Diamond Aircraft Piloting a Change in Floridas Attorneys Fees Law

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[https://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.

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

Within the past few years cloud computing has become popular with respect to everyday personal and business productivity. Between email, file sharing, word processing, web chatting and social media, the cloud concept has become integral in creating collaborative and efficient means of accessing and sharing data across multiple platforms. The popularity of cloud computing has transcended these everyday uses and has become a functional and cost effective storage option for businesses lacking the resources to store massive amounts of data.

Cloud computing generally involves some form of subscription-based service where a third party satisfies the computing and storage needs of its subscriber through a virtually unlimited hardware and communication source that can be accessed remotely thorough an internet connection. Typically the most attractive feature of cloud computing for consumers is that it allows subscribers to access their data remotely from multiple electronic platforms. Content is made available via the clouds web based utility so limited storage and hardware capacity becomes irrelevant to the respective device’s functionality. The increase in popularity of netbooks, tablets, and mobile computing can attest to this fact.

As such, the cloud concept is becoming more popular within the business community. Cloud computing allows employees to access sensitive tech information, customer information, insurance records, accounting and business data, etc. from anywhere at anytime. From a productivity and accessibility standpoint cloud computing is invaluable to the traveling business person. In addition to the flexibility of use, businesses find Cloud computing particularly appealing because it can minimize expenses and increase efficiency by lessening or even eliminating on-site disk storage and maintenance requirements.

Under the standard pay-per-use model offered by most Cloud vendors, businesses are able to quickly scale computing power up or down without fear of significant capital losses. From an economic standpoint, this overall increase in productivity and decrease in IT costs can be extremely valuable for companies competing in their respective markets.

Unfortunately there is a potential downside for businesses seeking to utilize a cloud vendor’s services. With sensitive business data now in the control of a third party, several potential business and legal risks come into play. Over the course of this three-part blog series we will address some of the major emerging business and legal issues that can arise with respect to cloud computing and provide recommendations on how to mitigate risks for companies who intend on entering into a cloud service agreement.

Part I of this three part cloud-computing blog series will address some of the potential security and privacy issues of which businesses should be aware when entering into a cloud agreement. This will be followed by Part II which will overview the jurisdictional and cloud-service provider rights in subscriber data. The third and final installment of the blog series “ Part III “ will look to the conclusion of the cloud-computing agreement, most specifically what should be done at the outset of the agreement to ensure that the ultimate termination of the agreement is as smooth and problem-free as possible. It is our hope that upon reading this series, businesses will have a basic but strong idea of how to negotiate and properly draft a cloud-service agreement to protect themselves and their customers from the legal and business risks associated with entering into a cloud contract.

Part I:

Security & Privacy Issues and Solutions

Privacy protection and security of cloud data is one of the biggest concerns with utilizing cloud features. Maintaining significant safeguards on sensitive data is one of the foremost priorities of any popular cloud vender. However, it is difficult to completely guarantee the safety of a customer’s data. Information stored by the vendor may have weaker privacy protections than what the creator of the information provides.

For example, in a 2009 Federal Trade Commission complaint by the Electronic Privacy Information Center (“EPIC”) regarding Google, Inc.’s (“Google”) cloud-based services, EPIC claimed that Google failed to adequately safeguard its users confidential information. While claiming to users that their data would be secure and private, Google’s terms of service policy explicitly disavowed any warranty or any liability for harm that could result from its negligence to protect the privacy and security of user data.

In a 2011 settlement to this FTC investigation, Google was forced to establish a comprehensive privacy program to address these allegations and strengthen its protection for its users. With respect to many of the consumer cloud-based services, the reality is that service arrangement’s terms of use policies are often limited to standardized shrink wrap agreements where the consumer is afforded little to no negotiation power.

Fortunately for businesses, an increasing amount of cloud-based service providers are providing customized data management services that require negotiation with respect to the terms of their cloud agreements. Businesses that are potential cloud computing subscribers (“Subscribers”) are encouraged to carefully negotiate their prospective cloud service transaction so as to ensure high-level privacy and security. In the following paragraphs we will discuss some considerations when negotiating the transaction.

1. Structure the Cloud Computing Agreement to Mitigate Risks

a. Limitation of Liability and Professional Liability Insurance

Subscribers should attempt to structure the agreement to make the cloud service provider primarily responsible for data security risks. To whatever extent responsibility is not transferred to the vendor, the Subscriber should then transfer personal risk to a professional liability carrier. Subscribers are advised to structure limitations of liability sections carefully, and indemnity and insurance provisions properly. By doing so both vendor and customer can effectively balance possible data and security risk.

b. Require Vendor to Provide Documentation of its Security Policy

Subscribers should also, as part of its cloud agreement, require the vendor to provide significant documentation of its security procedures in a Statement on Auditing Standards No. 70 Audit (“SAS70 Audit”) or updated Statement on Standards for Attestation Engagements (“SSAE16 Audit”) (collectively “Security Audits”). The American Institute of Certified Public Accounts developed the SSAE16 Audit and its predecessor the SAS70 Audit to ensure that service providers demonstrate that they have adequate control and safeguards in place when they host or process data belonging to their customers. These audits provide an authoritative and uniform format for vendors to report this information, and should be negotiated into a prospective cloud agreement between the Subscriber and Cloud service provider.

c. Incident Response System in the Event of Breach

In the event that a cloud provider suffers a security breach, an effective response plan should be in place. The terms of the agreement should require the cloud-service provider to promptly notify all parties that may be affected by the breach. Terms should be written into the agreement that further require the cloud-service provider to coordinate and assist customers with the investigation mitigation and containment of the breach. It may be beneficial for Subscribers to also reserve the right to conduct their own forensic assessment and investigation of the breach. Issues regarding terminating and limiting data access will be discussed in further detail in the upcoming entry, but with respect to data security, data preservation, and substantive defense issues it is crucial that both Subscriber and cloud-service provider are both in agreement as to what responsive action will be taken in response to a security breach.

In the next installment of the cloud-computing blog series, we will discuss some of the Jurisdictional issues that may occur with respect to the trans-border flow of data in a cloud environment. We will also discuss what rights the Cloud-Service provider has in the customer data it manages.

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.

Look for the second installment in our blog series on Cloud-Based Business coming soon.

Uncertainty Regarding the Future Regulation of Compounding Pharmacies

As we previously reported, the nationwide outbreak of fungal meningitis linked to contaminated injections produced by New England Compounding Center (“NECC”), a compounding pharmacy in Framingham, Massachusetts, prompted calls by the public for better oversight and tighter regulation of compounding pharmacies. In response, Congress and states proposed new legislation in hopes of preventing another public health disaster.

Generally, the operations of compounding pharmacies are regulated by State Boards of Pharmacy, whereas drug manufacturers are regulated by the U.S. Food and Drug Administration (“FDA“). Consequently, drugs produced by compounding pharmacies are not subject to premarket review by the FDA or any other regulatory body, unless state laws so require. The activities of the compounding pharmacy in the NECC case, which involved the manufacture and shipping of drug products across the country, appear to have been much more akin to traditional notions of drug manufacturing than compounding. However, the line separating compounding and manufacturing can be blurry, and in this case it appears to have created a regulatory vacuum. Federal and state lawmakers alike are working aggressively to prevent a similar incident from ever happening again.

In a recent press release, U.S. Representative Ed Markey (D-MA) stated that he is preparing to re-introduce legislation, entitled Verifying Authority and Legality in Drug (VALID) Compounding Act, that aims to increase federal regulatory oversight of compounding pharmacies. The bill, originally introduced on November 2, 2012, died in the previous session of Congress. Overall, the bill preserves state authority to regulate small compounding pharmacies. However, larger compounding pharmacies would be regulated by the FDA as drug manufacturers. In order to determine if a compounding pharmacy is manufacturing drugs, the bill proposes to consider the extent to which such pharmacy sells drugs across state lines, the quantity of the drugs sold, and any other factors deemed appropriate by the Secretary of the Department of Health and Human Services (“HHS“).

In a January 4, 2013 press release, Massachusetts Governor Deval Patrick announced plans to file legislation that would strengthen the states regulation of compounding pharmacies. The proposed legislation would establish strict licensing requirements for compounding sterile drugs; authorize the state Board of Pharmacy to assess fines against pharmacies that violate state policy, regulations, or laws; establish whistle-blower protection for pharmacists and pharmacy staff; and reorganize the state Board of Pharmacy to include more members who are independent of the pharmacy industry. Governor Patrick stated that the proposed legislation, in addition to random, unannounced inspections of compounding pharmacies, would help ensure the safety of compounded drugs.

Although lawmakers seem eager to find ways to prevent another regulatory oversight like the one in Massachusetts from happening in the future, it remains to be seen what steps Congress and states will take to address gaps in the present regulatory scheme. Fuerst Ittleman David & Joseph, PL will continue to monitor any developments in the regulation of compounding pharmacies. For more information, please feel free to contact our offices by email at contact@fidjlaw.com or by phone at (305) 350-5690.

FDA Releases Two More Rules Implementing the Food Safety and Modernization Act

As we previously reported, President Obama signed the Food Safety and Modernization Act (“FSMA”) in January 2011 to help ensure the safety and security of foods in the United States.  On January 7, 2013, the U.S. Food and Drug Administration (“FDA“) issued two proposed rules implementing the FSMA. Generally, the first proposed rule would require food manufacturers to develop a formal plan for preventing their food products from causing foodborne illness. The second rule proposes enforceable safety standards for the production and harvesting of produce on farms. Interested persons may submit comments by May 16, 2013.

The first proposed rule, entitled “Preventive Control for Human Food,” would revise current good manufacturing practice (“cGMP”) regulations for domestic and foreign facilities that are required to register under the Federal Food, Drug, and Cosmetic Act (“FDCA”). If implemented, the proposed rule would establish hazard analysis and risk-based preventive controls for human food. Additionally, the proposed rule would require plans for correcting any problems that arise. These requirements are similar to Hazard Analysis and Critical Control Points (“HACCP”) systems required for juice and seafood. See 21 C.F.R. §§ 120 and 123.

The second proposed rule, “Standards for Produce Safety,” would establish science- and risk-based minimum standards for safe growing, harvesting, packing, and holding of domestic and imported produce in order to reduce the likelihood of microbial contamination. The proposed rule would establish standards in the following areas: worker training health and hygiene; agricultural water sanitation; treatment of biological soil of animal origin; equipment sanitation. Certain produce, however, are exempt under the proposed rule, such as commodities that are rarely consumed raw.

The Standards for Produce Safety rule also provides specific standards applicable only to sprouts. Notably, since 1996, there have been at least 30 reported outbreaks of foodborne illness associated with different types of raw and lightly cooked sprouts caused mostly by Salmonella and E. coli. As we previously reported, the International Sprout Growers Association (“ISGA“) urged the FDA to issue new safety standards for the production of sprouts.

The FDA press release assured that three other key draft rules that remain under review at the Office of Management and Budget (“OMB“) will be released soon. The additional rules include (1) requirements for new foreign supplier verification, (2) preventive controls for animal food facilities, and (3) third party audit certification.

Fuerst Ittleman David & Joseph PL will continue to monitor new rules issued by the FDA under the FSMA. For more information regarding the new rules, please contact us at contact@fidjlaw.com or (305) 350-5690.

ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West

I. General Background

Fraud and abuse in the Medicare system undoubtedly increases healthcare costs for healthcare providers and healthcare beneficiaries. Healthcare providers, as a whole, can appreciate the efforts of the Department of Health and Human Services and the Centers for Medicare and Medicaid Services (“CMS”) to ferret out abuses in the Medicare system. However, these efforts must be rational and reasonable so as not to interfere with the duty to provide reasonably necessary healthcare treatment and services.

In 2008, CMS began consolidating its third-party audit contracts into multi-million dollar Zone Program Integrity Contractor (“ZPIC”) contracts in an effort to “address fraud, waste and abuse” in the Medicare system  “by performing regional Medicare data analysis, complaint resolution and investigative activities.” According to a ZPIC contractor’s website:

The ZPIC contracts include work for all claim types including Part A, Home Health, Hospice, Part B, Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS), Managed Care (Part C), Part D Medicare Prescription Drug, and Medicare and Medicaid Data Matching. Part A cost report audit and reimbursement will also added under the scope of a ZPIC contractor.2

In order to accomplish its goal, the United States was divided into seven (7) zones, with Florida in Zone 7. Figure 1, below, identifies the entities to which CMS awarded ZPIC contracts and the contract amounts:

Figure 1

Zone

Government-Contracted ZPIC auditorRegionContract Amount ($)
1SafeGuard Services, LLC3

Zone 1: California, Nevada, American Samoa, Guam, Hawaii, the Northern Mariana Islands, Palau, Marshall Islands, and the Federated States of Micronesia.

$72,809,122.00
2NCI, Inc. (previously AdvanceMed)4

Zone 2: Alaska, Washington, Oregon, Montana, Idaho, Wyoming, Utah, Arizona, North Dakota, South Dakota, Nebraska, Kansas, Iowa and Missouri.

$81,329,449.00
3 & 6Cahaba Safeguard Administrators5

Zone 3: Minnesota, Wisconsin, Illinois, Indiana, Michigan, Ohio and Kentucky; Zone 6: Pennsylvania, New York, Maryland, DC, Delaware, Maine, Massachusetts, New Jersey, Connecticut, Rhode Island, New Hampshire and Vermont.

$91,704,564.00
4Health Integrity, LLC6

Zone 4: Texas, Oklahoma, Colorado, and New Mexico.

$84,929,432.00
5AdvanceMed Corporation7

Zone 5: West Virginia, Virginia, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Tennessee, Arkansas, and Louisiana.

$107,957,737.00
7SafeGuard Services, LLC8

Zone 7: Florida, Puerto Rico, and the U.S. Virgin Islands

$78,684,443.00

TOTAL

$517,414,747.00

Considering the Federal government is spending over one half of a billion dollars on ZPIC contracts, healthcare providers should expect nothing less than highly aggressive ZPIC auditors justifying their contracts. ZPICs are targeting everyone, including top-rated and reputable skilled nursing facilities (a/k/a nursing homes). Moreover, ZPICs are executing their mandate through a variety of practices (discussed below), none of which appear to be authorized by the Medicare Act (42 U.S.C. § 1395hh(a)(2)), none of which have been promulgated through the rulemaking procedures required by the Administrative Procedures Act (5 U.S.C. § 553), and all of which severely restrict a skilled nursing facility’s ability to operate. It is only a matter of time before the nursing home residents begin to feel the adverse impact of these audits.

II. A Firsthand Sampling of ZPIC Abuses against Skilled Nursing Facilities

A sampling of the practices employed by ZPIC auditors are set forth below:

A. Unannounced Visits

Nursing homes are accustomed to unannounced surveys and audits from federal and state agencies. However, ZPIC auditors in Florida have taken the unannounced visit to a new level. When ZPICs Zone 7 auditor, SafeGuard Services, LLC (“SafeGuard”), targets a facility, not only are the visits unannounced, but the visits are also accompanied by demands for immediate access to voluminous and confidential patient medical records, related and unrelated billing records, proprietary corporate business and financial information, and employees (for interview purposes) ”” all without regard to federally mandated staffing levels, the requirements of resident care, and the orderly operation of the skilled nursing facility. Moreover, Safeguard has regularly sought to preclude the skilled nursing facilities’ abilities to procure legal advice to discern how to respond to the demand for instantaneous and boundless access to records and personnel.  When nursing homes question the ZPIC auditors’ tactics, ZPIC auditors have become hostile, and over time, have developed a reputation that has instilled fear in every nursing facility under its “jurisdiction.”

B. Unknown and/or Deficient ZPIC Auditor Qualifications

ZPICs are charged with the task of ensuring that only reasonably necessary medical services are compensated.  However, actual ZPIC auditors charged with the day-to-day task of “policing” the dispensation of medical services have been exposed to lack formalized auditor training and/or corresponding medical, therapeutic or other clinical backgrounds. That said, it appears as though experience in the medical profession does not appear to be a prerequisite to conduct the purported audits, which, among other things, focus on medical necessity.

In one instance, a ZPIC audit resulted in an “initial” denial of therapy claims9 for an individual who, just one week prior, had his leg amputated, was receiving two (2) separate intravenous antibiotics and had physicians orders for medically necessary therapy in order to strengthen his lower body so that he would be strong enough for a prosthetic leg. Despite such grave health issues, a ZPIC auditor with no known medical background or other formalized medical training or education, made the astonishing and troubling determination, without any explanation, that therapy in this situation was unnecessary and/or unwarranted, thereby disallowing reimbursement for the physician ordered treatment. In a separate instance, approximately $2,800,000.00 of claims were denied as being “medically unnecessary.” The ZPIC auditors came to this decision by using computer-driven extrapolation methods which stripped $2,800,000 of compensation for care already given by reviewing a grand total of”¦ten (10) records. Telling, not one of those ten records appeared to have been reviewed by physicians or medical professionals.

Despite half of a billion dollars being paid to third-party contractors, there appears to be no substantive effort to actually find fraud and abuse in the Medicare system. In the former scenario, the facility had no choice but to shoulder the entire financial burden of complying with the physician’s orders and providing such medically necessary therapy, including intravenous antibiotics as needed.  That same provider  must somehow find the resources to stay in business while it wastes time and resources slowly working through the appellate process.

If the ZPIC auditors are permitted to continue as they have been, many nursing facilities will simply have no choice but to stop providing treatment until such time as CMS formally approves the procedure. Needed care will be not be dispensed, at least on a timely basis. Businesses cannot operate on an accounts receivable basis with the persistent threat of indiscriminate, inexplicable challenges to the services already provided. After all, who is going to make payroll to the employees? Who will pay the vendors? Who will make the lease payments? Who will make the licensing fees? The skilled nursing facilities cannot (and should not be required to) shoulder these financial burdens, whether prospectively or retrospectively, without proper reimbursement under the Medicare program.

C. Unreasonable Scope of Document Requests

Section 1833(e) of the Social Security Act states that Medicare auditors are only entitled to “information as may be necessary in order to determine the amount due such provider.” Yet, requests by ZPIC auditors, in particular SafeGuard, go well beyond the scope of information which may lawfully be requested. In one known instance, SafeGuard made one hundred and fifty four (154) separate requests for six (6) months of patient files10, along with two years of confidential and proprietary business and financial information (including, but not limited to, credit card statements, Facility floor plans, board meeting minutes, organizational charts, chart of accounts, Facility check registers, lists of entities doing business with the Facility, profit/loss statements, journal entries/descriptions, balance sheets, general ledgers, financial statements (audited and summary), backup financial data for cost reports, etc.).

In the face of questioning as to why the entire scope of such information was relevant, or upon what authority SafeGuard claimed to be entitled to it, Safeguard retreated to the “because we said so” argument. SafeGuard has been unable (or unwilling) to engage in a substantive dialogue concerning the basis for such requests, or to in any way elucidate a rationale for why such proprietary and confidential information is relevant in determining amounts due to the provider.   Instead, Safeguard rests on its earned reputation of fear and intimidation to coerce the production of such protected documents.

D. Unreasonable and Arbitrary Compliance Deadlines

In addition to the unreasonable scope of the requests, the ZPIC auditors place skilled nursing facilities in a position where compliance with their over-bearing and voluminous requests is impossible. As it relates to the voluminous request noted above, the nursing facilities were given fifteen (15) days to comply, accompanied by the warning that “[n]o extensions shall be granted.” Thus, ZPIC mandates, without regard to expense of compliance, that the nursing facility stop providing care to its residents and instead focus every effort to copying tens of thousands of documents in order to meet a deadline with no extensions. Of course, ZPIC does not compensate for such a labor-intensive task, nor for that matter, the loss of revenue caused by the redistribution of the facility’s labor force.11

E. Restrictions on the Presence of an Attorney or Corporate Officer

As described above, SafeGuard simply appears at its target facility with no notice and demands access to various employees for private interviews, without the presence of a corporate officer or attorney. Of course, information garnered by SafeGuard from employee interviews could be used, in part, (a) to form the basis of a prepayment suspension and (b) as evidence against a facility in later appellate proceedings. Without the presence of a corporate representative or an attorney to, at a minimum, monitor employee interviews or without any reliable transcript/recording of the interviews, the facilities are severely prejudiced and will remain at a disadvantage in any subsequent appeal. When a facility demands, at a minimum, that its counsel be present during the course of such interviews, SafeGuard refuses, albeit with no explanation whatsoever for its purported right to unfettered access to the facility’s employees. Instead, SafeGuard threatens sanctions and retribution.

F. Delays in Producing Audit Findings; Prepayment Suspensions

Again, despite the truncated response deadlines, SafeGuard auditors lack any sense of urgency in actually reviewing the produced documents in a timely manner. Indeed, there are no known regulations governing the time ZPIC auditors have to issue findings. This is exceedingly problematic because ZPIC auditors (through MACs) appeared to initially have the ability to place all nursing homes undergoing a ZPIC audit on a prepayment suspension.

In laymans terms, before ZPIC auditors make a finding or determination related to the purported audit, the nursing homes Medicare receivables remain arbitrarily suspended and Medicare cash flow slams to an halt. (UPDATE:  CMS issued guidance to change the ZPIC audits from a pre-payment to a post-payment review system). This is where the importance of a timely ZPIC determination comes into play. Surprisingly, the Medicare Administrative Contractor (“MAC”) (the third party entity contracted by CMS to handle “claims processing, customer service, provider audit and reimbursement, provider enrollment and financial management functions for CMS)12 ”” in Florida, First Coast Services Options, Inc. ”” seems to comply with every ZPIC request to restrict a facilities’ receivables. In fact, if you inquire with the Medicare Administrative Contractor (“MAC”) as to why claims are not being process and why funds are restricted, often times, they either do not know, need additional time to look into the matter, or direct the facility to consult with the ZPIC auditor ””who then typically refers you back to the MAC. The facilities are left with their hands tied, only to figure out a way to comply with each request, jump through every hoop and meet every appeal deadline, all while figuring out ways to maintain resident care and meet payroll obligations.13

III. Conclusion

If these ZPIC practices become the industry norm, facilities will have no means to remain in the business of providing top-rated care. Federal and state budgetary cutbacks have already caused a substantial hole in the level of compensation paid for necessary treatment and care; the industry cannot fiscally stomach any further disruption. The ZPIC audits have demonstrated the unchecked abuse and disruption to the healthcare system. Unacceptable levels of future closings will take place, and those in need of the nursing home care will be at a total loss.  Armed with over Five Hundred Seventeen Million U.S. Dollars ($517,000,000.00) of taxpayer money, and empowered with unchecked authority, ZPIC auditors have placed unregulated burdens, demands and deadlines on skilled nursing facilities such that compliance is impossible, while at the same time financially crippling a facility’s ability to defend itself against attack.

Fuerst Ittleman David & Joseph, PL will continue to monitor the ZPIC landscape, vigorously defend against all perceived abuses of scope and authority, and work tirelessly with its clients through every stage of the investigations, including the five (5) stages of appeal, to ensure receipt of all funds due and owing. If your organization is the subject of a ZPIC audit, contact our firm’s litigation department by calling 305.350.5690, or by emailing us  at contact@fidjlaw.com.

1https://www.safeguard-servicesllc.com/faqs.asp

2https://www.safeguard-servicesllc.com/zpic.asp

3https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=83502d7b1098492dcc1b9d530a82ca7c&_cview=0

4https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=f15c85127b9a7cf0cb0217916aa955fd&_cview=0

5https://www.fbo.gov/index?s=opportunity&mode=form&id=fbc47c90f4347f601c2d96f44c8b0e21&tab=core&_cview=1

6https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=2d80a098b5d0d2acf9dec553ed3d538b&_cview=0

7https://www.fbo.gov/index?s=opportunity&mode=form&id=3b25ef7cc31e18e67c8c61d28f1e242e&tab=core&_cview=1

8https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=25cbacceb657c406dc18d2a8a34b77a3&_cview=0

9To fully appreciate how taxing such a denial is to the provider, one must appreciate that an “initial” denial is continual in nature until such time as the entire ZPIC audit process, which may include five (5) separate stages of appeal, is exhausted. Thus, despite providing obviously necessary medical treatment, the ZPICs “initial” denial causes the disastrous absence of funds to the provider, funds which are particularly necessary, and scarce, given the federally mandated cut-backs to the Medicare and Medicaid recipients. A detailed discussion concerning the five (5) stages of appeal is beyond the scope of this entry.

10Patient files may involve a magnitude of detailed documents, including, but not limited to, Physical Therapy Notes, Occupational Therapy Notes, Speech Therapy Notes, Nursing Notes, Podiatry Notes, Psychology Notes, Psychiatry Notes, Dietary Notes, Activity Notes, Social Service Notes, Care Plans, Minimum Data Sets (MDS) (a 65 page document which must be completed on day 5, 14, 30, 60, 90 of a residents stay or every time there is a change in therapy), Resident Assessment Protocols, Medication Administration Records (MARs), Treatment Records, Wound Assessments, Falls Assessments, Bowel and Bladder Assessments, Smoking Assessments, General Admissions Paperwork, Billing Records, Physicians Orders, Physician Progress Notes, Telephone Orders, Nutrition Assessments, Hydration Assessments, Restraint Assessments, Position Assessments, ADL flow sheets, etc.

11In one instance, a facility actually made the effort to comply with the demands and offered to produce the tens of thousands of pages sought to SafeGuard. Confused by the fact that a facility actually moved heaven and earth to comply with its demands, SafeGuard refused the production, instead demanding that the documents be produced exclusively in digital form (on a CD or removal storage drive). When the facility demurred to this new demand, SafeGuard threatened the facility with the ultimate sanction of the immediate removal from the Medicare program!

12https://www.fcso.com/

13As it relates to prepayment suspensions, Dr. Peter Budetti, M.D., J.D., Deputy Administrator and Director, Center for Program Integrity, Centers for Medicare & Medicaid Services, Department of Health and Human Services issued correspondence to Ms. Elise Smith, Senior Vice President, Finance Policy and Legal Affairs, American Health Care Association dated August 23, 2012 stating, “CMS has determined that we can accomplish the appropriate oversight without continued prepayment review and have instructed our contractors to stop prepayment review in these facilities effective August 23, 2012.” (Emphasis added). Dr. Budettis August 23, 2012 correspondence appeared, on its face, to be a source of relief for nursing homes struggling to care for residents and meet payroll in light of the prepayment suspensions. In practice, however, even when presented with this correspondence, SafeGuard continued to restrict cash flow (on a prepayment basis), restrict bad debt payments and re-open four years of cost reports retroactively deny all Medicare claims contained therein, all without any findings, determinations or notices of any kind.

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

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

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

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

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.

Class Action Lawsuits Attack Yogurt Products for Nonconformance with Standards of Identity

Over the past eight months, numerous class action lawsuits have been filed by consumers against yogurt manufacturers regarding the use of milk protein concentrate (“MPC”) as an ingredient in yogurt products. Generally, the lawsuits allege that the yogurt and Greek yogurt products are not actually yogurt because they do not comply with the required standard of identity for yogurt due to the use of MPC as an ingredient. Such lawsuits have been filed against General Mills Yoplait Greek yogurt, Cabot Greek-style yogurt, Dannon Activia yogurt, and Lucerne Greek yogurt.

The plaintiffs in these various suits allege that the products do not meet the FDA-approved standards of identity because the products contain MPC, which is not permitted in yogurt. MPC is often used as a filler to create a thicker product and increase the amount of protein. Plaintiffs also allege that because the products do not conform to the standard of identity for yogurt, the products are misbranded in violation of state law and the Federal Food, Drug and Cosmetics Act (“FDCA”).

Standards of identity define certain food products and govern the ingredients that must be used, or may be used, in the manufacture of those food products. The standard of identity for yogurt describes the permissible ingredients for yogurt, and components and processes that can be used to manufacture yogurt. The standard of identity for yogurt, nonfat yogurt and low fat yogurt are defined in 21 C.F.R. 131.200, 21 C.F.R. 131.203 and 21 C.F.R. 131.206, respectively.  As noted in the complaints, MPC is not expressly listed or described as a permitted ingredient in the applicable standards of identity for yogurt.

Pursuant to Section 403(g)( 1) of the FDCA, a food product is misbranded if: (i) it does not conform with the applicable standard of identity; or (ii) its label does not bear the name of the food specified in the definition and standard. 21 U.S.C. § 343(g). Moreover, courts have held that foods which purport to be standardized products, but contain ingredients not recognized in the standard of identity, are misbranded even if the label accurately describes the product’s ingredients. Libby, McNeill & Libby v. United States, 148 F.2d 71 (2d Cir. 1945) (affirming United States v. 306 Cases Containing Sandford Tomato Catsup With Preservative, 55 F. Supp. 725 (E.D.N.Y. 1944)).

According to the complaints, the use of MPC as an ingredient in these products renders the products misbranded pursuant to the FDCA, 21 U.S.C. § 343, because the products are represented as yogurt for which the standard of identity had been prescribed by regulation and the use of MPC in these products does not conform to the standards.

Significantly, manufacturers whose products are deemed by the FDA to be misbranded are subject to enforcement action. Enforcement actions can include the issuance of Warning Letters, injunctions or criminal penalties.  21 U.S.C §§ 332, 333. Previously, the FDA has warned dairy food product manufacturers that when MPC is not listed as an optional dairy ingredient in products governed by a standard of identity, the use of MPC is not permitted and would render the product misbranded. The FDAs Warning Letter can be found here. FDA Warning Letters notify recipients and the public that the FDA believes that a particular firm has violated federal law. Thus, given the bad publicity that these letters generate, it is advantageous for firms to correct possible violations as quickly as possible. The recipients of Warning Letters typically have 15 days to address the issues presented by the Warning Letter and to develop specific corrective actions. Failure to do so may put the recipient in jeopardy of facing product seizures or formal legal action by the FDA. Please see our previous reports here and here, discussing whether, and if so how, the recipients of Warning Letters may respond or challenge the Warning Letters in court in light of the United States Supreme Courts recent ruling in Sackett v. EPA.

Notably, on December 10, 2012, Judge Susan Richard Nelson of the U.S. District Court in Minnesota dismissed the General Mills Yoplait Greek yogurt lawsuit. In the ruling, Judge Nelson invoked the doctrine of primary jurisdiction, concluding that the FDA was best suited to handle the dispute. Under the doctrine of primary jurisdiction, a court has discretion to retain jurisdiction or stay litigation and refer issues that fall within the special competence of an administrative agency to that agency for its decision. See Access Telecomms. v. Sw. Bell Tel. Co., 137 F.3d 605, 608 (8th Cir. 1998). Courts generally apply the doctrine to promote uniformity and consistency within the particular field of regulation. Here, the Court determined that the underlying issue is whether MPC is a proper, permitted ingredient in yogurt as governed by the standard of identity for yogurt, and the resolution of this question falls squarely within the competence and expertise of the FDA, pursuant to the authority granted to the Agency by Congress. See 21 U.S.C. §§ 301, et seq.

It remains to be seen how quickly the FDA will act to address the ambiguities regarding the standard of identity for yogurt. Fuerst Ittleman David & Joseph will continue to monitor the FDAs regulation of food products. The attorneys in the Food, Drug, and Life Sciences practice group are well-versed in the complex FDA regulatory framework. For more information, please email us at contact@fidjlaw.com or call us at (305) 350-5690.