11th Circuit Case Signals Split on Law vs. Regulation vs. … Contract?

Decision holds interesting repercussions for trade violations and penalty amounts

On February 22, 2013, the U.S. Court of Appeals for the Eleventh Circuit vacated the smuggling and conspiracy convictions of two importers of allegedly tainted cheese products in the case of United States of America v. Yuri Izurieta and Anneri Izurieta (Case No. 11-13585). The decision created a circuit split over the scope of U.S. Customs and Border Protection (CBP) import bond regulations, yet also raised the possibility of a new line of attacks against CBP import penalties and liquidated damages.

With the highly respected U.S. Court of International Trade Judge Jane A. Restrani sitting with the 11th Circuit by special designation, a three-member panel found that a certain class of U.S. import regulations are civil rather than criminal in nature. Therefore, the criminal convictions of the husband and wife failed for lack of subject matter jurisdiction.

The case focused on the actions of the Izurietas and their Miami-based company, Naver Trading, Corp. Over several years, the company imported several large shipments of cheese and other dairy products into the United States. The shipments were “conditionally released” upon importation, that is, CBP and the U.S. Food and Drug Administration (FDA) allowed the shipments to move to Naver’s warehouse, but ordered the merchandise to be held at the warehouse pending further review and testing by the FDA. When the FDA tests came back indicating that the products were contaminated with Salmonella, E. coli and Staphylococcus aureus, the FDA ordered the products to be either destroyed or re-exported under the supervision of CBP.  The Izurietas failed to do so, however, and admitted that almost 5,000 kilograms of imported cheese that contained both E. coli and Staphylococcus aureus had been sold into the United States.

The FDA Office of Criminal Investigation, aided by special agents from U.S. Immigration and Customs Enforcement (ICE) investigated and referred the case for criminal prosecution to the U.S. Department of Justice. The Izurietas were tried, convicted, and sentenced in June 2011.

The defendants appealed to the 11th Circuit arguing violations of their Sixth Amendment rights to confront witnesses, improper statements made by the prosecutor over the course of trial, and faulty calculations underlying their sentences. The Appeals Court, however, saw a different issue in the case, which it raised sua sponte.

Six of the seven counts in the original indictment against the Izurietas alleged violation of 18 U.S.C. § 545, which is the statute barring smuggling into the United States. The operative language of the statute reads:

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law. . .
Shall be fined under this title or imprisoned not more than 20 years, or both. (18 U.S.C. § 545 (emphasis added).)

In this case, the “law” alleged to have been violated was a CBP regulation governing the conditional release of food, drug, device, cosmetic and tobacco products. Section 141.113 of Title 19, Code of Federal Regulations, allows for the conditional release of such products; however, subsection (c)(3) requires:

If FDA refuses admission of a food, drug, device, cosmetic, or tobacco product into the United States, or if any notice of sampling or other request is not complied with, FDA will communicate that fact to the CBP port director who will demand the redelivery of the product to CBP custody. … [A] failure to comply with a demand for redelivery made under this paragraph (c) will result in the assessment of liquidated damages equal to three times the value of the merchandise involved[.] (19 C.F.R. § 141.113 (c)(3).)

The court held that the regulation at issue “sets forth the terms of the contract between the importer and Customs by delineating the obligations of the importer upon conditional release and the damages for a breach of those contractual obligations.” When the Izurietas breached their contract with the Customs, the court held that criminal charges could not arise because “that law is civil only, and in particular reflects contractual requirements.” The court went on to state, “While some regulations may fall under the criminal prohibitions of 18 U.S.C. § 545, the text of 19 C.F.R. § 141.113(c) along with the comments issued during its promulgation certainly indicate to the average person that liability is strictly civil and monetary, capped at most at three times the value of the merchandise secured by bond, and is not aimed at punishment.”

Having found that only civil, contractual violations occurred, the 11th Circuit vacated the criminal convictions of the Izurietas under the smuggling charges, and vacated the accompanying conspiracy charge noting, “The indictment was sufficiently unclear as to whether any crime was charged such that the average person could easily read [the conspiracy count] as actually charging only a conspiracy to commit non-criminal acts.”

“We disagree with the conclusion of our sister circuit …”

The Izurieta case is noteworthy in many respects, not least of which is that the court’s opinion sets up a split among the Circuits regarding the interpretation of the “contrary to law” provision of 18 U.S.C. § 545.

The 11th Circuit panel referred to a Ninth Circuit case in which that court adopted a relatively narrow interpretation of the smuggling statute. The court in United States v. Alghazouli, 517 F.3d 1179 (9th Cir. 2008), decided that regulations are included within the definition of a “law” for purposes of 18 U.S.C. § 545 only if there is a statute (a “law”) that specifies that violation of that regulation is a crime. Alghazouli, 517 F.3d at 1187.

The court in Izurieta also took notice of a Fourth Circuit case, United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994). In Mitchell, the court adopted a more expansive reading of 18 U.S.C. § 545, stating, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency  regulations have the ‘force and effect of law.'” Mitchell, 39 F.3d at 468 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 295-96 (1979)).  The 4th Circuit then went on to apply a three-prong test (under Chrysler) to determine whether the regulation at issue in Mitchell had the “the force and effect of law.”

Finally, the Eleventh Circuit gave a nod to the First Circuit, which addressed this issue in United States v. Place, 693 F.3d 219 (1st Cir. 2012). The Izurieta court noted, however, “Because the appellant in [Place] made only an “all-or- nothing” argument that no regulations could be included within the scope of  “law” under 18 U.S.C. § 545, the First Circuit decided not to address ‘this delicate point.'” Place, 693 F.3d at 228 n. 12.

Examining the sum of these precedents and calling to mind the deliberations of Goldilocks in the three bears’ house that day, the 11th Circuit decided in Izurieta to reject both the narrow reading of the 9th Circuit and the “sweeping result” which would occur from the “breadth of the Fourth Circuit’s three-prong approach, derived from a non-criminal context.” Instead the court decided – correctly, in our opinion – to examine the true nature of the regulation and opt for lenity, or kindness, “especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.”

Important Ramifications for International Trade Enforcement Measures

In addition to the circuit split, the Izurieta case potentially opens the door for a new line of attacks on Customs’ and other regulatory agencies’ fines, penalties, and liquidated damages. In calling the CBP regulation “civil only” and contractual in nature, the question arises as to the applicability of the tenets of contract law to such governmental regulations.

The CBP regulation at issue in this case (19 C.F.R. § 141.113) is similar in language and intent to many other CBP and other government agency regulations. CBP regulations for import bonds under 19 C.F.R. § 113.62, et seq., has provisions such as “(a) Agreement to Pay Duties, Taxes, and Charges,” (f) Agreement for Examination of Merchandise,” and “(m) Consequence of default.” All of these provisions are very civil and very contractual in nature. In fact, most of the regulatory provisions for which CBP assesses “liquidated damages” – for violations of bond provisions, failure to files timely export information (15 C.F.R. § 30.24), violation of airport security regulations (19 C.F.R. § 122.181, et seq.) and violation of CBP-bonded warehouse and other customs-bonded facilities (Treasury Decision 99-29 and multiple regulations) – are decidedly civil and contractual in nature.

Thanks to Izurieta, it can now be argued by importers and others in the trade community in the Eleventh Circuit that violation of any of these types of civil, contractual regulations cannot result in criminal prosecution. Yet more interestingly, if these regulations are civil and contractual in nature would contract law provisions apply to the liquidated damages, fines and penalties that result from these provisions?

For example, if an importer enters incoming merchandise by filing entry documents with CBP, but is late in paying the duties that are due on that merchandise, the importer can be cited with a violation of the import bond provision (19 C.F.R. §§ 113.62(l)(4), and 113.62(a)(1)) and can be assessed liquidated damages in an amount of double the unpaid duties. In light of Izurieta, we would have to now ask, are these civil damages reasonable?

In a 2009 decision in the case of Country Inns & Suites By Carlson, Inc. v. Interstate Properties, LLC, 329 Fed. Appx. 220, No. 08-16850 (11th Cir., May 12, 2009), the Eleventh Circuit examined the validity of liquidated damages in a contract dispute arising under Florida law. The court held that the test under Florida law as to when a liquidated damages provision will be upheld should be applied to the case. Under Florida law, liquidated damages are enforceable when:

First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. (Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991).

In our hypothetical case of the late-paying importer above, CBP may assess liquidated damages of double the unpaid duties even if the duty payment is only one day late. Looking at the second prong of the test from Lefemine, the actual damages to CBP of a late duty payment are, at best, the opportunity costs of that late payment. In most contractual settings, such late payment fees are a small percentage (1% or 1½% per month) of the unpaid amount. In a duty bill of $100,000, however, the liquidated damages could equal to $200,000. Such CBP-levied damages clearly violate the Lefemine test and would be thrown out in a Florida court, and now apparently, in the 11th Circuit as well.

The implications for the potential application of Izurieta are enormous. The Eleventh Circuit includes the major international ports of Miami, Fort Lauderdale, Tampa, Jacksonville, Atlanta, and Savannah to name a few. The ports of the 11th Circuit saw over $150 Billion in imports during 2011, almost 10% of the total in the United States. The liquidated damages, fines and penalties to CBP arising from these ports are similarly great. The question after the holding in United States of America v. Yuri Izurieta and Anneri Izurieta is now whether these monetary damages can now be sustained.

Miami: Our Best Climate is the One Serving Your Business

According to recent media reports, Miami has become the “go-to” location for companies seeking a better business, a fact that has been noticed by many major New York observing the trend of migration to Florida. Consider the following statistics comparing the Miami and New York metro areas:

  • Miami’s sales tax is 6.62% vs. New York’s 8.48%
  • Metro Miami’s overall cost of living is 52% lower than the New York Metro area
  • State and local tax burden in Florida is 9.3% vs. New York’s highest-in-the-nation rate of 12.8%
  • Commercial real estate costs per square foot in New York are double Miami’s and residential costs may be five times more in New York

Source: Fox Business News

Miami’s far lower cost of living is allowing relocated businesses to attract and retain employees. But while “lifestyle climate” may be crucial to a happy business move, Miami’s real enticement may be found in Florida’s business climate. The attorneys at Fuerst, Ittleman, David & Joseph can ensure that your company maximizes the many tax advantages and business incentives offered by the state to companies relocating to Florida:

Tax Advantages

Florida’s stable and highly favorable tax climate provides advantages that make a Florida location profitable for every type of business. Progressive legislation also ensures that Florida remains a worldwide hub for new and expanding businesses.

Florida has”¦

NO corporate income tax on limited partnerships

NO corporate income tax on subchapter S-corporations

NO state personal income tax guaranteed by constitutional provision

NO corporate franchise tax on capital stock

NO state-level property tax assessed

NO property tax on business inventories

NO property tax on goods-in-transit for up to 180 days

NO sales and use tax on goods manufactured or produced in Florida for export outside the state

NO sales tax on purchases of raw materials incorporated in a final product for resale, including non-reusable containers or packaging

NO sales/use tax on co-generation of electricity

Florida offers Sales and Use Tax Exemptions on”¦

Machinery and equipment used by a new or expanding Florida business to manufacture, produce or process tangible personal property for sale

Labor, parts and materials used in repair of and incorporated into machinery and equipment

Electricity used in the manufacturing process

Certain boiler fuels (including natural gas) used in the manufacturing process

Semiconductor, defense and space technology-based industry transactions involving manufacturing equipment

Machinery and equipment used predominantly in research and development

Labor component of research and development expenditures

Commercial space activity ”” launch vehicles, payloads and fuel, machinery and equipment for production of items used exclusively at Spaceport Florida

Aircraft parts, modification, maintenance and repair, sale or lease of qualified aircraft

Production companies engaged in Florida in the production of motion pictures, made for television motion pictures, television series, commercial music videos or sound recordings.

Incentives

Florida offers bottom-line advantages for long term profitability for all types of businesses, from corporate headquarters to manufacturing plants to service firms. Florida offers incentives for:

Targeted Industry Incentives:

Qualified Target Industry Tax Refund (QTI)

The Qualified Target Industry Tax Refund incentive is available for companies that create high wage jobs in targeted high value-added industries. This incentive includes refunds on corporate income, sales, ad valorem, intangible personal property, insurance premium, and certain other taxes. Pre-approved applicants who create jobs in Florida receive tax refunds of $3,000 per net new Florida full-time equivalent job created; $6,000 in an Enterprise Zone or Rural Community (county). For businesses paying 150 percent of the average annual wage, add $1,000 per job; for businesses paying 200 percent of the average annual salary, add $2,000 per job; businesses falling within a designated high impact sector or increasing exports of its goods through a seaport or airport in the state by at least 10 percent in value or tonnage in each year of receiving a QTI refund, add $2,000 per job; projects locating in a designated Brownfield area (Brownfield Bonus) can add $2,500 per job. The local community where the company locates contributes 20 percent of the total tax refund. There is a cap of $5 million per single qualified applicant in all years, and no more than 25 percent of the total refund approved may be taken in any single fiscal year. New or expanding businesses in selected targeted industries or corporate headquarters are eligible.

Qualified Defense and Space Contractor Tax Refund (QDSC)Florida is committed to preserving and growing its high technology employment base by giving Florida defense, homeland security, and space business contractors a competitive edge in consolidating contracts or subcontracts, acquiring new contracts, or converting contracts to commercial production. Pre-approved applicants creating or retaining jobs in Florida may receive tax refunds of $3,000 per net new Florida full-time equivalent job created or retained; $6,000 in an Enterprise Zone or rural county. For businesses paying 150 percent of the average annual wage, add $1,000 per job; for businesses paying 200 percent of the average annual salary, add $2,000 per job.

Capital Investment Tax Credit (CITC)

The Capital Investment Tax Credit is used to attract and grow capital-intensive industries in Florida. It is an annual credit, provided for up to twenty years, against the corporate income tax. Eligible projects are those in designated high-impact portions of the following sectors: clean energy, biomedical technology, financial services, information technology, silicon technology, transportation equipment manufacturing, or be a corporate headquarters facility. Projects must also create a minimum of 100 jobs and invest at least $25 million in eligible capital costs. Eligible capital costs include all expenses incurred in the acquisition, construction, installation, and equipping of a project from the beginning of construction to the commencement of operations. The level of investment and the project’s Florida corporate income tax liability for the 20 years following commencement of operations determines the amount of the annual credit.

High Impact Performance Incentive Grant (HIPI)

The High Impact Performance Incentive is a negotiated grant used to attract and grow major high impact facilities in Florida. Grants are provided to pre-approved applicants in certain high-impact sectors designated by the Governor’s Office of Tourism, Trade and Economic Development (OTTED). In order to participate in the program, the project must: operate within designated high-impact portions of the following sectors– clean energy, corporate headquarters, financial services, life sciences, semiconductors, and transportation equipment manufacturing; create at least 50 new full-time equivalent jobs (if a R&D facility, create at least 25 new full-time equivalent jobs) in Florida in a three-year period; and make a cumulative investment in the state of at least $50 million (if a R&D facility, make a cumulative investment of at least $25 million) in a three-year period. Once recommended by Enterprise Florida, Inc. (EFI) and approved by OTTED, the high impact business is awarded 50 percent of the eligible grant upon commencement of operations and the balance of the awarded grant once full employment and capital investment goals are met.

Workforce Training Incentives:

Quick Response Training Program (QRT)

Quick Response Training (QRT) – an employer-driven training program designed to assist new value-added businesses and provide existing Florida businesses the necessary training for expansion. A state educational facility – community college, area technical center, school district or university – is available to assist with application and program development or delivery. The educational facility will also serve as fiscal agent for the project. The company may use in-house training, outside vendor training programs or the local educational entity to provide training. Reimbursable training expenses include: instructors’/trainers’ wages, curriculum development, and textbooks/manuals. This program is customized, flexible, and responsive to individual company needs. To learn more about the QRT program, visit Workforce Florida.

Incumbent Worker Training Program (IWT)

Incumbent Worker Training (IWT) – a program that provides training to currently employed workers to keep Florida’s workforce competitive in a global economy and to retain existing businesses. The program is available to all Florida businesses that have been in operation for at least one year prior to application and require skills upgrade training for existing employees. Priority is given to businesses in targeted industries, Enterprise Zones, HUB Zones, Inner City Distressed areas, Rural Counties and areas, and Brownfield areas. For additional information on the IWT program, visit Workforce Florida.

Infrastructure Incentive:

Economic Development Transportation Fund

The Economic Development Transportation Fund, commonly referred to as the “Road Fund,” is an incentive tool designed to alleviate transportation problems that adversely impact a specific company’s location or expansion decision. The award amount is based on the number of new and retained jobs and the eligible transportation project costs, up to $3 million. The award is made to the local government on behalf of a specific business for public transportation improvements.

Special Opportunity Incentives:

Rural Incentives: Florida encourages growth throughout the state by offering increased incentive awards and lower wage qualification thresholds in its rural counties. Additionally, a Rural Community Development Revolving Loan Fund and Rural Infrastructure Fund exist to meet the special needs that businesses encounter in rural counties.

Urban Incentives: Florida offers increased incentive awards and lower wage qualification thresholds for businesses locating in many urban core/inner city areas that are experiencing conditions affecting the economic viability of the community and hampering the self-sufficiency of the residents.

Enterprise Zone Incentives: Florida offers an assortment of tax incentives to businesses that choose to create employment within an enterprise zone, which is a specific geographic area targeted for economic revitalization. These include a sales and use tax credit, tax refund for business machinery and equipment used in an enterprise zone, sales tax refund for building materials used in an Enterprise Zone, and a sales tax exemption for electrical energy used in an enterprise zone.

Brownfield Incentives: Florida offers incentives to businesses that locate in brownfield sites, which are underutilized industrial or commercial sites due to actual or perceived environmental contamination. The Brownfield Redevelopment Bonus Refund is available to encourage Brownfield redevelopment and job creation. Approved applicants receive tax refunds of up to $2,500 for each job created.

Local Government Distressed Area Matching Grant Program (LDMG)

The Local Government Distressed Area Matching Grant Program stimulates investment in Florida’s economy by assisting Local Governments in attracting and retaining targeted businesses. Applications are accepted from local governments/municipalities that plan on offering financial assistance to a specific business in the area. These targeted businesses are required to create at least 15 full-time jobs and the project must either be new to Florida; expanding operations in Florida; or leaving Florida unless it receives local and state government assistance. The amount awarded by the State of Florida will equal $50,000 or 50% of the local government’s assistance amount, whichever is less, and be provided following the commitment and payment of that assistance.

Source: Enterprise Florida.

CBP Inspects Almost a Billion Ways to Say “I Love You”

As the last of forgetful but doting husbands, boyfriends, and lovers runs out to buy their special someone flowers on this Valentine’s Day, the inspectors at U.S. Customs and Border Protection (CBP) are breathing a sigh of relief.

Although final numbers for this season are not yet in, during the period of January 1 through February 14, CBP will see the importation of almost 1 billion stems of cut flowers from around the world, mostly from Central and South America.  During the 2012 Valentine’s season, CBP processed over 842 million stems, and levels of imports were expected  to rise between 7% and 9% this year due to the increasingly healthy U.S. economy.  Most of these cut flowers are coming through CBP inspection sites at Miami International Airport, which saw 716.7 million stems (or ~85% of the total imported cut flowers nationally) imported between January 1 and February 14, 2012.  The flowers come mostly from Colombia (about 67% of the total), followed by Ecuador, with approximately 23% of the total.

With the flowers coming from these locations, many might assume that CBP is looking for illegal narcotics.  And while some drugs are found in shipments, what CBP is really looking for is bugs.

Every year, mixed in among the roses, mixed bouquets, and dianthus (the biggest imports) are invasive, harmful pests such as Tetranychus sp. (mites), Aphididae (Aphids), Agromyzidae (Miner Flies) and Noctuidae (moths).  In 2012, CBP intercepted approximately 2,500 shipments infested with these pests.  Most often, the shipments are fumigated and the flowers continue on their way.  However, some other plants and flowers are intercepted and destroyed at the border.  Chrysanthemums, gladiolas, and orange jasmine from Mexico (which carries the Asian citrus psyllid, a dangerous pest that destroys citrus crops), as well as most flowering plants in soil are prohibited from entering the United States altogether.

Were it not CBP’s pest interdiction efforts, the U.S. Department of Agriculture estimates that billions of dollars in damage to U.S. crops, including vegetables, grains, and flowers, could be done by these pests.  In addition to bugs, CBP is also on the look-out for diseases.  Current CBP interdiction efforts are underway to prevent funguses called “Chrysanthemum White Rust” and “Gladiolus Rust” from entering the U.S.  These diseases, if they gained a toe hold in the United States, could severely damage the domestic flower industry.

So as you pass by the flower shop or roadside-stand filled with blooms, remember that CBP inspectors have played their role to ensure that nothing will “bug” your loved one this Valentine’s Day.

Florida Litigation Update: Does the Court Have the Authority to Sanction a Party After Voluntary Dismissal is Filed

Generally, the filing of a voluntary dismissal (with or without prejudice) divests the trial court of jurisdiction.  However, what happens where a party brings a frivolous action, but on the eve of trial, voluntarily dismisses the case?  The Florida Supreme Court recently addressed the answer in Pino v. The Bank of New York, Case No. SC11-697, 38 Fla. L. Weekly S78a (Fla. February 7, 2013), available here.

Pino involved a mortgage foreclosure action.   The defendant, Pino, discovered that the mortgagee Bank submitted fraudulent, back-dated documents to support its foreclosure claim.  Pino served, but did not file, a motion for sanctions against the Bank pursuant to Fla. Stat. §57.105 for bringing the frivolous action.  Pursuant to this statute, the Bank had a 21 day “safe harbor” window to withdraw the offending pleading.  If the Bank did not withdraw the Motion during this time, Pino could thereafter file his Motion for Sanctions.

The Bank served a voluntary dismissal without prejudice within the 21 day safe-harbor period. A dismissal without prejudice means that the same lawsuit may be re-filed at a later date, provided (amongst other things) the statute of limitations did not expire.  Thereafter, the Bank re-filed a new action for foreclosure, and this time supported its pleading with genuine and truthful documentation.  Pino creatively sought to re-open the original lawsuit based on the Banks original fraud, and asked the trial court to strike the voluntary dismissal without prejudice, and sanction the Bank for its prior fraud on the court by issuing a dismissal of the original lawsuit with prejudice, as opposed to without prejudice.  In addition, Pino demanded that the Bank and its lawyers be sanctioned pursuant to §57.105.

The Florida Supreme Court held that the trial court has no power or authority to strike a notice of voluntary dismissal “where the alleged fraud does not lead the plaintiff to obtain affirmative relief to the detriment of the defendant.”  However, the trial court is not left impotent.  The Court noted, for example, that the trial court may refer a lawyer to the Florida Bar, where appropriate.  However, a hit to the offending partys pocketbook appears to be ostensibly outside the Courts reach.

Unless a properly served §57.105 Motion had been served.

Specifically, the Court expressly held that a voluntary dismissal does not divest a trial court of the authority to sanction a party pursuant to §57.105 if the dismissal occurred outside the 21 day safe harbor window.  As held by Pino:

If the plaintiff does not file a notice of voluntary dismissal or withdraw the offending pleading within twenty-one days of a defendant’s request for sanctions under section 57.105, the defendant may file the sanctions motion with the trial court, whereupon the trial court will have continuing jurisdiction to resolve the pending motion and to award attorney’s fees under that provision if appropriate, regardless of the plaintiff’s subsequent dismissal.

Id.

Unfortunately for Mr. Pino, the Banks voluntary dismissal occurred within the 21 day safe harbor window, and thus the court was powerless to sanction the offensive conduct.  Moreover, because the “fraud on the court” took place in the first action before the voluntary dismissal, the court lacked any authority to sanction the Bank based on its inherent authority. Recognizing the injustice, the Court noted that it understood “the concerns of those who discuss the multiple abuses that can occur from fraudulent pleadings being filed with the trial courts in this state. While rule 1.420(a)(1) has well served the litigants and courts of this state, we request the Civil Procedure Rules Committee review this concern and make a recommendation to this Court regarding whether (a) explicit sanction authority should be provided to a trial court pursuant to rule 1.110(b), even after a case is voluntarily dismissed, (b) rule 1.420(a)(1) should be amended to expressly allow the trial court to retain jurisdiction to rule on any pending sanction motions  that seek monetary sanctions for abuses committed by either party during the litigation process, or to allow the trial court explicit authority to include attorney’s fees in any award to a party when the dismissed action is reinstated, or (c) to adopt a rule similar to Federal Rule 11 to provide explicit authority for the trial court to impose sanctions.”  Thus while Mr. Pino was left with no avenue to redress the damages caused to him by the Banks fraudulent litigation, at least he can take comfort knowing that his case laid the roadmap to ensnaring future miscreant litigants.

How to Ensure That Your Company’s Data Doesn’t Get Lost in the Clouds PART III

Cloud Service Termination, Transfer and Other Issues

Cloud computing has become an increasingly popular option for businesses to cheaply and efficiently manage their data systems.  Businesses interested in utilizing these services should be cautious, however, when entering into agreements to use these services.  Just like with any corporate transaction, the contracts and agreements for cloud services must be drafted effectively so as to mitigate business risks to the greatest extent possible.

In Part I of our cloud-computing blog series we addressed privacy and security concerns for business engaged in cloud computing.  Part II of the series examined jurisdictional issues and subscriber data ownership issues that may arise in cloud-computing agreements.

Now n our third and final installment of this blog series we will address how subscribers should structure the termination of a cloud computing agreement to ensure “ to the greatest extent possible “ that their data are safely returned and/or disposed by the cloud service provider.  We will also address some miscellaneous issues that may arise with respect to the transfer or termination of ownership by the cloud provider.

1. Termination

At the end of a transaction or upon the termination or expiry of an agreement, in traditional corporate contract settings, there are usually standard provisions calling for the return of data by the party that was using the data, or the destruction of that data and a certification to that effect.  In a cloud computing arrangement, however, the parties to the corporate contract are not is possession of that data “ the cloud service provider is.

Many would argue that the contract party cannot be held responsible, therefore, for the return or destruction of the data.  Nothing could be further from the truth.

Upon the conclusion of a cloud computing agreement, a procedure should be in place for the cloud-computing service provider to return all data to their subscriber, or to destroy the data and certify as to its destruction. Most businesses seeking a cloud service provider likely already have internal policies and procedures in place for retaining, backing up, and disposing of data.  It is crucial that subscribers inquire into their prospective cloud-service provider’s data retention and destruction policies to ensure that the policies of the subscriber can be adhered to in their cloud provider’s environment.

For example, the cloud service agreement can call for the service provider to return all data to the subscriber or, upon the request of the subscriber, destroy all data and certify as to its destruction.  Then, in the corporate contract, appropriate language can be added to allow for the cloud service provider to return or destroy the data.  A sample agreement provision might read:

Upon the expiration or termination of this Agreement, the Receiving Company immediately shall delete or order the deletion of all proprietary data and information from any on-demand computer network access storage location (i.e., cloud computing service) and provide the Providing Company with (a) written notice, certified by an appropriate officer of the Receiving Company, of such actions, and (b) written certification(s) from such on-demand computer network access storage location service provider(s) that the deletion has taken place.

Contract provisions of this type will help ensure that your data is not left floating in the Cloud at the end of an agreement or transaction.

2. Transfer

Along the lines of termination, use of a cloud service provider raises additional questions. What happens if the cloud service provider changes?  Situations such as the sale of the cloud service, sale of the cloud company, merger, or government seizure can all have tremendous effects on the subscriber’s serviced data Comingling of personal information, jurisdictional issues, and sharing of a subscriber’s business data could all prospectively result from these situations.

Awareness and prior planning are key features to mitigating these business risks. Subscribers need discuss these issues with their prospective cloud service provider prior to entering into an agreement. In many situations, specific clauses can be drafted into the cloud service agreement to allow for the safe return or destruction of a subscriber’s data before any change in the dominion or control over that data can take place.

At a minimum, to protect their data from ending up in the hands of unforeseen third parties, subscribers should require their cloud service provider inform them of any situation in which their data may be accessed by, or transferred to, an unrelated third party.  While similarly worded “assignment” clauses are ubiquitous in business contracts, our recent review of several cloud service agreements found these clauses to be altogether lacking. To protect your valuable data, subscribers must reserve the right to terminate the cloud service agreement for cause “ and demand return or destruction of the data “ in events such as these.

3. Additional Issues

There are many other ways in which operating in the cloud computing environment must be considering by all businesses. While far from exhaustive, some of the most critical areas to consider are:

  • Segregation of Subscriber Data. In your local, server-based systems, confidential data, proprietary data, and sensitive financial data (to name a few), can be segregated from other business data and protected appropriately. Very often businesses certify to customers and business partners that their data will receive this special treatment. Is your cloud service provider also guaranteeing this segregation and an appropriate level of safeguarding?
  • Authentication of Data. Does your cloud service provider have the technical processes and control procedures in place to guarantee that your data will not be (inadvertently or otherwise) changed over time? Think of the ramification to your business if credit approvals, account receivable limits, or termination dates on contracts were changed while in the cloud.
  • Responding to Litigation. In the world of e-discovery in litigation, being able to preserve subscriber data and provide copies of that data in a timely and complete fashion are critical. Can your cloud service provider respond to your needs in the event of litigation. Moreover, what if the service provider itself is the target of litigation. Is your data safe from unwarranted disclosure or disclosure without prior notice to the subscriber?

Concluding Thoughts

It goes without saying that the contractual nuances arising in the cloud computing environment could easily fill several volumes.  Our goal in this blog series is to educate business as to how operating in the Cloud requires you to rethink even the most fundamental aspects of the business agreements you currently use.

Cloud computing can provide significant business advantages in efficiency and cost savings. In the age of transparency it will be key for businesses to maintain sensitive intellectual property, customer, and confidential data in such as way as to ensure that they preserve their competitive advantage and avoid any issues regarding unauthorized use of data.  As such, businesses must carefully negotiate and draft not only their cloud service agreements, but all of their commercial contracts and agreements to insulate themselves from liability and protect their invaluable data.

Does your company need assistance in ensuring the security and integrity of its cloud-based business and information?  Fuerst Ittleman David & Joseph has experience in designing cloud-based business solutions, including negotiating, drafting and executing a wide variety of transactional agreements to ensure that while your business may be in the clouds, your feet are firmly rooted on solid legal ground.  Contact us today for a free consultation.

Recent Conviction of Medical Marijuana Distributor Highlights Continuing Federal Efforts To Prosecute Medicinal Marijuana Under The CSA

On January 7, 2013, Aaron Sandusky, operator of three medicinal marijuana dispensaries in Southern California, was sentenced to ten years in federal prison for violating federal drug laws. Sandusky’s conviction highlights the interplay between State and Federal law and provides an example of how operators of medicinal marijuana dispensaries still face the threat of federal prosecution even though their activities may fully comply with State law.

As we have previously reported, in spite of the fact that 18 States have sanctioned the use of marijuana in various forms, the federal government has proceeded unchecked in its efforts to criminalize the entire industry. More specifically, marijuana remains classified as a Schedule I drug under the Controlled Substances Act (“CSA”), 21 U.S.C. § 801 et seq, which means that marijuana has been found by Congress to: 1) have a high potential for abuse; 2) have no currently accepted medical use in treatment in the US; and 3) lack accepted safety for use under medical supervision. Therefore, although it may be legal under state law to possess cultivate, and/or distribute marijuana, such actions still violate federal law.

For example, in Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court directly addressed the issue of whether Congress, pursuant to its Commerce Clause authority, could regulate and prohibit the local cultivation of marijuana which complied with California state law. In holding that the CSA’s prohibition of locally grown and used marijuana was permissible, the Court found that Congress had a rational basis for concluding that local marijuana substantially affects interstate commerce. The Court found that Congress can regulate purely intrastate activity that is not itself “commercial,” i.e., not produced for sale, if it concludes that failure to regulate that class of activity would undercut the regulation of the interstate market in that commodity. The Court went on to find that due to the inability to distinguish or prevent locally cultivated marijuana from entering the interstate market, the failure to regulate it would undermine the purposes of the CSA as a whole.

In addition to prosecutions for violating federal law, federal authorities have used various other techniques in an attempt to quash the burgeoning medical marijuana industry. Such techniques include the use of civil asset forfeiture pursuant to 21 U.S.C. § 881 and disallowing medicinal marijuana dispensaries from taking business deductions pursuant to 26 I.R.C. §  280E. More information regarding the joint Department of Justice and Internal Revenue Service efforts can be read in our previous report.

In this case, Mr. Sandusky was charged with: 1) conspiracy to manufacture and possess marijuana with intent to distribute it, 2) conspiracy to operate a drug-involved premises and 3) possession of marijuana with intent to distribute it. Sandusky was ultimately convicted in October 2012. While Mr. Sandusky faced a maximum of life in prison, United States District Court Judge Percy Anderson sentenced Sandusky to ten (10) years in prison, the federal mandatory minimum for such charges.

Mr. Sandusky’s case is the fourth nationwide where federal prosecutors have filed charges against medical marijuana dispensary owners in states where such dispensaries comply with State law. The other prosecutions previously occurred in California, Michigan, and Montana. Additionally, because marijuana sale and distribution violates federal laws prohibiting drug trafficking, dispensary owners face the possibility of other separate yet interrelated federal charges. The Montana indictment of Christopher Williams is an example of this. As the Helena Independent Record reports, in addition to being charged with conspiracy to grow and distribute marijuana, Williams was also charged with possession of a firearm during a drug-trafficking offense. Williams currently faces five years to life in federal prison and is scheduled to be sentenced February 1, 2013.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience dealing with administrative law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com.

Construction Litigation Update: Florida Supreme Court Rules that Unlicensed Contractors Cannot Enforce Construction Contracts

Jim and Mary Homeowner are newlyweds who used their wedding money to buy their first home, a fixer-upper that required considerable renovations. The happily married couple was given the name of a local handyman, Bob, who was honest, hard-working, and wasn’t too expensive. The Homeowners interviewed Bob and were duly impressed with his plan to accomplish the renovations, and more importantly, with the below-market price which Bob quoted to perform the work. To Bob’s credit, Bob was upfront and fully apprised the Homeowners that he was able to charge such reduced rates because he was not a licensed contractor. Bob was hired on the spot, and the parties entered into an agreement which detailed the scope of work and the price for the job.

Bob finished the project on time and invoiced the Homeowners for the work. Given that the cost of marriage substantially exceeded the limited budgets of the newlyweds, the Homeowners did not pay Bob. Bob sued the Homeowners under the terms of the contract. Bob expected to hammer the Homeowners with the terms of his iron-clad contract.

Fortuitously, the Homeowners’ uncle is a lawyer, and he agreed to represent the newlyweds. After hitting the books, their lawyer asserted that the contract with Bob was unenforceable under Fla. Stat. §489.128(1), which provides, “This statute provides in pertinent part that [a]s a matter of public policy, contracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.”

Bob logically countered that the Homeowners knew he was unlicensed, and in fact expressly hired Bob because as an unlicensed contractor, he could charge lower rates. Bob asserted that the doctrine of in pari delicto barred the Homeowner’s defense. In other words, Bob claimed that the Homeowners should not be able to profit from the same wrongful conduct which they themselves willingly participated.

In pari delicto, is derived from the Latin, in pari delicto potior est conditio defendentis, meaning, “In a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one.” The defense is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality. In its classic formulation, the in pari delicto defense was narrowly limited to situations where the plaintiff truly bore at least substantially equal responsibility for his injury, because “in cases where both parties are in delicto, concurring in an illegal act, it does not always follow that they stand in pari delicto; for there may be, and often are, very different degrees in their guilt.” Earth Trades, Inc. v. T&G Corp., 38 Fla.L.Weekly S35 (Fla. January 24, 2013). In short, the in pari delicto defense requires that the parties be wrongdoers of relatively equal fault.

Under the recent decision by the Florida Supreme Court in Earth Trades, Inc., available here, Bob cannot enforce his contract. In Earth Trades, the Supreme Court was asked to resolve conflict between a decision of the Third District and a decision of the Fifth District. Siding with the Fifth District, the Supreme Court concluded “that a party’s knowledge that a contractor or subcontractor does not hold the state-required license to perform the construction work of the contract is legally insufficient to establish the defense that the parties stand in pari delicto.” The reasoning for the decision rested on the finding that public policy’s requirement for contractors to be duly licensed to engage in the practice of construction outweighed any knowledge which the contracting party may have of the statutory noncompliance. Specifically, the Court held:

In order to protect the public and to prod contractors into obtaining the required licensing, the Legislature has, as a matter of state policy, greatly disadvantaged the contractor who chooses not to obtain the legally required license. Thus, to avoid the draconian effects of the statute, the unlicensed contractor need only comply with the law. In light of the state’s policy, we hold that a party’s knowledge that a contractor is unlicensed is insufficient as a matter of law to establish the defense of in pari delicto.

Id. (internal citations omitted). Accordingly, as a matter of public policy, the two wrongs by the parties were not equal, and did not make it right.

The Homeowners received the benefit of their bargain without having to pay Bob for all of his good work. The moral of the story? Make sure your uncle is a good lawyer.

How to Ensure That Your Company’s Data Doesn’t Get Lost in the Clouds: Part II

Jurisdiction & Cloud-Service Providers Rights in Data

Cloud computing has become an increasingly popular option for businesses to cheaply and efficiently manage their data systems.  Businesses interested in utilizing these services should be cautious, however, when entering into agreements to use these services.  Just like with any corporate transaction, the contracts and agreements for cloud services must be drafted effectively so as to mitigate business risks to the greatest extent possible.

In Part I of our cloud-computing blog series we addressed some of the privacy and security concerns of which businesses should be aware and offered some guidance as to what steps they should take to mitigate risks to their businesses and stored data.

In Part II of this series we now take a close look at some of the jurisdictional issues that may arise in cloud-computing agreements as well as what rights and responsibilities the cloud-service provider has “ or may have “  in a subscribers data.

1. Jurisdictional Issues in Cloud Computing

As recently as a few years ago, if one company shared computer files with another company under a data sharing agreement, it was reasonably certain that those data files would be physically stored somewhere. The files would be sent by CD, thumb-drive, or some file transfer protocol (FTP) from computers physically residing in one location to computers physically residing in another location. It was easy back in the “old days” to say that a Data Sharing Agreement was governed under Florida law, for example, because the files were actually located in Florida. As a result, jurisdiction of Florida courts over those files was never an issue.

We recently concluded a major merger and acquisition transaction in which a companys data located in the Cloud was sent via file transfer software (also resident in the Cloud) to a recipient Company which was also storing the data in the Cloud. On a conference call we discussed jurisdiction over the data between the Florida corporation and the Delaware LLC. The Chief Information Officer (CIO) of the Delaware company remarked, “State jurisdiction what a quaint concept.”

To be sure, the advent of cloud computing raises a bevy of data location and cross-border issues of which companies need to be aware when entering into cloud-computing agreements. The nature of subscriber data and the physical location of its processing may expose subscribers to litigation and will dictate what legal obligations (and possible remedies) prospective subscribers may have.

For example, one of the most important questions that subscribers can ask their cloud service providers is whether they employ servers in foreign countries for cloud services. Cross-border data flow issues are not new; however, in a cloud-computing context they are magnified because of the free flow nature of the technology. Under the European Union (“EU”) Data Protection Directive, the movement of personal information of EU residents to countries outside of the EU can constitute a violation of EU law. Canada also has similar data transfer provisions. Under the United States dual-use export control regime, the Export Administration Regulation (“EAR”), companies may unintentionally subject themselves to liability for export violations by transmitting sensitive technical data on foreign servers.

Furthermore, processing data in an unexpected country may expose subscribers to legal risks and subject them to different laws and regulations that could otherwise have been avoided on a jurisdictional basis. Many foreign companies are aware of this and purposely maintain their data outside of the United States to avoid the U.S. Governments compelled disclosure provisions of the PATRIOT Act.

The previous examples illustrate how important it is for subscribers to be aware of the possible consequences that can stem from trans-border data flow. Below we have provided a few steps that subscribers can take to help insulate themselves from possible jurisdictional troubles:

  • The subscriber should require their respective cloud-service provider to reveal the physical location of all servers that will be processing the subscribers cloud data and provide reasonable notice of any changes.
  • Some cloud service providers may not be able to provide server location information because they lack the infrastructure or resources to track this content. We strongly suggest that subscribers avoid working with a cloud data provider which cant provide this information, especially if the information to be stored is sensitive customer information.
  • Finally, the subscriber should also require the service provider to collaborate with the subscriber to assure compliance with local laws and restrictions stemming from the transfer of data from one jurisdiction to another. Compliance provisions covering all possible jurisdictions and covenants not to allow data to stray outside of the disclosed jurisdictions should be the norm in cloud-based service agreements.

2. Cloud-Vendor Rights in Data and Service Level Agreements

The Service Level Agreement (“SLA”) is an ancillary component of most cloud-based service agreements. SLAs typically function as an outline for all of the cloud-service providers access and availability commitments. A good SLA will formally define the level of service by providing quantifiable target performance levels, operational requirements, and cloud-vendor responsibilities. SLAs also define technical terms and very often delineate the cloud-service providers rights in the subscribers data.

This is a critical component of the SLA. Without realizing, a company can allow a service provider to access (and potentially use) subscriber data. Due to this risk, it is advantageous for subscribers to tailor the SLA as narrow as possible to limit cloud vendor rights to utilize data outside of the subscribers business requirements.

Subscribers should also limit the cloud-providers use of third-party platforms whenever possible. While the subscriber and service provider may have well crafted non-disclosure, confidentiality, and data security provisions in their agreement, very often cloud agreements do not restrain the service providers right to use third-parties for data storage, back-up, and other technical services. In fact, in the cloud environment, the use of third-party services is ubiquitous. Google, for example, describes itself as a “data processor” and uses “agents” to perform other functions.

Whenever third parties are involved, the subscriber and data provider need to address the applicability of the service agreement to those third parties as well as any prospective liability and service failure issues that may arise. By carefully negotiating and drafting this portion of the agreement, subscribers can significantly mitigate risks associated with the potential unauthorized use of their data.

A cloud-service provider may also create and incorporate additional code in attempts to provide customized solutions for its subscribers. It is prudent for subscribers to specify clearly the ownership interests in and to any intellectual property created in the course of the agreement. Following the cloud-service agreement negotiations, both parties should be aware of whether or not any resulting intellectual property is maintained and owned by the cloud-service provider or the subscriber as work for hire.

In the third and final installment of the cloud-computing blog series, we will discuss cloud-based data retention and termination issue. We will also address how business customers should protect themselves from possible issues that can arise when a prospective cloud-service provider transfers ownership of a customers data through a merger or sale of the cloud-service providers business.

Look for Part III in our series coming soon.

FTC Commission Upholds POM Wonderful Decision Regarding Deceptive Claims

As we previously reported, on September 27, 2010, the Federal Trade Commission (“FTC“) filed an administrative complaint against POM Wonderful LLC (“POM“) for allegedly making unsubstantiated claims, which were also false or misleading in violation of Sections 5(a) and 12 of the Federal Trade Commission Act (“FTC Act“). In its Complaint, the FTC alleged that POMs claims that its products prevent, reduce the risk of, or treat heart disease, high blood pressure, prostate cancer, and erectile dysfunction (“ED”) were not supported by competent and reliable evidence. Additionally, the Complaint contained a proposed cease and desist order that would require, among other things, U.S. Food and Drug Administration (“FDA“) approval of certain disease claims for POMs products.

On May 17, 2012, an FTC Administrative Law Judge (“ALJ”) held in an Initial Decision that POMs claims that its products could treat, prevent, or reduce the risk of heart disease, prostate cancer, and ED were deceptive because these claims were not supported by sufficient competent and reliable evidence. However, the Decision rejected the FTCs theory that competent and reliable scientific evidence for the disputed claims could only be satisfied with two double-blind, randomized placebo-controlled clinical trials (RCTs). Instead, the ALJ found that competent and reliable scientific evidence could be established without RCTs. The ALJ also held that FTCs proposed requirement that POM be prohibited from making any disease claim in the future unless the claim had been pre-approved by FDA “would constitute unnecessary overreaching.”

On June 18, 2012, both POM and the FTC appealed the Initial Decision to the FTC Commissioners. POM appealed all portions of the Decision relating to the finding of liability. The FTC appealed the ALJs decision arguing that (1) all advertisements challenged in the Complaint violated the FTC Act, (2) the substantiation of disease efficacy claims should require well-designed, well-conducted RCTs, and (3) the ALJ erred in not requiring FDA approval for all future claims. The appeal briefs for POM and the FTC can be read here and here respectively. For more information regarding the POM and FTC appeals please see our previous report here.

On January 10, 2013, the FTC Commissioners issued a Final Order approving the Initial Decision 5-0 that POM made deceptive claims about treating, preventing or reducing the risk of heart disease, prostate cancer and ED. However, the Final Order differs in some respects from the Initial Decision. The Commissioners rejected the ALJs conclusion that “RCTs are not required to convey information about a food or nutrient supplement where . . . the safety of the product is known; the product creates no material risk of harm; and the product is not being advocated as an alternative to following medical advice.” The Commissioners also rejected the ALJs determination that the level of substantiation may vary depending on whether the advertiser offers the product as a replacement for traditional medical care.

The Final Order requires POM to possess two RCTs in order to substantiate claims regarding a products effectiveness in the diagnosis, treatment, or prevention of any disease. The Commissioners noted that “[a]lthough [the Commissioners] did not need to decide how many RCTs are necessary to substantiate [POMs] disease claims in order to establish liability, [they] specify a two RCT requirement in the Order for two reasons. First, such a requirement is consistent with Commission precedent.” Second, POM has “demonstrated propensity to misrepresent to their advantage the strength and outcomes of scientific research, as reflected by [the Commissions] conclusion that [POM] made false and misleading claims about serious diseases, including cancer, in a number of the advertisements.”

The Commissioners agreed with the ALJs conclusion that FDA pre-approval is not warranted as part of the remedy. The Commissioners concluded that FDA pre-approval is unnecessary because the goals are sufficiently accomplished by requiring POM to possess at least two RCTs. Significantly, the Commissioners left open the issue regarding FTCs authority to require FDA pre-approval for disease claims. It remains to be seen whether the FTC will continue to include provisions regarding FDA pre-approval in FTC consent orders in other cases. However, as we have previously reported, the FTC has increasingly included FDA pre-approval provisions in consent decrees with companies such as Dannon and Iovate. Our reports can be found here and here, respectively.

POM has 60 days to appeal the Commissions Final Order to a United States Circuit Court of Appeals. See 5 U.S.C. § 45(c). Fuerst Ittleman David & Joseph, PL will continue to monitor the development of the POM case. For more information about food and dietary supplement claims or to have Fuerst Ittleman David & Joseph, PL complete a label and website review of your products, please contact us at (305) 350-5690 or contact@fidjlaw.com.

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

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.