On December 1, 2015, several amendments to the Federal Rules of Civil Procedure took effect. These amendments, which were initially proposed during the 2010 Federal Rules Advisory Committee meeting and adopted by the Supreme Court in April 2015, generally focus on three areas: 1) early case management; 2) the scope of discovery in federal civil litigation; and 3) the consequences associated with the failure to preserve electronically stored information. A complete copy of the amendments to the Federal Rules of Civil Procedure, can be read here.

I. Amendments regarding case management

The Supreme Court adopted amendments to Rules 1, 4, and 16 for the purpose of improving cooperation and encouraging active judicial case management.

A. Rule 1

Rule 1 has been amended to state that the Federal Rules of Civil Procedure “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” (emphasis added). This amendment emphasizes that both the courts and parties to litigation share in the responsibility of ensuring the just, speedy, and inexpensive resolution of federal civil litigation. As explained by the Committee Notes, Rule 1 was amended to “discourage over-use, misuse, and abuse of procedural tools that increase cost and result in delay.”

B. Rule 4

The Supreme Court also adopted two amendments to Rule 4. First, as explained in more detail below, because the amendments abrogate Rule 84 and other official forms, Rule 4(m) was modified to directly incorporate Forms 5 and 6 of the previous version of the rules into Rule 4. Second, and more importantly, Rule 4(m) has been amended to shorten the time for service of a defendant from 120 days to 90 days. As explained in the Committee Notes, “[t]his change, together with the shortened times for issuing a scheduling order set by amended Rule 16(b)(2), will reduce delay at the beginning of litigation.”

C. Rule 16

With regards to Rule 16, the Supreme Court adopted several revisions to Rule 16(b). First, for Rule 16(b)(1), the Committee struck language which permitted a scheduling conference to occur “by telephone, mail, or other means.” The Committee believed that these scheduling conferences are “more efficient if the court and parties engage in direct simultaneous communication.” As explained by the Committee Notes, under the amended version of 16(b)(1), initial scheduling conferences “may be held in person, by telephone, or by more sophisticated electronic means” such as, videoconferencing.

Second, to coincide with the revisions to Rule 4(m), 16(b)(2) has been amended to require a court, absent good cause, to issue a scheduling order no later than 90 days after any defendant is served (shortened from 120 days) or 60 days after any defendant has appeared (shortened from 90 days).

Third, Rule 16(b)(3) was revised by adding three items to the list of permitted contents of a scheduling order: 1) the preservation of electronically stored information (“ESI”); 2) whether any agreements can be reached under FRE 502 regarding the disclosure of privileged information or materials protected as work product; and 3) the scheduling order may now “direct that before moving for an order relating to discovery, the movant must request a conference with the court.”

II. Amendments regarding the permissible scope of discovery

A. Rule 26

In an effort by the Committee to address the high costs of discovery, one of the most significant amendments has come to the permissible scope of discovery under Rule 26(b)(1). As currently written, Rule 26(b)(1) states:

(1) Scope in General. Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense—including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).

As amended, Rule 26(b)(1) now reads:

(1) Scope in General. Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.

(emphasis added).

The amendment did several things. First, it deleted language authorizing the court to “order discovery of any relevant subject matter involved in the action.” Instead, Rule 26(b)(1) was amended to provide that information is discoverable if it is both “relevant to any party’s claim or defense” and “proportional to the needs of the case” based on numerous factors including: 1) the importance of the issues at stake; 2) the amount in controversy; 3) the parties’ relative access to relevant information; 4) the parties’ resources; 5) the importance of the discovery in resolving the issues; and 6) whether the burden or expense of the proposed discovery outweighs its likely benefits. It should be noted that each of these factors, with the exception of one, were previously located in Rule 26(b)(2)(C)(iii) as factors used by the courts to limit discovery. However, as explained by the Committee Notes, “[t]he present amendment restores the proportionality factors to their original place in defining the scope of discovery. This change reinforces that the Rule 26(g) obligation of the parties to consider these factors in making discovery requests, responses, or objections.”

The rule also adds a new proportionality factor, to wit: “the parties’ relative access to relevant information.” The factor was added by the Committee to address situations of “information asymmetry” in which a party requesting discovery may have very little discoverable information and the other party may have vast amounts, including much which can readily be retrieved. As explained by the Committee, “[i]n practice these circumstances often mean that the burden of responding to discovery lies heavier on the party who has more information, and properly so.”

In addition, the amendment deleted from Rule 26(b)(1) language providing that “relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” The Committee noted that the phrase was used incorrectly by practitioners in some instances to define the scope of discovery. With the amendment, the scope of discovery has been clarified to make clear it is not tied to how probable the discovery of admissible evidence is.

Rule 26(c)(1)(B) has been amended to add the “allocation of expenses” among the terms that may be included in a protective order issued by the court. As explained by the Committee, “[a]uthority to enter such orders is included in the present rule, and courts already exercise this authority. Explicit recognition will forestall the temptation some parties may feel to contest this authority.” However, “[r]ecognizing the authority does not imply that cost-shifting should become a common practice. Courts and parties should continue to assume that a responding party ordinarily bears the costs of responding.”

Further, Rule 26(d)(2) has been amended to allow a party to deliver Rule 34 requests for production in advance of the Rule 26(f) conference. However, the Committee noted that delivery does not count as service. Instead, requests delivered prior to the 26(f) conference will be considered served at the first 26(f) conference. Rule 34(b)(2)(A) was amended to reflect that if requests for production are delivered pursuant to Rule 26(d)(2), the responding party has 30 days from the date of the first Rule 26(f) conference to respond. It was Committee’s goal to facilitate focused discussion at the 26(f) conference

B. Rules 30, 31, and 33

Rules 30, 31, and 33 were each amended to reflect the proportionality factors now present in Rule 26(b)(1).

C. Rule 34

The Supreme Court adopted numerous amendments to Rule 34(b)(2), each with the goal of reducing the potential of a party to impose unreasonable burdens on the discovery process through the use of objections. Rule 34(b)(2)(B) was amended to clarify that boilerplate objections are unacceptable. Instead, an objecting party must state “with specificity the grounds for objecting to the request, including the reasons.” Relatedly, Rule 34(b)(2)(C) was amended to require that “[a]n objection must state whether any responsive materials are being withheld on the basis of that objection.” As explained by the Committee, “[t]his amendment should end the confusion that frequently arises when a producing party states several objections and still produces information, leaving the requesting party uncertain whether any relevant and responsive information has been withheld on the basis of the objections.”

III. Amendments regarding Electronically Stored Information

A. Rule 37

The amendments also saw the significant rewrite of Rule 37(e) regarding the preservation and loss of Electronically Stored Information (“ESI”). Rule 37(e) has been amended to state:

(e) Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from the loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

While the rule carries severe consequences, its restrictions must be noted. First, the rule is limited to ESI which is both lost and cannot be recovered or replaced through additional means of discovery. Second, although rooted in the common law duty to preserve evidence in anticipation of litigation, as noted in the Committee Notes, the “rule applies only if the lost information should have been preserved in the anticipation or conduct of litigation and the party failed to take reasonable steps to preserve it.” Thus, if a loss of information occurs despite the party’s reasonable steps, the rule is inapplicable. Further, the Committee Notes provide a detailed analysis of factors which courts should take into consideration when determining reasonableness including the sophistication of the parties with regard to litigation, whether the ESI is in the party’s control, and a party’s resources. Finally, the remedial measures of the rule only take effect upon a finding of prejudice.

IV. Other Amendments

The Supreme Court adopted two other amendments to the Federal Rules of Civil Procedure. First, Rule 55(c) was amended to read, “The court may set aside an entry of default for good cause, and it may set aside a final default judgment under Rule 60(b).” The addition of the word “final” to clarify the interplay between Rule 54(b), Rule 55(c), and Rule 60(b). As explained by the Committee, “A default judgment that does not dispose of all of its claims among all parties is not a final judgment unless the court directs entry of final judgment under Rule 54(b). Until final judgment is entered, Rule 54(b) allows for revision of the default judgment at any time.” However, “[t]he demanding standards set by Rule 60(b) apply only in seeking relief from a final judgment.”

Finally, Rule 84 and the appendix of forms has been abrogated. The Committee explained, Rule 84 was adopted when the Civil Rules were established in 1938 “to indicate, subject to the provisions of these rules, the simplicity and brevity of statement which the rules contemplate.” The Committee note that “the purpose of providing illustrations for the rules, although useful when the rules were adopted, has been fulfilled,” and “recognizing that there are many excellent alternative sources for forms, including the website of the Administrative Office of the United States Courts, the websites of many district courts, and local law libraries that contain many commercially published forms, Rule 84 and the Appendix of Forms are no longer necessary and have been abrogated.” However, the Committee explained that “the abrogation of Rule 84 does not alter existing pleading standards or otherwise change the requirements of Civil Rule 8.”

 

The commercial litigation attorneys of Fuerst Ittleman David & Joseph have extensive experience litigating cases in federal court and working with the Federal Rules of Civil Procedure. You can contact us at contact@fidjlaw.com or via telephone 305.350.5690.

Thursday October 15, 2015

On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a Memorandum to the U.S. Department of Justice (“DOJ”) staff outlining changes to DOJ policies on criminal and civil enforcement of responsible individuals in corporate criminal investigations. The new Memorandum directs DOJ staff to focus on holding individuals accused of corporate misconduct accountable for their actions in all civil and criminal corporate investigations moving forward.

Although the DOJ’s stated policy to aggressively pursue individuals involved in corporate misconduct is a recent development, the authority empowering the Government to take such action has always existed. For instance, in the food and drug realm, the U.S. Supreme Court ruled in 1975 that corporate officials may be held strictly liable for violations committed by the corporate entity if they stood in a responsible relationship to the violation. United States v. Park, 431 U.S. 658, 674-77 (1975). In United States v. Park, a corporate officer was convicted for holding for sale adulterated or misbranded food, a misdemeanor violation of the federal Food, Drug, and Cosmetic Act (“FDCA”)(21 U.S.C. § 301 et seq.). The Supreme Court held that the FDCA imposes on senior corporate executives an unwavering “duty to implement measures that will insure that violations will not occur.”

Since 1975, the jurisprudence in this area of law has continued to develop, as courts have held corporate officials in a wide range of FDA-regulated industries responsible where the corporate official had the power to prevent or correct a violation of law but failed to do so, regardless of whether they had any personal knowledge of the violation. In 2011, the FDA published guidelines and criteria it intends to follow in investigating or recommending corporate officer prosecutions under the Park Doctrine. As we explain in further detail below, DOJ and FDA have recently pursued criminal convictions against individual officers and employees of companies responsible for introducing adulterated and misbranded products into interstate commerce.

Although we focus in this article on FDA-regulated industries, the Yates Memorandum clearly establishes that the Government’s focus on individual liability for corporate wrongdoing will spread to many other regulated industries, including financial services, import and export, and tax, and we expect the Yates Memorandum to be put to the test in the ongoing Volkswagen investigation. The DOJ’s focus on individual culpability, coupled with its recent turn toward aggressive prosecution, sends a strong signal to regulated industries that the number of civil and criminal claims against individuals will continue to rise. Below, returning our focus to FDA-regulated industries, we explain the history of the Government’s authority to prosecute responsible corporate officers and analyze the Government’s recent criminal enforcement actions against individuals.

DOJ Memorandum Regarding Individual Accountability for Corporate Wrongdoing

As explained above, Deputy Attorney General Sally Quillian Yates recently issued a Memorandum to DOJ personnel detailing the DOJ’s new policies and efforts to crack down on individual liability for corporate wrongdoing. In a speech discussing the new policy, Deputy Attorney General Yates stated:

Crime is crime. And it is our obligation at the Justice Department to ensure that we are holding lawbreakers accountable regardless of whether they commit their crimes on the street corner or in the boardroom. In the white-collar context, that means pursuing not just corporate entities, but also the individuals through which these corporations act.

When applied in the context of FDA-regulated industries, the DOJ’s Memorandum expands upon the Government’s already-existing authority under the FDCA to prosecute individuals for corporate wrongdoing. Under the FDCA, in addition to felony misbranding and adulteration violations which may be charged based upon the specific intent of the defendant, corporate officers and executives may be found strictly liable for the criminal actions of others within the organization, even in the absence any personal wrongdoing, negligence, or knowledge of either wrongdoing or negligence.

Section 333 of the FDCA sets forth the Government’s criminal enforcement powers. This section provides two tiers of liability for FDCA offenses: misdemeanors and felonies. First, the FDCA authorizes the Government to pursue a misdemeanor charge for engaging in any act prohibited by the FDCA, regardless of whether the person or entity had criminal intent to do so. Specifically, the essential elements of a misdemeanor offense under the FDCA are that a defendant (1) distributed, or caused the distribution of, a food, drug, device, or cosmetic in connection with interstate commerce as outlined in the statute, and (2) the food or drug was adulterated or misbranded. (For more information, please review the U.S. Attorneys’ Civil Resource Manual here.) This misdemeanor provision creates a “strict liability” offense, which means that the Government need not prove that the defendant intentionally broke the law in order to secure a conviction. Under the FDCA, a misdemeanor carries the possibility of up to a year in jail and a fine of no more than $1,000, or both. Once an individual or entity has been convicted for a misdemeanor offense under the FDCA, any subsequent violation of the statute could result in felony charges. Equally as importantly, following a misdemeanor criminal conviction, the Government may impose collateral consequences, including exclusion of corporate executives from participation in federal programs, payment of significant fines, or debarment. (For more information about collateral consequences of the Park Doctrine, please read our previous blog here.)

Second, the Government may pursue felony charges against those who commit a violation of the FDCA “with the intent to defraud or mislead.” According to the DOJ’s U.S. Attorneys’ Civil Resource Manual, an intent to defraud or mislead can be established by demonstrating a fraud upon either the ultimate consumer of the product, or upon the FDA, or both. For example, courts have held that a seller of violative products acts “with the intent to defraud” within the meaning of section 333 of the FDCA if he or she takes affirmative steps to evade detection by, and thus mislead, regulatory authorities. See, e.g., United States v. Andersen, 45 F.3d 217, 220 (7^th Cir. 1995)(“The FDA represents the public, and a deliberate attempt to mislead the FDA should be considered as clearly a fraud as are attempts to mislead customers or other individuals.”) Courts have also held that schemes to circumvent the requirements of the FDCA constitute schemes to defraud the FDA. See United States v. Bradshaw, 840 F.2d 871, 874 (11th Cir.), cert. denied, 488 U.S. 924 (1988). In one example of a scheme to defraud the FDA, a defendant prevented a legitimate inspection by the FDA and prepared and maintained false records. By preventing a legitimate inspection by the FDA, the defendant interfered with the FDA’s governmental function and undermined the FDA’s important statutory responsibilities. See DOJ’s U.S. Attorneys’ Civil Resource Manual.

The Yates Memorandum essentially directs the Government to consider the applicability of the FDCA’s misdemeanor and felony provisions and the Park Doctrine in all investigations where an individual may be accountable for corporate wrongdoing. This Memorandum directs the Government to take certain actions intended to ensure that individuals suspected of corporate misconduct will be held accountable for their actions in all civil and criminal corporate investigations moving forward. The “six key steps” outlined in the DOJ Memorandum are as follows:

1. To be eligible for anycooperation credit, corporations must provide to the DOJ all relevant facts about the individuals involved in corporate misconduct.
2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitation expires and declinations as to individuals in such cases must be memorialized.
6. Civil Attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond the individual’s ability to pay.

These policies send a clear message that, in the course of investigating corporations, the DOJ will investigate and pursue criminal charges or civil claims against individuals. As we explain below, companies and employees in allindustries should take notice, as the DOJ’s new enforcement policies suggest that criminal prosecutions will be initiated against individuals working in all other regulated industries.

Examples of DOJ’s Recent Criminal Enforcement Against Individuals in FDA-Regulated Industries

Adulterated Cantaloupe

In 2014, a federal court sentenced Eric and Ryan Jensen, the owners of a cantaloupe farm, to serve five years of probation, with the first six months in home detention, for introducing adulterated food into interstate commerce. The Jensens were required to complete 100 hours of community service and pay $150,000 in restitution. The DOJ’s investigation confirmed that the cantaloupe from Jensen Farms were contaminated with listeria monocytogenes (“listeria”) and linked to 33 deaths and 147 hospitalizations. The FDA issued a Warning Letter to Jensen Farms stating that several environmental swabs from various surfaces and locations throughout their facility and multiple samples of cantaloupe taken during an inspection had tested positive for listeria. The cantaloupe products were, therefore, adulterated within the meaning of the FDCA. Thereafter, the FDA recommended the case to DOJ for prosecution.

Adulterated Peanuts

On September 21, 2015, the DOJ announced the sentencing of corporate officials at the Peanut Corporation of America (“PCA”), who were found guilty of introducing misbranded and adulterated food into the market, as well as other charges related to the sale of salmonella-tainted peanuts and peanut products. (For additional information about this sentence, please read the DOJ’s announcement here and the New York Times’ coverage here.) An outbreak of salmonella in 2008, which resulted in nine deaths and affected 714 others, was eventually linked to a peanut paste produced by PCA. In 2009, the FDA conducted an inspection of PCA’s plant in Blakely, Georgia, and issued a Form 483 describing several observations of FDCA violations. These observations included the failure to (1) manufacture foods under conditions and controls necessary to minimize the potential for growth of microorganisms and contaminations; (2) maintain equipment and containers in a manner that protects against contamination (e.g., no evidence equipment was cleaned after salmonella was isolated from processed peanut paste); and (3) perform mechanical manufacturing steps to protect food against contamination.

At trial, the Government produced evidence that PCA company officials fabricated certificates of analysis for shipments of peanut products showing they were free of pathogens, even where the products had not been tested or tested positive for pathogens. In that case, a federal judge sentenced Stewart Parnell (the former owner and president of PCA), Michael Parnell (a food broker who worked on behalf of PCA), and Mary Wilkerson (an employee who held various positions at PCA’s Blakely, Georgia plant) to terms of twenty-eight, twenty, and five years in prison, respectively. Mr. Parnell’s 28-year prison sentence is regarded as the toughest penalty ever given for a corporate official in a food poisoning outbreak.

Adulterated Dietary Supplements

Less than one week after the sentencing of PCA’s corporate officials, the DOJ sentenced Barry Steinlight, the owner of a dietary supplement company, Raw Deal, Inc. (“Raw Deal”), to serve a 40-month prison term for conspiring to commit wire fraud in relation to a scheme in which his company sold diluted and adulterated dietary supplements.

On October 4, 2012, the FDA issued a Warning Letter to Mr. Steinlight stating “serious violations of the dietary supplement CGMP regulations in 21 CFR, Part 111 “were discovered during a FDA inspection. According to the FDA, those violations caused Raw Deal’s dietary supplements to be adulterated within the meaning of the FDCA because the products were prepared, packed, or held under conditions that did not meet current good manufacturing practices.

In 2013, FDA issued a second Warning Letter to Mr. Steinlight stating that the dietary supplements manufactured by Raw Deal were adulterated because “ingredients used to manufacture the products have been substituted wholly or in part.” In that letter, FDA described how certain products contained maltodextrin or white rice powder but these ingredients were not declared in the formulations provided to customers. The Warning Letter also included examples of how substituting maltodextrin for ingredients in a formula altered the composition of the products and rendered them adulterated. One such example described that Raw Deal had substituted 95.6 percent of the ingredients by weight with maltodextrin and white rice powder, grossly shrinking the percentage of declared ingredients from 100 percent to a mere 4.4 percent of the batch by weight. Raw Deal does not appear to have taken corrective actions to address the deficiencies identified in the FDA’s Warning Letters.

Consequently, on December 17, 2014, the DOJ filed a criminal information charging Mr. Steinlight with one count of wire fraud in furtherance of a conspiracy to introduce adulterated and misbranded products into interstate commerce in violation of 18 U.S.C. § 371. The criminal information filed against Mr. Steinlight reflects deficiencies in manufacturing similar to the ones identified in the FDA’s 2013 Warning Letter. By pleading guilty, he admitted that as early as 2009, he directed Raw Deal employees to add various less expensive fillers, including maltodextrin and brown and white rice flour, to supplements packaged by Raw Deal for its customers. For example, Mr. Steinlight reviewed a customer’s order for 25 kilograms of Odorless Garlic powder and directed Raw Deal employees to fill the order with four kilograms of garlic powder, 10.5 kilograms of white rice flour, and 10.5 kilograms of maltodextrin. The adulterated product was shipped to the customer with a certificate of analysis that failed to list white rice flour or maltodextrin as ingredients.

In pleading guilty, Mr. Steinlight admitted to engaging in the overt acts described above, including adulterating supplements by adding fillers to customer products without their knowledge or consent. He also admitted to directing employees to create certificates of analysis that falsely certified that certain products were “kosher” or “organic,” and to alter an ingredient list provided to FDA in the course of a facility inspection. Upon entering a plea agreement with Mr. Steinlight, the Government agreed that it would not initiate any further criminal charges against him for causing the distribution of adulterated and misbranded products by Raw Deal between 2009 and November 2013.

Mr. Steinlight’s criminal sentence is the latest in a series of criminal cases brought by FDA and DOJ against individuals whose acts resulted in the introduction of violative products into interstate commerce. In the past year and a half alone, there has been a groundswell of highly publicized cases involving the sale and distribution of adulterated food. These cases demonstrate the Government’s willingness to not only investigate companies for violations of the FDCA but also prosecute and sentence responsible individuals for their roles in these violations. 

Enforcement Trend: FDA and DOJ’s Joint Efforts to Aggressively Pursue Civil and Criminal Liability

Since early 2014, the FDA appears to be taking a progressively assertive approach to prosecuting individuals for their roles in defrauding or misleading consumers in cases of adulterated or otherwise violative products. In these cases, the FDA has demonstrated its willingness to take significant action against companies that do not adequately remediate issues identified in administrative documents, such as Warning Letters or Form 483 observations. The FDA has also shown its commitment to investigating whether corporate officials have the requisite intent to trigger misdemeanor or felony prosecution.

In each of the cases described above, the FDA took administrative action notifying the company of deficiencies in their manufacturing or handling processes that resulted in adulterated food prior to taking any judicial action. The FDA also conducted thorough investigations of the company and the responsibility of each of the individual corporate officials. However, the obvious difference between the Jensens’ cases and those against Mr. Steinlight and the corporate officials of PCA is the degree of the criminal offense charged against the respective defendant. The Jensens were charged with misdemeanor crimes, whereas Mr. Steinlight and the corporate officials of PCA were charged with felony crimes. In a statement released by U.S. Attorney John Walsh, the prosecution only recommended probation in the Jensens’ case “because of the defendants’ unique cooperation, including their willingness to meet with Congress and their willingness to meet with and be confronted by the victims of their misconduct. […] In short, they have done everything we have asked of them to mitigate the damage done.”

In the cases against the corporate officials of PCA and Mr. Steinlight, the DOJ found evidence that the individuals intended to defraud or mislead consumers or the FDA. For example, the DOJ produced evidence that the corporate officials of PCA fabricated certificates of analysis for shipments of peanut products. Similarly, Mr. Steinlight was found guilty of falsifying certificates of analysis to consumers by intentionally omitting fillers in the ingredient declarations. Moreover, Mr. Steinlight was found guilty of directing employees to provide the FDA with formulations that had been altered to conceal the use of fillers in their dietary supplements. All of these actions demonstrated an intent on the part of the corporate officials to defraud consumers and the FDA about adulterated products.

In both the PCA and Jensen cases, the adulterated food products were blamed for dozens of deaths and hundreds of hospitalizations and illnesses. In the information against Mr. Steinlight, however, there is no mention of any adverse events or fatalities linked to the consumption of the adulterated dietary supplements. The FDA’s willingness to escalate its administrative investigation of Mr. Steinlight to criminal prosecution suggests that the FDA intends to take a hardline against individual corporate officials whose companies violate the FDCA, even in cases where there are no reported deaths or adverse reports. In speaking about the criminal sentences in the PCA case, Principal Deputy Assistant General Benjamin C. Mizer summed up the recent shift in FDA and DOJ’s prosecutorial efforts:

The Department of Justice will continue to work aggressively with its partners to ensure that the American people are protected from food that is adulterated or misbranded within the meaning of the Food, Drug, and Cosmetic Act and pursue any person who fails to abide by the vital food safety protections in the law.  We are dedicated to using all the tools that we have at our disposal to ensure that the processors and handlers of our food have the public’s safety forefront in their minds. 

Conclusion

The FDA and DOJ’s actions in the last year and a half send a strong signal to regulated industry that FDA intends to strictly enforce the FDCA and its related regulations, and is willing to aggressively pursue criminal charges against individual corporate officials, even if the individual corporate officials have not engaged in or been aware of any wrongful activity or negligence within their companies. The DOJ’s recent Memorandum empowers the Government to prioritize these types of cases and to expend their investigative and prosecutorial resources in order to hold individuals accountable for their roles in corporate misconduct. Based on its recent enforcement in this area and DOJ’s new Memorandum, the DOJ has made clear their intentions to relentlessly hold individuals accountable for wrongdoing, and show no signs of relenting any time in the near future.

As a result, regulated industry should be vigilant in ensuring that their practices and operations are compliant with all applicable regulations and policies. These changes in the regulatory climate should also serve as a wakeup call to individual corporate officials. Individual corporate officials should be prepared for their actions and decisions to be heavily scrutinized by the Government, as well as the possibility of civil and criminal enforcement action.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, food and drug law, anti-money laundering, tax law and litigation, constitutional law, regulatory compliance, white collar criminal defense, and litigating against the Food and Drug Administration and U.S. Department of Justice. If you seek further information regarding the steps which you or business must take to remain compliant and mitigate your risks of enforcement action, you can reach an attorney by emailing us atcontact@fidjlaw.com or by calling us at (305) 350-5690.

Tuesday, September 29, 2015

There has always been a tension between the legal interests of companies and the individual employees who work for them. Often when companies seek to minimize their legal exposure they does so at the expense of their employees who are pressured into waiving their Fifth Amendment right against self-incrimination.  This blog explores a recent change to the legal landscape in the United States that has wide-reaching implications for all employees of regulated businesses.

On September 9, 2015, the United States Department of Justice (“DOJ”) issued a memo from Sally Quillian Yates, the Deputy Attorney General.  The Yates Memo details the Justice Department’s policy regarding corporate fraud and other misconduct that was typified in the years that led up to the “Great Recession.”  This new policy is effective for all future and on-going investigations. A copy of the Yates memo is available here.

The Yates Memo sets forth the modernized policy of the Justice Department as it relates to individual employees of corporations under investigations. The policy may be summarized by reference to the following six critical points:

1. “In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct;”

2. “Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;”

3. “Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;”

4. “Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation;”

5. “[DOJ] attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases;” and

6. “civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.”

The Yates memo is explicit –

In order for a company to receive any consideration for cooperation under the Principles of Federal Prosecution of Business Organizations, the company must completely disclose to the Department all relevant facts about individual misconduct. Companies cannot pick and choose what facts to disclose. That is, to be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct. If a company seeking cooperation credit declines to learn of such facts or to provide the Department with complete factual information about individual wrongdoers, its cooperation will not be considered a mitigating factor pursuant to USAM 9-28.700 et seq. Once a company meets the threshold requirement of providing all relevant facts with respect to individuals, it will be eligible for consideration for cooperation credit. The extent of that cooperation credit will depend on all the various factors that have traditionally applied in making this assessment (e.g., the timeliness of the cooperation, the diligence, thoroughness, and speed of the internal investigation, the proactive nature of the cooperation, etc.).

Yates memo at 3 (emphasis added).

Thus, any company under federal investigation must provide information relating to any potential misconduct of its employees or independent contractors.  The information must be provided without regard to the type of employee, so all employees from the rank and file all the way to the CEO and board members are now required to be disclosed.  Failure on the part of the company to fully disclose such information may be a basis for the government to deny the company mitigation or even, under the appropriate circumstances, to criminally prosecute the company.  As the Yates memo makes clear – the stakes to the company could not be higher.

Moreover, federal prosecutors must “proactively investigat[e] individuals at every step of the process -before, during, and after any corporate cooperation.”  Yates memo at 4.  And government attorneys (both criminal and civil) “should focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct.” Yates memo at 4.  This is so, according to the Yates memo, “[b]ecause a corporation only acts through individuals, investigating the conduct of individuals is the most efficient and effective way to determine the facts and extent of any corporate misconduct.”  Yates memo at 4.

The Yates memo goes on to address global resolutions, i.e. settlements resolving corporate and individual liability, and provides that “[b]ecause of the importance of holding responsible individuals to account, absent extraordinary circumstances or approved departmental policy such as the Antitrust Division’s Corporate Leniency Policy, Department lawyers should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers or employees.”  Yates memo at 5.  Although not impossible, for an individual to now obtain a release from criminal and/or civil liability, such a resolution will have to personally approved, and be in writing, by either an Assistant Attorney General or United States Attorney.  Finally, an individual’s ability to pay, in civil cases, no longer will dictate whether the Federal Government brings suit.  Yates memo at 6.

What does this mean for corporate employees, officers, and board member? Starting immediately, if there is a governmental investigation or potential governmental investigation, each employee must be keenly aware that his/her interests now are potentially adverse to his/her employer.  This is so because every company, in order to obtain leniency from the DOJ in both criminal and civil (including parallel criminal and civil investigations), must disclose all facts regarding its employees potential misconduct.  As the U.S. Attorney’s Manuel clearly states:

when the government investigates potential corporate wrongdoing, it seeks the relevant facts. For example, how and when did the alleged misconduct occur? Who promoted or approved it? Who was responsible for committing it? In this respect, the investigation of a corporation differs little from the investigation of an individual. In both cases, the government needs to know the facts to achieve a just and fair outcome.

USAM at 9-28.720.

Failure to provide a full disclosure of the employee’s actions could result in the prosecution of the company – a virtual corporate death sentence. Thus, given the potentially disastrous result of a federal prosecution, companies will have little choice but to but to sacrifice their employees for the better interests of the company.

Should corporate employees be worried? Undoubtedly. However, beyond worry, employees must be cognizant of the fact that information taken in isolation or out of context (e.g. emails) often can be viewed by governmental investigators as evidence that individuals committed illegal acts. Additionally, because investigations can often take years to resolve (the statute of limitations for most federal crimes is five years), memories can and will fade, resulting in the necessary testimonial evidence to provide context to the documentary evidence being lost.

In the current legal environment, companies facing a governmental investigation will typically turn to an outside law firm to investigate any irregularities.  However, these attorneys represent the company, and do not represent the employees.  Thus, these outside attorneys are under no obligation to inform the company’s employees that their interest may be adverse to the company’s interests, and rarely inform the employee that she has the right to have her own legal representation.  This should come as no surprise, since based on the Yates memo, in order for the company to obtain leniency “the company must completely disclose to the Department all relevant facts about individual misconduct.”

In the past, the DOJ’s position was that prosecutors were required to inquire “whether the corporation appears to be protecting its culpable employees and agents [and that] a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” Indeed, in the DOJ’s investigation of KPMG for the illegal sale of tax shelters, the DOJ did just that – it pressured KPMG to condition the advancement of legal fees with the employee’s cooperation with the DOJ’s investigation.  See United States v. Stein, 541 F.3d 130 (2d Cir. 2008)(holding that the dismissal of a criminal indictment was appropriate when the Government interfered with the criminal defendants constitutional right to counsel). A copy of theStein slip opinion is available here.

As the New York Times has reported, Ms. Yates minced no words when she said: “We mean it when we say, ‘You have got to cough up the individuals.’”  A copy of the NY Times article is available here. Additionally, Ms. Yates provided additional detail in a recent speech at the New York University School of Law. In that speech, Ms. Yates reiterated that “Crime is crime.  And it is our obligation at the Justice Department to ensure that we are holding lawbreakers accountable regardless of whether they commit their crimes on the street corner or in the boardroom.  In the white-collar context, that means pursuing not just corporate entities, but also the individuals through which these corporations act.”  Ms. Yates’s prepared remarks are available here.

What should an employee do in light of the Yates memo? We will discuss all of this in future articles and blog entries. Suffice it to say for purposes of this entry that at a minimum, if at all possible, the terms of the employment should be amended to address the following critical points:

1. Under what circumstances is the company required to pay for the legal representation of the employee?
2. Can the employee choose for his own lawyer?
3. Under what circumstances can monetary fines, penalties and forfeitures be indemnified by the company?
4. Does the company have director and officer (“D&O”) insurance? If so, does it provide for coverage in both civil and criminal investigations?

In any case, employees must be aware of the new enforcement environment in which they work and proactively seek out independent legal counsel who will zealously represent their, as opposed to the company’s, best interests. Independent legal counsel should be engaged as soon as possible to assist with navigating the investigation and to shape the dialogue between the employee and the DOJ.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in governmental investigations and litigating both criminal and civil cases against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com  or by calling us at 305.350.5690.

Tuesday, August 25th, 2015