391 (1976), available here, where the Supreme Court explained that where an individual transfers documents to his or her attorneys to obtain legal assistance in tax investigations, those documents, “if unobtainable by summons from the client, are unobtainable by summons directed to the attorney by reason of the attorney-client privilege.”

However, the Fisher court also held that “where Ëœ[t]he existence and location of the papers are a foregone conclusion and the taxpayer adds little or nothing to the sum total of the Governments information by conceding that he in fact has the papers[,] . . . enforcement of the summons does not touch upon constitutional rights.” In this case, based on the information provided by the taxpayers accountant to the IRS, the Ninth Circuit noted that the District Court found the IRS had precise knowledge of the location of the boxes containing folders and the documents, and knew with “reasonable particularity” the existence and the tax attorneys possession of the taxpayers tax records prior to issuing the summons. Thus, the Ninth Circuit ruled that the district court correctly applied the “foregone conclusion” exception and affirmed its decision.

Among other things, this case teaches that disclosures of information by accountants and lawyers to the IRS during the course of a criminal investigation may negatively impact a taxpayers case.  Taxpayers, accountants, and attorneys must all be diligent in protecting and preserving claims of privilege against the Government.

The attorneys at Fuerst Ittleman David & Joseph have extensive criminal and civil tax litigation experience including petitions to quash IRS summons and petitions to quash grand jury subpoenas.  You can contact us by email at contact@fidjlaw.com or by calling us at 305.350.5690.

Eleventh Circuit Holds Fair Debt Collections Act Requires That District Court Adjudicate Any Contested Ownership Interests In Property Subject To A Writ Of Execution

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In addition to the criminal penalties which stem from a fraud based convictions, a court may also order a convicted defendant to pay restitution. “The purpose of restitution . . . , however, is not to punish the defendant, but to make the victim whole again by restoring to him or her the value of the losses suffered as a result of the defendant’s crime.” United States v. Newman, 659 F.3d 1235, 1241 (2011). The Fair Debt Collection Procedure Act (“FDCPA”), 28 U.S.C. §§ 3001-3015, provides the exclusive means for the United States to obtain a satisfaction of a judgment in a criminal case that imposes restitution.

Pursuant to the FDCPA, one of the means the United States may use to satisfy a judgment is to obtain a writ of execution. See 28 U.S.C. § 3203.  However, issues often arise when the government attempts to obtain a writ of execution and levy co-owned or jointly-owned property. On November 29, 2012, the United States Court of Appeals for the Eleventh Circuit issued its opinion in United States v. Duran, et al., No. 12-2227 (11th Cir. Nov. 29, 2012),  holding that under the FDCPA a District Court must determine any contested ownership interests in property subject to a writ of execution.

In May 2011, Lawrence Duran pled guilty to conspiracy to defraud Medicare. In addition to a sentence of 50 years imprisonment, Mr. Duran was also ordered to pay $87 million in restitution to the United States. On October 19, 2011, the United States applied for a writ of execution against an apartment in New York to partially satisfy the judgment. Within its writ, the Government alleged that Mr. Duran had “possession, custody, or control” and “a substantial nonexempt interest” in the apartment. Opinion at 3. Based on these representations, the clerk issued a writ of execution on the apartment ordering the United States Marshal to satisfy the judgment against Mr. Duran by “levying on and selling” the apartment. Id.

However, prior to Mr. Duran being sentenced, he and his wife Carmen divorced. As part of the divorce settlement, Carmen was given sole title to the apartment which was the subject of the writ. As a result, on November 17, 2011, Carmen Duran moved to dissolve or stay the writ of execution arguing that the United States could not levy the apartment to satisfy the restitution judgment against her ex-husband because he lacked any ownership interest in the residence. Additionally, Mrs. Duran argued that the levy was improper because the Government failed to provide her with any notice of the issuance of the writ. Instead, the Government only provided service to the parties to the criminal proceeding. The District Court denied Mrs. Durans motion on the basis that it lacked jurisdiction to make a ruling on her claims of ownership. Instead, the District Court found that the proper forum for such a dispute would be New York State court.

In vacating and remanding the District Courts decision, the Eleventh Circuit engaged in a step-by-step analysis of the requirements and obligations which must be satisfied in order to levy property with disputed ownership. First, the Court noted that the United States may levy “all property in which the judgment debtor has a substantial nonexempt interest.” Opinion at 6.

However, the Court noted that the FDCPA limits the authority of the United States to levy against jointly-owned property. Pursuant to 28 U.S.C. § 3010 (a), “[c]o-owned property shall be subject to execution to the extent such property is subject to execution under the law of the State in which it is located.” Additionally, “with regard to levying against property under a writ of execution, Ëœco-owned property is subject to execution only to the extent such property is subject to execution under the law of the State in which it is located.” Opinion at 6 (citing 28 U.S.C. § 3203(a)).

As to notice, the Court went on to find that 28 U.S.C. § 3202 requires that the United States serve a copy of the notice on all co-owners and any person with an interest in the property prior to the taking. More importantly, the Court noted that the burden is on the Government to make a “diligent inquiry” to determine who may be an interested party or co-owner. Opinion at 6.

Finally, the Court found that the FDCPA requires the District Court to adjudicate any contested ownership interests in property subject to a writ of execution. As explained by the Eleventh Circuit:

The [FDCPA] provides that the United States may levy only property in which a judgment debtor has a “substantial nonexempt interest.” To that end, the district court must determine whether the debtor has any ownership interests in the property, and the district court must determine the ownership interests of any person who moves to dissolve or modify any writ.

Opinion at 7 (internal citation omitted). Thus, because the district court both failed to determine whether Mr. Duran had a substantial nonexempt interest when the United States levied the property, and failed to determine the respective ownership interests between Mr. and Mrs. Duran in the property subject to the writ of execution, the Eleventh Circuit found that the District Court erred in refusing to adjudicate Carmens motion to dissolve. As such, the Eleventh Circuit vacated the District Courts order and remanded. The Eleventh Circuit instructed the District Court to determine the respective ownership interests, if any, of Mr. and Mrs. Duran in the apartment when the United States obtained the writ of execution and whether Mr. Duran had a “substantial nonexempt interest” in the apartment that the Government could levy.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive civil and criminal litigation experience before the U.S. District Courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. Circuit Courts of Appeal. You can contact us by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.

Switzerland’s Oldest Bank, Wegelin & Co., Pleads Guilty to Tax Violations, Agrees to Pay $74 Million to the United States

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On January 3, 2013, the United States Attorneys Office for the Southern District of New York announced that Switzerlands oldest bank, Wegelin & Co. (“Wegelin”), has pled guilty “to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and the income generated in these accounts from the Internal Revenue Service (the ‘IRS’).”  The plea agreement is available here, and the indictment charging Wegelin with violating 18 U.S.C. 371 (commonly referred to as a “Klein conspiracy”) is available here

As the press release, indictment, and plea agreement reveal, Wegelin pled guilty to conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret Swiss bank accounts and the income generated in these accounts from the Internal Revenue Service (the “IRS”). One of the managing partners of Wegelin, Otto Bruderer, appeared on behalf of the bank to enter the guilty plea before U.S. District Judge Jed S. Rakoff. This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea by a foreign bank to tax charges.

As part of its guilty plea, Wegelin agreed to pay approximately $20 million in restitution to the IRS and a $22.05 million fine. In addition, Wegelin agreed to the civil forfeiture of an additional $15.8 million, representing the gross fees earned by the bank on the undeclared accounts of U.S. taxpayers. Together with the April 2012 forfeiture of over $16.2 million from Wegelins correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million.

Publicly available documents detail the manner by which Wegelin violated U.S. law:

  • Opening and servicing undeclared accounts for U.S. taxpayer-clients in the names of sham corporations and foundations formed under the laws of Liechtenstein, Panama, Hong Kong, and other jurisdictions for the purpose of concealing some clients identities from the IRS;
  • Accepting documents that falsely declared that the sham entities were the beneficial owners of certain accounts, when in fact the accounts were beneficially owned by U.S. taxpayers, and making them part of Wegelins client files;
  • Permitting certain U.S. taxpayer-clients to open and maintain undeclared accounts at Wegelin using code names and numbers to minimize references to the actual names of the U.S. taxpayers on Swiss bank documents;
  • Ensuring that account statements and other mail for U.S. taxpayer-clients were not mailed to them in the United States;
  • Communicating with some U.S. taxpayer-clients using their personal email accounts to reduce the risk of detection by law enforcement; and
  • Issuing checks drawn on, and executing wire transfers through, its U.S. correspondent bank account for the benefit of U.S. taxpayers with undeclared accounts at Wegelin and at least two other Swiss banks. In so doing, Wegelin sometimes separated the transactions into batches of checks or multiple wire transfers in amounts that were less than $10,000 to reduce the risk that the IRS would detect the undeclared accounts.

As a result of its guilty plea and fines, Wegelin has  announced that it will “cease to operate as a bank.”
This case demonstrates that the U.S. Department of Justice is serious about punishing foreign banks that facilitate tax evasion by enabling U.S. taxpayer to avoid their income tax obligations.

The attorneys at Fuerst Ittleman David & Joseph anticipate that the Wegelin case will be just the first in a string of prosecutions of foreign banks.  Further, we anticipate that the U.S. Department of Justice will continue to be active in prosecuting those individuals that hide money in foreign banks, fail to report their foreign holdings as required by the Bank Secrecy Act, and fail to properly report and pay the correct amount of tax due and owing to the IRS.
The attorneys at Fuerst Ittleman David & Joseph have extensive experience litigation criminal and civil tax cases before the U.S. District Courts, the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. Courts of Appeal.  You can contact us by email at contact@fidjlaw.com or by calling us at 305.350.5690.

United States v. Caronia: Second Circuit Rules Manufacturers Cannot Be Criminally Prosecuted for Off-Label Promotion of Drugs Under FDCA

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On December 3, 2012, the United States Court of Appeals for the Second Circuit issued a landmark decision in United States v. Caronia, holding that “the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.” In its opinion, available here, the court rejected the Governments interpretation of the FDCA as prohibiting manufacturer promotion of off-label uses and held that such a prohibition on manufacturers speech is an unconstitutional violation of the First Amendment. This decision is significant because it could change the way the FDA continues to regulate drugs under the misbranding and adulteration provisions of the FDCA.

Regulatory Framework

Under 21 U.S.C. § 355(a) of the FDCA, a drug must be approved by the FDA for specific use prior to being distributed into interstate commerce. Once the FDA approves a drug for distribution, physicians can prescribe the drug for both FDA-approved and unapproved (or “off- label”) uses. Courts and the FDA have long recognized the public value in allowing physicians to, in their best judgment, prescribe drugs for off-label use when in the best interest of the patient.

According to the FDA, the FDCA permits off-label prescription by physicians but does not allow “misbranding” by manufacturers through off-label promotion. The FDA has interpreted off-label promotion to be misbranding, stating that “[a]n approved drug that is marketed for an unapproved use (whether in labeling or not) is misbranded because the labeling of such drug does not include Ëœadequate directions for use.” (See FDAs Draft Guidance for Industry here.) It is important to note, however, that the FDCA and its associated regulations do not expressly prohibit the “promotion” or “marketing” of drugs for off-label use.

Factual Background

Alfred Caronia, an employee of Orphan Medical, Inc. (“Orphan”), now known as Jazz Pharmaceuticals, was found guilty of conspiracy to introduce a misbranded drug into interstate commerce in violation of the FDCA. Orphan manufactured the drug Xyrem, a central nervous system depressant, which contained gamma-hydroxybutryate (“GHB”), otherwise known as the “date rape drug”. Orphan obtained FDA approval for Xyrem for two indications: 1) to treat narcolepsy patients who experience cataplexy and 2) to treat narcolepsy patients with excessive daytime sleepiness. Due to the serious safety concerns related to the use of Xyrem, the FDA required Orphan to use a “black box” warning on its label stating that the drugs safety and efficacy were not established in patients under 16 years of age.

Mr. Caronia was hired by Orphan as a Specialty Sales Consultant to promote Xyrem. Under Orphans procedures, sales consultants were not permitted to respond to questions regarding the off-label use of Xyrem. Instead, sales consultants were required to fill out “medical information request forms” and Orphan would send information to the inquiring physicians. Any physician employed by Orphan as a promotional speaker, however, was permitted to answer off-label use questions. In 2005, the federal government launched an investigation of Orphan and Dr. Peter Gleason, a physician promotional speaker. The federal governments investigation was specifically focused on the off-label promotion of Xyrem. With the assistance of a government cooperator, who posed as a prospective Xyrem customer, the federal government audio-recorded Mr. Caronia and Dr. Gleason promoting Xyrem for unapproved uses. Specifically, Mr. Caronia was recorded as promoting Xyrem for use in the treatment of muscle disorders, chronic pain, and Fibromyalgia, as well as for treatment in patients under age sixteen. Xyrem was not approved for use in the treatment of these conditions or in patients under the age of sixteen. As a result of these statements, Mr. Caronia was charged and convicted with conspiracy to introduce and introducing a misbranded drug into interstate commerce in violation of 21 U.S.C. §§ 331(a) and 333(a)(2). Mr. Caronia appealed, arguing that the misbranding provisions of the FDCA prohibit off-label promotion, and therefore unconstitutionally restrict speech.

U.S. v. Caronia: Decision and Legal Rationale

The question before the Second Circuit Court of Appeals was whether the governments prosecution of Mr. Caronia under the FDCA for promoting an FDA-approved drug for off-label use was constitutionally permissible. In a 2-1 decision, the court found that “a conviction obtained under the governments application of the FDCAwould run afoul of the First Amendment” and vacated Mr. Caronias criminal conviction. In reaching its decision, the court relied heavily on the reasoning of the United States Supreme Court in IMS v. Sorrell. In that case, the Supreme Court first held that “[s]peech in aid of pharmaceutical marketingis a form of expression protected by the Free Speech Clause of the First Amendment.” In reaching this conclusion, the Court engaged in a two-step inquiry. First, the court considered whether the government regulation restricting speech was content and speaker-based. Second, the Court considered whether the government had shown that the restriction on speech was consistent with the First Amendment under the applicable level of scrutiny. The Court determined that because the statute set forth content- and speaker-based restrictions, it was subject to heighted scrutiny. Specifically, the Court held that the law, which prohibited pharmaceutical companies from using prescriber-identifying information for marketing purposes, disfavored speech with a particular content (marketing) when expressed by certain disfavored speakers (pharmaceutical manufacturers). Therefore, because “the creation and dissemination of information are speech within the meaning of the [Constitution],” the Supreme Court held that the Vermont law unconstitutionally restricted speech.

In reaching its decision in U.S. v. Caronia, the Second Circuit, like the Supreme Court in IMS v. Sorrell, engaged in a two-step inquiry: 1) whether the government regulation restricting speech was content-and speaker-based; and 2) whether the government had shown that the restriction on speech was consistent with the First Amendment under a heightened level of scrutiny. First, the court found that the governments interpretation of the FDCAs misbranding provisions as prohibiting off-label promotion is content-based because it distinguishes between “favored speech” and “disfavored speech” on the basis of ideas. Specifically, the court found that under the governments interpretation of the FDCA, speech about government-approved use of drugs is permitted, while certain speech about the off-label use of drugs is prohibited. Second, the court found that the governments regulation restricting speech only targeted one kind of speaker (pharmaceutical manufacturers), while allowing others to speak freely without restriction. Under the FDCA, off-label prescriptions and drug use are legal, which means that physicians and academics, for example, can speak about off-label use without consequence, while the same speech is prohibited when delivered by pharmaceutical manufacturers. The FDAs “construction Ëœthus has the effect of preventing [pharmaceutical manufacturers]”and only [pharmaceutical manufacturers]”from communicating with physicians in an effective and informative manner.” Therefore, the governments construction of the FDCAs misbranding provisions is content- and speaker-based, and subject to heightened scrutiny under Sorrell.

The court then examined the constitutionality of the governments restriction on commercial speech under the test set forth in Central Hudson Gas & Electric Corp. v. Public Service Commission. In applying the Central Hudson test, the court determined that the governments regulation of Mr. Caronias off-label promotion is unconstitutional because it does not directly advance the governments interest in drug safety and public health and is more extensive than necessary to achieve those interests.

The opinion explained that because the FDA contemplated and accepted off-label prescription and drug use as part of its regulatory framework, “it does not follow that prohibiting the truthful promotion of off-label drug usage by a particular class of speakers would directly further the governments goals” of preserving the FDAs drug approval process and reducing patient exposure to unsafe and ineffective drugs. Moreover, the court explained that selectively prohibiting manufacturer commercial speech “paternalistically” interferes with the ability of physicians and patients to receive treatment information, which could “inhibit, to the publics detriment, informed and intelligent treatment decisions.” Therefore, the governments construction of the FDCA “provides only ineffective or remote support for the governments purpose” because it “essentially legalizes the outcome”off-label use”but prohibits the free flow of information that would inform that outcome.”

Moreover, the court found that the governments construction of the FDCA “to impose a complete and criminal ban on off-label promotion by pharmaceutical manufacturers is more extensive than necessary to achieve the governments substantial interests” because other, less speech-restrictive alternatives are available. For example, according to the Second Circuit, the government could create other limits, such as ceilings or caps on off-label prescriptions to minimize off-label use or to address manufacturer evasion of the drug approval process. Alternatively, the government could further develop guides to help physicians and patients differentiate between misleading and false promotion, exaggerations and embellishments, and truthful or non-misleading information. Lastly, the court suggested that the government could even prohibit off-label use altogether if the use of off-label drug use is exceptionally concerning.

The court did limit the scope of its decision: “Our conclusion is limited to FDA-approved drugs for which off-label use is not prohibited, and we do not hold, of course, that the FDA cannot regulate the marketing of prescription drugs.”

Because the First Amendment mandates that the regulation of speech “be a last”not first”resort,” the court held that the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech that promotes the lawful, off-label use of an FDA-approved drug. In its opinion, the court also explained that it construed the misbranding provisions of the FDCA as not prohibiting or criminalizing truthful promotion of off-label usage.  For these reasons, the court vacated Mr. Caronias criminal conviction and remanded the case to the district court.

At present, the U.S. v. Caronia decision is only binding on courts within the jurisdiction of the Second Circuit. However, we expect the government to petition for a rehearing or rehearing en banc in the Second Circuit, or for writ of certiorari to the United States Supreme Court. Because it is highly unlikely that the government will do nothing and simply allow the decision to stand, the constitutionality of off-label promotion of approved drugs is far from resolved, even in the Second Circuit. This decision is one that favors members of the pharmaceutical and life sciences industries; however, it remains unclear how, or whether, other courts will join the Second Circuit in finding that manufacturer off-label promotional speech warrants protection under the First Amendment.

Fuerst Ittleman David & Joseph will continue to monitor any developments in the regulation of off-label promotion of FDA-approved products. For more information, please feel free to contact us via email at contact@fidjlaw.com or via telephone at 305.350.5680.

Kirtsaeng v. John Wiley & Sons:

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U.S. Supreme Court Addresses the First Sale Doctrines Applicability to Goods Produced and Manufactured Abroad

On October 29, 2012, the Supreme Court heard oral arguments in Kritsaeng v. John Wiley & Sons. The outcome of this case has very important implications for consumers as well as discount sellers and online re-sellers alike such as Amazon, EBay, Google, and Costco. The final decision could also reshape courts interpretation of the “First Sale Doctrine,” the legal principle that “permits the owner of a lawfully purchased copy of copyrighted work to resell it without limitations imposed by the copyright holder.”

The Kirtsaeng Case:  Factual and Procedural Overview

Supap Kirtsaeng moved to the United States from Thailand in 1997 to pursue an undergraduate degree in Mathematics at Cornell University. Upon completion, Kirtsaeng later moved to California to pursue a doctoral degree. To help fund the cost of his education, Between 2007 and September 8, 2008 Kirtsaeng operated a resale text book business.  His friends and family members would ship him foreign edition textbooks printed by John Wiley & Sons Asia division. Kirtsaeng would then sell these textbooks on commercial websites in the United States such as EBay and Amazon.

What many consumers may not know is that “foreign edition” textbooks; i.e., textbooks designed to be sold and used outside of the United States, are often identical in content to the U.S. editions, but retail for prices that are as much as 75% less.  American publishers will produce these international versions because students in foreign countries often cannot afford to pay the same prices as their American counterparts.

It is estimated that Kirtsaeng made anywhere between $900,000 and $1.2 Million in revenues and $100,000 in profits from secondary market sales of these text books.  In response, the publishing giant Wiley filed a copyright infringement law suit against Kirtsaeng in the United States District Court for the Southern District of New York. The District Court ultimately found Kirtsaeng liable for willful copyright infringement and imposed $600,000 in damages.

Kirtsaeng subsequently appealed the decision to the United States Court of Appeals for the Second Circuit arguing that pursuant to the first sale doctrine, Wiley lost its right to control resale of the books once they were legally purchased by his relatives in Thailand.

On appeal, the threshold question was whether the Copyright Act protections for copyright holders applied to goods produced and purchased outside of the United States, and subsequently resold in the United States without the copyright holders permission.  In its analysis of the statue, the Second Circuit looked to 17 U.S.C. §602(a)(1) and 17 U.S.C. §109(a) which both give somewhat conflicting views on the copyright holders protections.  On the one hand, Section 602(a)(1) provides that “[i]mportation into the United Sates,

without the authority of the owner of copyright under this title, of copiesof a work that have been acquired outside of the United States is an infringement of the exclusive right to distribute copies” On the other, 17 U.S.C. §109(a) “ the codification of the “first sale doctrine” “ provides that “the owner of a particular copylawfully made under this titleis entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”

In attempts to resolve this conundrum, the Second Circuit looked to the Supreme Courts decision in Quality King Distributors, Inc. v. Lanza Research International, Inc. In that 1998 case, Lanza Research International, a California distributor, sold its hair care products both internationally and domestically, but charged foreign distributors significantly lower prices than domestic distributors. Quality King took advantage of these cost savings by purchasing shipments of Lanzas products from one of Lanzas foreign distributors and re-exporting the products to the United States for re-sale. Similar to Wiley in the Kitrsaeng case, Lanza made claims that Quality Kings operation violated its exclusive rights to distribute and reproduce the copyrighted material in the United States. In an unanimous opinion, the Quality King court held that Section 109(a) limited the scope of Section 602(a)(1)s exclusive rights provisions, and that resale by a lawful owner is not an unauthorized importation. Thus, the first sale doctrine was indeed applicable, and the copyright holder, Lanza, could not prevent re-importation and resale of the products that it lawfully sold to its foreign distributors.

However, as the Second Circuit noted in the Kirtsaeng decision, the Quality King holding was distinguishable because there, the copyrighted items in question had all been manufactured in the United States. It is arguable whether Quality Kings dicta suggested that copyrighted material manufactured abroad was not subject to the first sale doctrine. But Justice Ruth Bader Ginsburgs concurrence in that case squarely stated that “I join the Courts opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”

Ultimately, the Second Circuit ruled in favor of Wiley. In its decision, the Second Circuit interpreted Section 109 (a)s phrase Ëœlawfully made under this Title to apply exclusively to

copies that are made in territories where the Copyright Act is law and not to foreign-manufactured works. The Second Circuit did however note the difficulty of deciphering the ambiguous language of the statues, and noted that its interpretation may be incorrect.  In response to the unfavorable decision, Kirtsaeng filed a petition for writ of certiori which was granted on April 16, 2012 and is now before the United States Supreme Court. This will not be the first time the United States Supreme Court has addressed the issues presented in the Kirtsaeng matter.

In 2010, the United States Supreme Court addressed this issue in Omega S.A. v. Costco Wholesale Corp.  In that case, Costco obtained watches with Omegas copyrighted design from the grey market.  Omega manufactured its watches in Switzerland and sold the watches through its network of authorized distributors abroad. Third parties purchased the watches and subsequently sold them Costco.  Costco then sold these watches domestically.  At no point did Omega authorize the importation of the watches into the U.S nor did it authorize Costcos resale.

In a 4-4 split decision in which Justice Elena Kagan recused herself, the Court was unable to come to a conclusion as to where it stood on the issue; therefore, it was obligated to affirm the lower courts decision which maintained that the first sale doctrine does not apply to items manufactured overseas unless they were previously imported and sold in the United States with the copyright holders permission.

Consequences of a Kirtsaeng Decision in Favor of Wiley

Legal commentators are hopeful that the ruling on the Kirtsaeng v. Wiley matter will provide a final answer on the issue of the first sale doctrine as it applies to foreign-produced items. While the Kirtsaeng case in particular deals with textbooks, the holding with respect to the applicability of the first sale doctrine to products produced outside of U.S. borders will have tremendous effects on consumer sales and trade. Many of the most frequently purchased items domestically are manufactured abroad and have logos, packaging, or component parts that are subject to copyright laws.  As such, global resellers and e-commerce sites may have to make major adjustments to their operations if the Court rules in Wileys favor.

On a broader scale, if the Supreme Court follows Wileys proposed interpretation of the first sale doctrine, another result may be an increase in the economic cost of producing goods.  As Judge Garvan J. Murtha of the Second Circuit wrote in his dissent in Kirtsaeng, “Granting a copyright holder unlimited authority to control all commercial activities involving copies of

her work would create high transaction costs and lead to uncertainty in the secondary market.”

Take for an example a domestic distributor of laptop computers or automobiles that are manufactured outside the United States. Under a holding that favors Wiley, a manufacturer could refuse the resale of these products in the U.S.  While this scenario is unlikely, there is no doubt that an interpretation of the first sale doctrine which limits secondary market sales of goods produced abroad could result in higher manufacturing costs to produce finished goods that are in compliance with this heightened standard.  Another possible consequence is that domestic manufacturers will be further incentivized to increase overseas manufacturing of their goods as a means of limiting the distribution of their products through secondary markets.

Gray Market Importations

Regardless of the outcome in Kirtsaeng, it is important to note that U.S. Customs and Border Protection (“CBP”) affords companies gray market protection for their items.  Such protections can include CBP seizing imports of genuine products for which importation into the U.S. has not been authorized by the trademark holder.

We will continue to follow the developments in this precedential case, but encourage U.S. resellers of imported merchandise to check the U.S. Customs and Border Protection Intellectual Property Rights e-Recordation database to determine if the copyright or trademark holder of the imported product(s) has requested gray market protection through CBP.  Failure to do so could result in the seizure of the products.

Furthermore, businesses attempting to protect unauthorized distributors from reselling their goods in domestic markets should record their trademarked or copyrighted material with CBP and designate gray market protection for these items.  It is a fairly inexpensive process that allows CBP to enforce the copyright and trademark protection at the border and enables owners to submit reports of possible violations and violators.  Most importantly, recordation serves as evidence of a businesss desire to keep its goods off of the gray market while also informing individuals operating in secondary markets that importation of such goods carries significant business risks.

U.S. Indicts Multiple Companies and 165 Parties Added to the BIS Entity List for Alleged Involvement in Russian Military Procurement Network

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On October 3, 2012, two companies and 11 individuals of an alleged Russian military procurement network operating in the United States and Russia were indicted in the U.S. District Court for the Eastern District of New York. The individuals, who work for a Texas-based export company and Russia-based procurement firm, are alleged to have illegally exported high-tech microelectronics to Russian military intelligence agencies. These high-tech microelectronics are subject to U.S. Department of Commerce dual-use export controls due to their potential use in an array of military systems such as radar and surveillance systems, detonation triggers, and weapons guidance systems.

In a coordinated effort, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) also issued an amendment (found here) to the Export Administration Regulations (“EAR”) to add 165 foreign persons and companies to the Entity List which identifies specific licensing requirements independent of those required under the EAR. These 165 foreign persons and individuals were alleged to have received, transshipped or facilitated the export of microelectronics to Russia and have “been determined by the U.S. government to be acting contrary to the national security or foreign policy interests of the United States.”

The indictment alleges that since October 2008, Alexander Fishenko, the president of the Russia-based procurement firm Apex Systems, LLC (“Apex”), and the Texas-based export company, Arc Electronics, Inc. (“Arc”), along with ten other defendants engaged in a “surreptitious and systematic conspiracy to obtain advanced microelectronics from the U.S. and to export those high-tech goods to Russia, while carefully evading the government licensing system set up to control such exports.”

According to the indictment, Apex functioned as a certified supplier of military equipment for the Russian government. The defendants often provided false end user information in connection with the purchase of goods, concealed their status as exporters, and falsely classified goods as having civilian end uses so as to induce manufacturers and suppliers to sell them the highly sought after microelectronics. Arcs website, for example, falsely claimed to be a traffic light manufacturer when it manufactured no goods and operated exclusively as an exporter. In another instance it is alleged that one of the defendants instructed the Russian procurement company to “make sure that” the end-use certificate indicated “fishing boats, and not fishing/anti-submarine ones” before they start working.

Each individual defendant in the case faces a maximum of 5 years incarceration for the conspiracy charges, 20 years for substantive International Emergency Economic Powers Enhancement Act (“IEEPA”) and Arms Export Control Act (“AECA”) charges, and an additional 20 years for obstruction of justice changes. In addition Fishenko faces a possible additional sentence of 20 years for money-laundering conspiracy charges and an additional 10 years for acting as an unregistered agent of the Russian government. Both Arc and Apex face up to $500,000 in fines for conspiracy counts and $1,000,000 in fines for the substantive IEEPA and AECA counts.

The involvement of Arc, Apex, Fishenko, and the 10 remaining individuals in the alleged Russian military procurement scheme offers proof of suspect activity that has the potential to result in significant incarceration and monetary penalties for these parties. But what about the additional 160+ individuals and companies “ which include suppliers, re-exporters, and transhippers “ which, to their detriment, may have relied on Fishenkos alleged fraud, misclassification of goods, and claims that his exports were for civilian end uses? They now find themselves on the EAR Entity List on the basis of Section 744.11 for acting contrary to the national security or foreign policy interests of the United States. And as such, these individuals and businesses find themselves subject to additional BIS license requirements and limited ability to apply license exceptions for exports and re-exports.

While at this stage there is no way to prove for certain the level of knowledge or active involvement of these 160+ individuals and businesses, we can expect that at least some of them were not fully aware of the nature of Fishenkos business operation and intended Russian military end uses of its high-tech exports.

Exporters, re-exporters, transshippers, and all parties involved in export-related transactions must implement effective export compliance procedures to help insulate themselves from situations such as this, situations in which they can be accountable for their passive involvement in illegal export activities. An effective compliance program and inquiry into products intended end uses prior and throughout the shipment process can provide crucial insight into the legitimacy of an exporters operation.

Furthermore, as set forth in Supplement 1 and 2 of Part 766 of the EAR, an effective compliance program is entitled a high level of consideration with respect to mitigation of actual and suspected violations of the EAR. Exporters, re-exporters, and transhippers are encouraged to complete their due diligence with respect to all of their shipments by implementing proper export controls. While even the most effective export compliance plan may not identify business activity that is a result of fraud or conspiracy (such as in the alleged Russian military procurement network mentioned above), the presence of an established export compliance program may provide BIS sufficient proof of passively involved shipping companies attempts to comply with U.S. export control law. This proof may be just enough to keep unsuspecting businesses off of the Entity List and/or mitigate EAR violation penalties issued by BIS.

Below we have provided some of the guidelines that BIS takes into account when assessing the effectiveness of a companies export compliance program:

  • Whether the company has performed a meaningful risk analysis of the goods being exported and their intended end use
  • The existence of a written compliance program that is communicated to others
  • Whether senior management oversees export compliance program
  • Whether the company screens customer transactions
  • An existence of an internal system for reporting export violations
  • Whether corrective action has been taken in response to export violations

The Customs and Trade Practice at Fuerst Ittleman David & Joseph, PL, has extensive experience in drafting customized export compliance manuals for a wide variety of business types and industry applications. If you want to strengthen your businesss export compliance procedures please feel free to email our offices at contact@fidjlaw.com or phone 305-350-56909.

Update: Third Party Payment Processor Sentenced to Jail Time for Processing Internet Poker Company Funds

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On October 3, 2012, Judge Lewis A Kaplan of the United States District Court for the Southern District of New York sentenced Chad Elie to five months in prison for his role in facilitating the processing of payments for three online poker companies. A copy of the Department of Justices press release announcing the sentencing can be read here.

As we previously reported, the poker companies, Fill Tile Poker, Absolute Poker, and PokerStars, were shut down by the FBI on April 15, 2011 as part of an investigation and eventual indictment of 11 people for various gambling related charges including violations of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) 31 U.S.C. §§ 5361-5366, bank fraud  18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. A copy of the indictment can be read here.

As a result of the indictment, PokerStars and Fill Tilt reached a $731 million settlement with the federal government. Additionally, several top executives have pleaded guilty for their roles in the alleged UIGEA, bank fraud, and money laundering conspiracy. More information on these guilty pleas and the PokerStars settlement can be read in our prior reports here, here, and here.

According to authorities, the companies used third party payment processors to disguise financial transactions between the companies and U.S. players so that the transactions would appear to be unrelated to online gambling. The third party payment processors would then lie to U.S. financial institutions about the source of the funds processed, often times facilitated by the creation of nonexistence online companies and phony websites.

Authorities alleged that between 2008 and 2011, Elie served as a payment processor for each online poker company. Authorities further allegedly that in order to conceal the sources of the funds he was processing, Elie falsely represented to U.S. banks that he was processing “payday loans” and payments for online club memberships. As a result of these allegations, Elie pleaded guilty to participating in a conspiracy to commit bank fraud and to operating illegal gambling businesses.

In sentencing Elie to five months in prison, rather than the federal Probation Departments recommended sentence of probation, six months home confinement, and community service, Judge Kaplan found that the evidence against Elie indicated that he continued to process payments for the poker companies despite his knowledge of the federal investigation and arrests of other payment processors and company executives. In addition to prison, Elie was ordered to two years of home confinement and was ordered to forfeit $500,000 to the United States. Elies sentencing highlights the potential consequences and criminal penalties payment processors can face when processing ill-gotten assets on behalf of others.

If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about FIDJs experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com