EMPLOYMENT LITIGATION UPDATE: ARBITRATION AGREEMENTS CANNOT ELIMINATE PLAN-WIDE RELIEF UNDER ERISA

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            Miguel J. Chamorro

 

On December 15, 2025, the Eleventh Circuit Court of Appeals joined several circuit courts in refusing to enforce arbitration agreements that purport to waive plan-wide relief available under the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001, et seq. (“ERISA”). See Williams v. Shapiro, 2025 WL 3625999 (11th Cir. Dec. 15, 2025). The decision is significant because it illustrates the limits of arbitration agreements and it provides a salient example of when dicta—Supreme Court dicta—serves a key role in jurisprudence.

 

            Factual background of Williams.

 

At issue in Williams was an employee stock-ownership plan set up to help employees save for retirement. Such plans invest primarily in the company’s own stock. The plan at issue was an ERISA “defined contribution plan” (a pension plan that “provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account”). The employees contributed to the plan to accumulate allocated shares, and they then had the option to sell their shares upon retirement.

 

Things turned sour when the plan and its trustee sold the plan’s shares to an affiliate, amended the plan document by adding the controversial arbitration clauses at issue, and terminated the plan. The plan then distributed the proceeds from the stock sale to the plan participants. Some participants sued under ERISA and sought to represent a class of about 280 participants, alleging that various defendants unlawfully caused the plan’s shares to be redeemed by the company for $35.4 million less than fair-market value. Id. at *2. Among the relief sought by the participants was rescinding the stock purchase agreement and reforming the plan document to eliminate its arbitration clauses. The latter is not surprising because §§ 1109(a) and 1132(a)(2) of ERISA authorize plan participants to sue for plan-wide relief whereas the arbitration clauses specifically prohibited such relief and limited the participants to seeking relief on an individual basis. The defendants, not surprisingly, moved to compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the “FAA”), based on those clauses. See id. at *2-3.

 

The district court denied the motion to compel arbitration, and invalidated the arbitration clauses because ERISA authorizes plan-wide relief, and the arbitration clauses specifically prohibit such relief. The district court held that the arbitration clauses could not stand because they prevented plan participants from effectively vindicating their rights under ERISA. And because the arbitration clauses were by their own terms non-severable, the court held that the plan’s arbitration procedure was entirely unenforceable. The Eleventh Circuit affirmed.   

 

            The Effective Vindication Doctrine and its application to arbitration agreements

 

            “[F]ederal statutory claims” are arbitrable “unless the FAA’s mandate has been overridden by a contrary congressional command [,]” CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012), and the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). But this precedent yields to the effective vindication doctrine: a doctrine that invalidates arbitration agreements that prospectively waive “a party’s right to pursue statutory remedies.” Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 235 (2013) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985)). See Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 653 (2022) (“the FAA does not require courts to enforce contractual waivers of substantive rights and remedies.”). The key question is whether “the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.” Williams, at *3 (quoting Italian Colors, 570 U.S. at 235).

 

Because the arbitration clauses in Williams clearly invalidate plan-wide relief under ERISA, the effective vindication doctrine would render the clauses unenforceable. The defendants nevertheless opposed the application of the doctrine “because it is judge made and rooted in Supreme Court dicta.” Williams, at *4. Dicta or not, the argument failed. As noted by the Eleventh Circuit in Escobar v. Celebration Cruise Operator, Inc., 805 F.3d 1279, 1291 (2015), even though the effective vindication doctrine “originated as dictum in Mitsubishi Motors,” in Italian Colors (2013), “the Supreme Court acknowledged the effective vindication doctrine” and set out its parameters. To the Eleventh Circuit, therefore, it was ultimately immaterial that the Supreme Court had yet to apply the doctrine to invalidate a particular arbitration clause or that the doctrine could still even be considered dicta:

 

It is true that neither we nor the Supreme Court have applied the doctrine to strike down an otherwise enforceable arbitration provision. Yet whether we think judge-made doctrines are generally appropriate or wise is of little importance when the United States Supreme Court repeatedly acknowledges a doctrine’s existence. See Italian Colors, 570 U.S. at 235–36 (“[Our] cases have similarly asserted the existence of an ‘effective vindication’ exception but have similarly declined to apply it to invalidate the arbitration agreement at issue…. And we do so again here.”) (internal citations and footnote omitted)…. It seems to us, therefore, that the discussion of the doctrine in Italian Colors cannot be passed off as mere dicta.

 

Williams, at *4 (emphases added).

 

As emphasized by the Eleventh Circuit, even if the Supreme Court’s pronouncements on the effective vindication doctrine qualified as dicta, “dicta from the Supreme Court is not something to be lightly cast aside.” Peterson v. BMI Refractories, 124 F.3d 1386, 1392 n.4 (11th Cir. 1997). See also Schwab v. Crosby, 451 F.3d 1308, 1325 (11th Cir. 2006) (“[T]here is dicta and then there is dicta, and then there is Supreme Court dicta. This is not subordinate clause, negative pregnant, devoid-of-analysis, throw-away kind of dicta.”). Faced with the reality that “federal common law is interstitial but essential” because no legislation addresses every conceivable issue that may arise in litigation, see United States v. Little Lake Misere Land Co., 412 U.S. 580, 593 (1973) (“the inevitable incompleteness presented by all legislation means that interstitial federal lawmaking is a basic responsibility of the federal courts”), the Eleventh Circuit officially adopted the effective vindication doctrine. Williams, at *4.

 

            In good company.

 

            In adopting and not merely recognizing the existence of the effective vindication doctrine, the Eleventh Circuit joined six circuits that invalidated arbitration agreements that prevent plan participants from obtaining plan-wide relief under ERISA:

 

  • Platt v. Sodexo, S.A., 148 F.4th 709, 721 (9th Cir. 2025) (“[Employee] argues that the arbitration provision violates the effective vindication doctrine by prohibiting him from bringing a § 502(a)(2) breach of fiduciary duty claim. We agree.”)
  • Parker v. Tenneco, Inc., 114 F.4th 786, 798 (6th Cir. 2024) (“The individual arbitration provision thus eliminates the ability to proceed in a representative capacity on behalf of the Plans and obtain relief for losses to the Plans, which … are substantive statutory remedies provided by ERISA. The provision is therefore unenforceable as a prospective waiver of these statutory rights.”)
  • Cedeno v. Sasson, 100 F.4th 386, 400-06 (2d Cir. 2024); State Farm Mut. Auto. Ins. Co. v. Tri-Borough NY Med. Prac. P.C., 120 F.4th 59, 91 (2d Cir. 2024) (“Bearing in mind a healthy regard for the federal policy in favor of enforcing valid arbitration agreements, we recognize that the effective vindication exception applies in rare cases where an arbitration agreement prevents parties from effectively vindicating their statutory rights.”)
  • Henry ex rel. BSC Ventures Holdings, Inc. Emp. Stock Ownership Plan v. Wilmington Tr. NA, 72 F.4th 499, 508 (3d Cir. 2023) (“The class action waiver requires ESOP participants to waive their statutory right to pursue statutorily authorized remedies. It is therefore unenforceable even if it permits the Department of Labor to pursue those remedies on behalf of the ESOP’s participants.”)
  • Harrison v. Envision Mgmt. Holding, Inc. Bd. of Dirs., 59 F.4th 1090, 1107 (10th Cir. 2023) (“[what] is problematic … is Section 21’s prohibition of any form of relief that would benefit anyone other than Harrison that directly conflicts with the statutory remedies available under 29 U.S.C. §§ 1109 and 1132(a)(2), (a)(3).”).
  • Smith v. Bd. of Dirs. of Triad Mfg., Inc., 13 F.4th 613, 623 (7th Cir. 2021) (“the “effective vindication” exception may be rare, but it applies here.”)

 

In joining six sister courts, the Eleventh Circuit affirmed the district court’s ruling that the arbitration clauses of the plaintiff’s stock-ownership plan were unenforceable. It also held that the arbitration clauses were, by their own terms, non-severable, meaning that the remaining arbitration provisions could not survive. This compelled the conclusion that the plan’s arbitration procedure was entirely unenforceable and that the district court properly denied the defendants’ motion to compel arbitration, thus requiring the action to be litigated in district court.

UNDOCK THAT APPEAL—THE FEDERAL ARBITRATION ACT DOESN’T APPLY TO WORKERS ENGAGED IN INTERSTATE COMMERCE

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By Miguel J. Chamorro

The Federal Arbitration Act, 9 U.S.C. §§ 1-16 (the “FAA”), broadly construes arbitration clauses in contracts “evidencing a transaction involving commerce.” 9 U.S.C. § 2. See Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003) (the term “involving commerce” “signal[s] the broadest permissible exercise of Congress’ Commerce Clause power”); Allied–Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 277–81 (1995) (“evidencing a transaction” means only that a transaction in fact involved interstate commerce, “even if the parties did not contemplate [it]”). However, the FAA exempts certain types of commerce from its reach—even interstate commerce. The Eleventh Circuit Court of Appeals recently addressed one such case in APM Terminals Mobile, LLC v. International Longshoremen’s Ass’n, AFL-CIO, Local Union, 2025 WL 3202319 (11th Cir. Nov. 17, 2025), when it rejected an appeal of an order denying a motion to compel arbitration under the FAA.

The facts of APM Terminals are straightforward. APM conducts stevedoring operations at the Port of Mobile, Alabama, and the employees who move its cargo are supplied and represented by a union. A collective bargaining agreement between APM and the union governed the union’s work for APM. The agreement required all disputes arising therefrom to be settled by alternative dispute resolution mechanisms, with the “final step of that process [being] arbitration.” Id. at *1. APM filed suit in court over a union strike and moved for a temporary restraining order. After the union removed the action to district court, APM filed an amended complaint seeking damages, whereupon the union moved to compel arbitration. The district court’s denial of that motion, and the union’s interlocutory appeal therefrom, generated the Eleventh Circuit’s opinion dismissing the appeal for lack of jurisdiction. Id.

 

In its appeal, the union made three arguments to invoke the Circuit Court’s appellate jurisdiction and thus avoid dismissal of its appeal. This article explores the first of those arguments: the availability of interlocutory appeals under section 16 of the FAA, which sets forth the type of orders that may be immediately appealed.

The union’s section 16 argument seemed like a winner: the FAA clearly permits interlocutory appeals from, inter alia, orders “denying a petition [for] … arbitration to proceed.” 9 U.S.C. § 16(a)(1)(B). To invoke that provision, however, the FAA must apply. And it did not. Section 1 of the FAA provides that the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. The precedent on this exclusion doomed the appeal.

As to “contracts of employment,” the Eleventh Circuit has held that “collective bargaining agreements” are ‘contracts of employment’ within the meaning of the [section 1] exclusion.” American Postal Workers Union v. U.S. Postal Serv., 823 F.2d 466, 473 (11th Cir. 1987). Likewise, the Supreme Court held that “workers who physically load and unload cargo on and off airplanes on a frequent basis” are “engaged in foreign or interstate commerce” and therefore fall under the section 1 exclusion. Sw. Airlines Co. v. Saxon, 596 U.S. 450, 456 (2022)). Indeed, “any class of workers directly involved in transporting goods across state or international borders falls within § 1’s exemption” and “[a]irplane cargo loaders are such a class.” Saxon, 596 U.S. at 457. See Baltimore & Ohio Sw. R. Co. v. Burtch, 263 U.S. 540, 544 (1924) (“It is too plain to require discussion that the loading or unloading of an interstate shipment by the employees of a carrier is so closely related to interstate transportation as to be practically a part of it”).

Here’s a short list of other classes of workers “engaged in foreign or interstate commerce”:

  • Postal service workers, see American Postal, 823 F.2d 466 (11th Cir. 1987)
  • Transportation workers, see Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001)
  • Field supervisors at package transportation companies, see Palcko v. Airborne Express, Inc., 372 F.3d 588 (3rd Cir. 2004)
  • Independent contractors, see New Prime Inc. Oliveira, 586 U.S. 105 (2019)
  • Uber drivers, see Singh v. Uber Technologies, Inc., 939 F.3d 210 (3d Cir. 2019)
  • Delivery drivers, see Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. 2020)
  • Airplane cargo loaders, see Saxon, 596 U.S. 450 (2022)

The Eleventh Circuit readily found that the longshoremen at the Port of Mobile were included in the list, holding that there was:

no material distinction between the airline workers in Saxon and the longshoremen here. As the district court explained and the parties do not dispute, the union “represents longshore employees” who help APM “load[] and discharge … containerized cargo” for interstate transportation.

Id. at *2. Thus, the section 1 exclusion applied to the union’s collective bargaining agreement, which meant that the union could not properly take an interlocutory appeal under section 16 of the FAA (or for that matter invoke any provision of the FAA). Id. Its appeal was dismissed for lack of jurisdiction.

The decision serves as another reminder that despite the FAA’s prominent role in the enforcement of arbitration agreements throughout the country, the FAA itself exempts certain cases from its purview.

FLORIDA’S NEW STEM CELL LAWS: UNBURDENED BY WHAT HAS BEEN

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On July 1, 2025, Florida’s new “Stem Cell Therapy” legislation became effective, adding Fla.Stat. § 458.3245 to Florida’s Medical Practices statutes and § 459.0127 to Florida’s Osteopathic Medicine statutes. Florida’s new stem cell laws follow a similar Utah law passed in 2024, but Florida’s higher median age and population size will inevitably create a much larger market and far greater public attention.

The new Florida law allows physicians to administer “stem cell” products derived from human tissue (including birth tissue but excluding aborted fetuses) to patients for orthopedics, pain management, and wound care. The law requires product manufacturers to register with FDA and become certified by one of four listed accrediting organizations, but does not require the “stem cell” products to be FDA approved. In this way, and as I will explain in more detail below, the Florida law and federal law are at loggerheads.

This conflict between state and federal law is more than academic, and should be understood by physicians adding “stem cells” to their practices and patients seeking “stem cells” for their injuries. Fortunately, the recent history of “stem cells” in the United States is rich with data to inform those important decisions.

Twenty Years of Regulatory History, In Brief.

Following an eight-year regulatory process, the United States Food & Drug Administration (“FDA”) finalized its “stem cell” regulations in 2005. Those regulations are found at 21 CFR Part 1271, titled “Human Cells, Tissues, and Cellular and Tissue-Based Products,” (“HCT/Ps”), and  govern most medical products derived from human tissue and intended for the treatment of patients in the United States.

Part 1271 covers an expansive array of HCT/Ps – including birth tissue, skin, bone, bone marrow, and many others – and creates regulatory categories for each based on the tissue source, the type and extent of manufacturing, and the intended use. Speaking generally, FDA takes a “tiered, risk based approach” to regulating HCT/Ps: the more “homologous” the tissue is to its intended use (e.g., skin allografts for wound covering versus fat derived cells for autism), and the less processing is involved (cleaning and sizing versus chemical digestion and culture expansion), the more likely it is that FDA will allow the product onto the market without FDA approval. Critical to this discussion, FDA requires “allogeneic” HCT/Ps (meaning, tissue derived from a donor and administered to a different person) which either have a systemic effect or are “dependent upon the metabolic activity of living cells to achieve [their] primary function” to be approved before they can be marketed and administered to patients in the United States. See, 21 CFR § 1271.10(a)(4)(i).

Over the years, FDA has amplified its position on “stem cell” products derived from donated birth tissue through guidance,  consumer alerts,  web postings, and warning letters, and enforced consistently against many of the products the new Florida law allows, including  exosomes, umbilical cord blood, Wharton’s jelly, and amniotic tissue. FDA’s position is clear: when birth tissue products are marketed as either “cellular” or otherwise “dependent upon the activity of cells” to achieve their intended function, they must be approved prior to commercialization, and companies manufacturing, distributing, or using them without approval violate federal law.

Of course, the violations called out by FDA are not merely technical. In many instances allogeneic “stem cell” products have presented real risks to patients, either because they were genuinely dangerous or contained no beneficial properties. As an example, in 2019 FDA issued a  warning letter to Liveyon Labs, which had manufactured and distributed unapproved umbilical cord products which sickened numerous patients and ultimately resulted in the founder being sentenced to prison. Earlier this year, the Federal Trade Commission (“FTC”) and the attorney general of Georgia obtained a permanent injunction and $5M judgment against the Stem Cell Institute of America and its founders stemming from their false and unsubstantiated “stem cell” advertisements on a national scale. Meanwhile, there has been no shortage of press coverage, with “false hope” being a common refrain.

“Stem cells” or stem cells?

Another key takeaway from the last twenty years is that “stem cells” are not always stem cells, at least as actual stem cells are understood by biologists and implied by patients.

To a cell biologist, a stem cell is a specific type of living cell that can renew itself, develop into different cell types in the body, and multiply in the laboratory when provided with proper nutrients. Ideally, when actual, living stem cells are injected into the body, they can self-renew and “regenerate,” allowing for the repair of cartilage and the regrowth of damaged joints and organs. These characteristics are unique to stem cells, and again, they must be alive to multiply and regenerate.

However, over time, the scientific understanding of the term “stem cell” gave way it becoming marketing jargon. The federal district judge in Stem Cell Institute of America proves this point by defining “stem cell therapy” as involving “the injection of shots with products containing cells or growth factors derived from birth tissue, including amniotic tissue or fluid, placenta, Wharton’s jelly, umbilical cord blood, adipose tissue, and bone marrow.” In other words, even to a federal court judge, a “stem cell” product need not contain actual stem cells. Instead, if the product is derived from human tissue and contains any type of cell or growth factor – living or dead – the product is a “stem cell” product.

Meanwhile, no less than three studies have been published showing that the “stem cell” products widely available on the market do not contain stem cells at all.

First, in 2019, a study in the American Journal of Sports Medicine examined amniotic fluid products from seven companies and found that none contained live stem cells in spite of the presence of dead nucleated cells. This study therefore concluded that the amniotic fluid products should not be considered “stem cell” therapies, and cautioned researchers to “use caution when evaluating commercial claims that products contain stem cells.”

Second, in 2020, a study in the Cartilage journal reviewed nine products derived from amniotic membrane and arrived at the same conclusion. Here, the authors noted that although these products contained a variety of proteins and could have some beneficial effect in orthopedic applications, the actual method of action was unknown, and none contained live or otherwise viable cells which might justify calling them “stem cell” products.

Finally, in 2021, another study in the American Journal of Sports Medicine reviewed five commercially available products derived from umbilical cords, arrived at the same result, and concluded that whatever therapeutic benefit could be derived was likely due to the presence of proteins or non-viable cells. Again, however, these “stem cell” products contained no actual stem cells.

Unburdened by what has been.

To summarize, “stem cell” products derived from donated birth tissue have proliferated in the United States over the past twenty years in spite of FDA’s unambiguous position that, without approval, they violate federal law. Likewise, although these products are called “stem cell” products, they often contain no actual stem cells, and achieve a therapeutic benefit through proteins or dead cells, or simply by lubricating and cushioning. Thus, in many, many instances, off-the-shelf “stem cell” products are not really stem cell products – in spite of the risks companies take on by commercializing them.

The new Florida “stem cell” law is unburdened by this well-established history and, for the most part, disregards it. For starters, the law does not specifically define “stem cells” or require “stem cell” products to contain actual stem cells. Instead, the law defines “stem cell therapy” as a “treatment involving the use of afterbirth placental perinatal stem cells, or [HCT/Ps]…” Thus, so long as the product is derived from birth tissue or another HCT/P, the product can qualify as a “stem cell” therapy under Florida law.

Similarly, although the new Florida “stem cell” law requires manufacturers to provide doctors with an “analysis report” showing that the products contain “viable or live cells” at the time of manufacturing, the law does not require the “viable or live cells” to be stem cells and does not define “viable or live.” Consequently, the “analysis report” may include cells other than actual stem cells, and characterize them as “viable or live” when, in reality, they are  mostly dead. These are exactly the issues discussed by the studies discussed above.

The law also requires physicians to inform their patients in writing that “stem cell” products have “not yet been approved by FDA.” Physicians must also include this caveat in all of their advertising. However, given the history described above, this “informed consent” requirement might be incomplete, or worse, deceptive, for two reasons:

– The informed consent gives patients an incomplete understanding of the federal regulatory status of these products. In short, a patient might read that a product has not “yet” been approved by FDA and believe that to be the end of the matter. However, the law does not require the patient to be informed that the products actually violate FDA’s regulations, which could be even more relevant to the patient’s choice of treatment. Advising the patient of the former factor but not the latter might create an incomplete sense of security.

– The informed consent falsely assumes that an FDA approval application has been submitted for the product. The Florida laws require the informed consent to advise patients that  products “have not yet” been approved by FDA. By using the word “yet,” the law assumes that FDA approval is forthcoming, but in reality, manufacturers under the new Florida stem cell law are not even required to seek an approval. Only FDA registration is required, which is an exponentially lower barrier to market. In contrast to Florida’s “stem cell” law, Florida’s Right To Try Act, for patients with “terminal” medical conditions, requires products to have an approval application pending with FDA.

In addition to its inherent conflict with federal law, Florida’s new stem cell law is irreconcilable with preexisting Florida law – namely the Florida Drug and Cosmetic Act, which treats violations of federal law as violations of Florida law. So, for instance, if a person selling “stem cell” products in Florida violates federal law because his products lack FDA approval, he also violates Florida law. The new Florida stem cell law provides nothing in the way of reconciliation.

These gaps in the new Florida “stem cell” laws were easily foreseeable by the Florida legislature when the laws were being drafted and passed, and each presents potential risks to patients – either because patients are not receiving what they expected, or because the products are harmful. The Florida Board of Medicine now has the authority to implement the “stem cell” law through rulemaking, and it should consider these defects in the laws when choosing how to proceed.

Parting thoughts.

The best analog for the new Florida “stem cell” laws is cannabis legalization in the United States beginning with California’s Proposition 215 in 1996. Indeed, just as California “legalized” a federally banned substance within its own borders, so too has Florida with
“stem cell” products which FDA treats as adulterated, misbranded, unapproved new drugs.

Many good things have come with state legalization of cannabis, both in terms of commerce and patient access. The Florida law has similarly commendable intentions: greater access to potentially helpful therapies from licensed physicians for patients who might otherwise travel outside of the United States to receive care.

However, the cannabis industry has trudged a steep path since legalization. The United States Supreme Court has long since blessed DEA’s enforcement authority over cannabis companies operating in accordance with state law, and the government has used that authority routinely since then. Here, federal enforcement will remain an evergreen threat, so physicians should proceed with caution when incorporating “stem cells” to their practices.

Hopefully, the new Florida law will push FDA to modernize its HCT/P rules, much like the Justice Department did to its marijuana enforcement priorities beginning in 2013. Legalization in Utah is one thing, but legalization in Florida might be too big for FDA to ignore. As I argued in 2017, “FDA cannot enforce this problem away. FDA now finds itself with a distributed, decentralized drug manufacturing industry, and too few resources to know where all the participants are.” With the horse officially out of the barn, and an HHS commissioner who has promised to end FDA’s “suppression” of stem cells, FDA’s right next move might be to support state stem cell initiatives. I shared my thoughts on how it might do so in 2021, and to its credit, Florida’s new “stem cell” law includes several of the building blocks I called for at the time.

Supreme Court Justice Louis Brandeis once wrote in 1932 that “a single courageous state may, if its citizens choose, serve as a laboratory, and try novel social and economic experiments without risk to the rest of the country.” Florida endeavors to do precisely that with its new stem cell law. But there is no shortage of cases since that time endorsing the federal government’s efforts to crack down on entirely intrastate activity, and that risk is very real for Florida’s stem cell experiment. Whether FDA and Florida go to battle or find a middle ground is to be determined, but for the time being practitioners and patients must be mindful of what has been when deciding on treatments now available under Florida’s “stem cell therapy” law.

International Tax Compliance Update: IRS to Issue ”John Doe” Summonses Seeking Information Regarding U.S. Taxpayers with Undisclosed Offshore Bank Accounts

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On November 7, 2013, United States District Judge Kimba M. Wood of the Southern District of New York, granted authorization to the IRS to issue John Doe summonses to Bank of New York Mellon and Citibank requiring those banks to produce records and information pertaining to US taxpayers holding accounts at Zurcher Kantonalbank and its affiliates (ZKB) in Switzerland. 

Thereafter, on November 12, 2013, U.S. District Judge Richard M. Berman, also of the Southern District of New York, granted permission for the IRS to issue John Doe summonses to Bank of New York Mellon, Citibank, JP Morgan Chase, HSBC, and Bank of America requiring those banks to produce records and information relating to accounts held by US persons at The Bank of NT Butterfield & Son, Limited, and its affiliates (Butterfield) in a number of foreign jurisdictions including the Bahamas, Barbados, the Cayman Islands, and Switzerland.  The Department of Justice’s news release on these orders is available here.

The judicial orders and the summonses that will follow represent the latest effort by the United States to root out and hold accountable US taxpayers holding accounts and financial assets abroad in an attempt to avoid US taxation.  Recently, for instance, three employees of ZKB were indicted for conspiring with US taxpayers to hide over $400 million in Swiss bank accounts.  Additionally, the United States, working together with Swiss bank regulators, has reached an agreement with certain Swiss banks encouraging those banks to disclose their US account holders in exchange for non-prosecution guarantees.  Further, Congress has enacted the Foreign Account Tax Compliance Act (FATCA), which is designed to punish foreign banks, via a withholding tax mechanism imposed on payments made to those banks from US sources, which refuse to provide information regarding their US account holders.  For more information about FATCA and the Treasury Department’s struggles to implement the law, please see our prior blog discussions here, here, and here. 

The issuance of John Doe summonses is a tactic the IRS has utilized previously.  For instance, last April, the IRS issued a John Doe summons to Wells Fargo seeking information concerning US persons with accounts at First Caribbean International Bank. 

The IRS will issue John Doe summons in instances where it is unsure of the precise identity of the inpiduals about whom it is seeking information.  Because the scope of a John Doe summons is necessarily broad, John Doe summonses allow the IRS to recover vast amounts of information from the banks on which they are served.  The IRS serves summonses on US banks seeking information about accountholders of foreign banks because US banks often act as correspondent banks for the foreign banks.  Under these arrangements, a US bank will hold accounts for the benefit of a foreign bank that is seeking to do business in US dollars but that otherwise does not have a US presence.  Service of the summons on the US correspondent bank is simpler and more efficient than attempting to retrieve information directly from the foreign bank.

The IRS’s efforts to crack down on offshore tax evasion have led to severe consequences for non-compliant US taxpayers.  For instance, the IRS’ focus on identifying non-compliant account holders with UBS have led to criminal convictions and the imposition of severe monetary penalties, as highlighted here, here, and here.  Further, the United States has pursued the banks and the bankers that have assisted non-compliant US taxpayers in hiding their assets, as highlighted here, here, and here.  Given the tough stance the IRS has taken on this issue, cooperation between foreign banks and the IRS regarding the production of information about US accountholders is likely to only grow in the future.  Such cooperation, in turn, will likely increase the risk that more non-compliant US accountholders are identified and prosecuted.

It is important to keep in mind that there is no prohibition against US persons holding foreign bank accounts.  However, US persons holding foreign accounts generally must disclose these interests to the IRS in any year in which the balance of the account exceeds $10,000.00, by making a Foreign Bank Account Report (FBAR).  Separate reporting requirements exist for other foreign assets held by US persons, such as stock in foreign corporations or interests in offshore trusts.  Further, US persons are taxed on their worldwide income, regardless of the source of the income.  Interest earned on foreign bank accounts, distributions from offshore trusts, and pidends paid by foreign corporations are all subject to US tax and must be reported on the US person’s annual tax return.  Failure to report the existence of overseas accounts or financial interests when required can lead to significant monetary penalties and, potentially, criminal prosecution.  For more information regarding the FBAR requirements, see our previous blog entries here, here, and here.

The IRS has re-opened the Offshore Voluntary Disclosure Program (OVDP), which permits taxpayers with undisclosed foreign income or assets from previous tax years to make a full disclosure of their previously undisclosed interests and income in exchange for generally lower penalties and a guarantee from the IRS that it will not recommend the disclosing taxpayer’s case to the Justice Department for criminal prosecution.  Read more about the most recent OVDP here.

The most recent efforts by the IRS to learn the identity of non-compliant US accountholders at ZKB and Butterfield is especially pertinent considering the limitations of the OVDP.  Specifically, once the IRS or the Department of Justice becomes aware of a taxpayer’s non-compliance through the use of a John Doe summons or similar investigatory mechanism that taxpayer becomes ineligible for participation in the OVDP.  That prohibition does not apply, however, in situations where a non-compliant taxpayer merely holds an account at a bank that is the subject of a John Doe summons””the government must learn of the specific taxpayer’s non-compliance on its own before the door to the OVDP is shut.

Given the generally beneficial nature of the OVDP, it would be wise for non-compliant US taxpayers holding accounts with ZKB or Butterfield to immediately explore their options regarding the OVDP.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who are seeking to avail themselves of the OVDP.  We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fidjlaw.com.

Announcing the FIDJ Mini-Blog

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This week, Fuerst Ittleman David & Joseph is launching a Mini Blog, which will be submitted to its readers on a weekly basis. Unlike its usual Blog, which will continue to be updated here, the Mini Blog will allow FIDJ to communicate with its readers in a short and to-the-point style, delivering critical news updates with just enough commentary to explain why the updates are critical. We believe that this Mini Blog will be a valuable resource for our readers, and will allow subscribers to stay up to date on issues affecting all of our practice areas, including Tax & Tax Litigation, Food Drug & Cosmetic Law, Complex Litigation, Customs Import & Trade Law, White Collar Criminal Defense, Anti-Money Laundering, Healthcare Law, and Wealth & Estate Planning. Additionally, subscribers may sign up to receive only the content relevant to their interests on a subject-by-subject basis. As always, please feel free to reach out to us with comments regarding our content or suggestions regarding how we may better keep you up to date.

Click here to sign up.

Here is a sampling of what you can expect to receive in our Mini Blog:

Food and Drug:

On May 28, 2013, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidelines for voluntary “serving facts statements” that alcoholic beverage manufacturers may include on their packaging. A copy of TTB’s press release can be read here. The serving facts statements are similar to the nutrition panels currently found on non-alcoholic foods and beverages. According to the rule, serving facts statements will include: 1) the serving size; 2) the number of servings per container; 3) the number of calories; and 4) the number of grams of carbohydrates, protein, and fat preserving. In addition, serving fact statements may also include the percentage of alcohol by volume and a statement of the fluid ounces of pure ethyl alcohol per serving. TTB is providing the interim guidance on the use of voluntary serving facts statements on labels and in advertisements pending the completion of rulemaking on the matter. A copy of the TTB Ruling can be read here.

Healthcare:

A new bill in the U.S. House of Representatives, the Medicare Audit Improvement Act of 2013, seeks to amend title XVIII of the Social Security Act to improve operations of recovery auditors under the Medicare integrity program and to increase transparency and accuracy in audits conducted by contractors. A few proposals include limiting the amount of additional document requests, imposing financial penalties on auditors whose payment denials are overturned on appeal and publishing auditor denials and appeals outcomes.

In related news, the Department of Health and Human Services c/o the Centers for Medicare and Medicaid Services  (“CMS”) is proposing to increase the maximum reward for reporting Medicare fraud from “10 percent of the overpayments recovered in the case or $1,000, whichever is less, to 15 percent of the final amount collected applied to the first $66,000,000”¦” In case you don’t have a calculator handy, that’s a change from $1,000 to a potential maximum windfall of $9,900,000. It’s safe to assume that the number of whistleblower reports of alleged Medicare fraud are going to skyrocket. As the saying goes, you miss 100% of the shots you don’t take.

As decided by the United States Court of Appeals for the Eleventh Circuit, HIPAA preempts Florida’s broad medical records disclosure law pertaining to a decedent’s medical records. In Opis Management Resources, LLC v. Secretary of Florida Agency for Health Care Administration, No. 12-12593 (11th Cir. Apr. l 9, 2013), the 11th Circuit Court of Appeals ruled that Florida’s broad medical records disclosure law did not sufficiently protect the privacy of a decedent’s medical records. The Court noted that Florida allows for “sweeping disclosures, making a deceased resident’s protected health information available to a spouse or other enumerated party upon request, without any need for authorization, for any conceivable reason, and without regard to the authority of the individual making the request to act in a deceased resident’s stead.” In contrast, HIPAA only permits the disclosure of a decedent’s protected health information to a “personal representative” or other identified persons “who were involved in the individual’s care or payment for health care prior to the individual’s death” to the extent the disclosed information is “relevant to such person’s involvement”.

Tax:

On May 29, 2013, the New York Times reported that the Swiss Government will allow Swiss Banks to provide information to the U.S. Government in exchange for assurances that Swiss banks would only be subject to fines and not be indicted in an American criminal case. Per the New York Times,

The New York Times article reports that: But [Ms. Widemer-Schlumpf (Switzerland’s finance minister)] said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement”¦. Ms. Widmer-Schlumpf said the government would work with Parliament to quickly pass a new law that would allow Swiss banks to accept the terms of the United States offer, but said the onus would be on individual banks to decide whether to participate.

This appears to be the beginning of the end of Swiss bank secrecy. If the Swiss relent to the U.S., the European Union will be next in line to obtain the same concession.

Anti-Money Laundering:

Our thoughts on the United States government’s attack on Mt. Gox can be read here, and Bitcoin continues to remain a hot topic all across the internet; see here, here, and here. Another virtual currency, Liberty Reserve, has also made a splash since being shut down by the Feds last week in what many have described as the largest money laundering scheme of all time; see here for details of the takedown, as well as the following articles describing the initial bits of fallout from the Liberty Reserve takedown: online anonymity, anti-money laundering compliance,Barclays Bank involvement, and the not guilty pleas entered by Liberty Reserve’s proprietors on Thursday. We will keep our eyes on these two cases as the fallout continues.

Proposed Medicare Settlement Clarifies CMS’s Position on “Skilled Maintenance Services”

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On October 16, 2012, in the case of Jimmo v. Sebelius, Case No. 5:11-CV-17 (D. Vt. October 16, 2012), a class of Medicare beneficiaries and the United States Department of Health and Human Services agreed to a proposed settlement which clarifies the standards by which skilled nursing and therapy services for Medicare beneficiaries are to be covered and paid for by Medicare. Although the position of the government is that the settlement only clarifies existing Medicare policies and guidelines for payment by its contractors, the practical effect is that long term skilled maintenance care for beneficiaries with little to no restorative potential will now be covered. As a result, home health agencies and skilled nursing facilities will be able to care for beneficiaries suffering from chronic illnesses without fear of subsequent audits and overpayment findings based on lack of medical necessity. A copy of the proposed settlement agreement can be read here.

The Jimmo case centers on the so-called “Improvement Standard” which plaintiffs in the case, a class of Medicare beneficiaries with chronic illnesses, alleged affects coverage determinations for skilled nursing and therapy services. More specifically, according to the plaintiffs, under the Improvement Standard policy, coverage of skilled services was based on the presence or absence of a beneficiarys potential for improvement. Phrased differently, the plaintiffs alleged that Medicare coverage of skilled services was blanketly denied by Medicare contractors on the basis that a beneficiary was not improving, without an individualized assessment of the beneficiarys condition or the medical reasonableness and necessity of the treatment provided.

Plaintiffs further alleged that neither the Medicare Act nor its implementing regulations require that beneficiaries demonstrate restorative potential in order for skilled services to be covered. Rather, plaintiffs alleged that so long as the services provided have been ordered by a physician and are medically reasonable, coverage cannot be denied on the basis of restorative potential alone.

In reaching a proposed settlement, the Centers for Medicare & Medicaid Services (“CMS”), the agency with HHS that administers the Medicare Program, has agreed to revise the Medicare Benefit Policy Manual to clarify that coverage of skilled services should not be based on a beneficiarys potential for improvement. Instead, the manual will be revised to make clear that it is the beneficiarys need for skilled care.

As explained in the proposed settlement agreement:

The manual revisions will clarify that, under the [Skilled Nursing Facility], [Home Health Agency], and [Outpatient Therapy] maintenance coverage standards, skilled therapy services are covered when an individualized assessment of the patients clinical condition demonstrates that the specialized judgment, knowledge, and skills of a qualified therapist are necessary for the performance of a safe and effective maintenance program. Such a maintenance program to maintain the patients current condition or to prevent or slow further deterioration is covered so long as the beneficiary requires skilled care for the safe and effective performance of the program.

See Proposed Settlement Agreement at ¶ 6(a). The Proposed Settlement Agreement provides for a similar clarification for skilled nursing services. See Proposed Settlement Agreement at ¶ 7(a). Additionally, CMS has also agreed to certain accountability measures to ensure that the new guidance policy is followed by its fiscal intermediaries, the entities through which the Secretary performs the audit and payment functions of the Medicare program. For example, CMS has agreed to develop protocols for reviewing sample coverage decisions to determine overall trends and identify problems in the application of the maintenance coverage standards. See Proposed Settlement Agreement at ¶ 17.

Skilled nursing facilities and home health agencies which participate in the Medicare program as providers should take notice of CMSs clarified position. Under the Improvement Standard, beneficiaries with chronic debilitating conditions who rely on skilled services to maintain their current condition and prevent further deterioration are often left without providers because of the providers fear that payment for “maintenance” skilled services would be denied by Medicare contractors. With the impending policy change, so long as a beneficiary meets the requirements for home health or skilled nursing coverage, providers should be able to provide the skilled maintenance services needed by their patients.

FIDJ will continue to monitor these developments. If you have questions pertaining to the Medicare Act or its implementing regulations and how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

The Corporate Solution to Texting While Driving

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The safety hazards of texting or emailing while driving are obvious. Potentially fatal repercussions await such callous and indifferent texters, who pose a threat not just to themselves, but to everyone on the road. A texting driver is tantamount to an impaired driver — he is not focused on the task of driving or the hazardous conditions of the road. Instead, the texter is himself a danger that other drivers must defend against.

Strangely, lawmakers in Florida and many other states have not banned texting while driving. The lawmakers in these states have banned other driver-impairments, such as drunk driving, and imposed State-sponsored safety requirements, such as mandating that drivers and passengers alike fasten their respective safety belts. Yet, despite imposing its will on select-safety requirements, several States (including Florida) have failed to pass texting-related legislation.

Perhaps the court systems in these states have the ultimate panacea. For instance, Florida circuit judges have recently allowed juries to punish texting drivers by awarding punitive damages to injured plaintiffs. Thus, as the cases start to weave their way through our congested dockets, we are all on notice that there exists a heavy price to pay for engaging in dangerous, impaired driving, whether that “price” is in the form of our own personal injury or death, the pain inherent in causing others to suffer such calamities, or of course, paying for the injuries from our own wallets.

But is this enough? Unchecked, callous disregard for human life seems to be the norm of our society. Why should a faceless corporation care about texting drivers?

Consider this doomsday scenario: Your employee just finished a successful sales meeting and was heading home. She was so excited about the sale that she wanted to tell her husband (and brag about the big commission). While in her car, perhaps out of pure habit, she pulled out her smartphone and texted (or emailed) her husband, thumbing the good news, complete with a smiley face emoticon. While texting, she failed to notice the car in front of her, broken down with its lights flashing, parked in the middle of the street. As she hit the “send” key, she looked up from her phone and her eyes flashed to the road, suddenly realizing that she would be unable to stop in time to avoid hitting the parked car. She braced herself as she slammed into the rear of the parked car, which then collided with the road wall, killing the twin nine (9) year old girls who were standing on the side of the road next to their horrified mother.

Your employee survives, suffering a few physical bruises, and of course, the debilitating, lifelong suffering of knowing that she unnecessarily killed two children. In addition to facing manslaughter charges, she will be mentally and economically ruined from the imminent lawsuit.

Is the corporation liable under theories of negligent supervision, negligent training, or respondeat superior? If so, to whom is the employer liable? Does the employer owe a duty to the responsible employee? What about the victims family? The issues are rather complex and center on such fine points as whether the employee was engaged in the scope of her employment, along with the formal training, policies and manuals of the corporation.

Notwithstanding the complex risk management issues associated with employees that use their cars for employment purposes, corporations throughout the country are taking a proactive approach to the dangers of texting while driving. The newest trend is for corporations to outright ban any texting or emailing while driving. The ostensible purpose of the trend is to show that the faceless corporation in fact cares about its employees. However, the fringe benefit of such caring is the proactive risk-management of setting black letter policy proscribing the reckless and avoidable impairment of its drivers.

Lawsuits are more easily defended, and risks more efficiently insured, where a company enacts firm, hard, understood rules prohibiting dangerous conduct. Corporations have the actual power to meet the threats imposed by impaired driving; power to enact the very rules which our State has been unsuccessful or unwilling to legislate. By corporations using this power, whether for care of their employees or simply safeguarding bottom-line profits, perhaps needless death and disability will be avoided by the corporate legislation of what is, in essence, simple common sense.

If you have any questions about this issue, and specifically about how our lawyers can help your company implement a ban on your employees texting while driving, please feel free to contact us at 305-350-5690 or contact@fidjlaw.com.

Centers for Medicare and Medicaid Services Urged To Issue Final Rule on Physician Gift and Disclosure Regulations

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On April 4, 2012, Senators Charles Grassley (R-IA) and Herb Kohl (D-WI), authors of the Physician Payments Sunshine Act (“Sunshine Act”), wrote a letter to the Centers for Medicare and Medicaid Services (“CMS”) pushing CMS to issue its statutorily mandated final rule implementing the Sunshine Act provisions of the Patient Protection and Affordable Care Act (“PPACA”). As we previously reported, section 6002 of the PPACA is also known as the Sunshine Act because it is based on the previously proposed, but never enacted, Physician Payment Sunshine Act.

In their letter, Senators Grassley and Kohl said they were “disappointed” that CMS missed the October 1, 2011 statutory deadline for implementing the Sunshine Act. They requested that CMS issue the final rule on implementation no later than June of this year so that partial data collection for 2012 can begin. Furthermore, Senators Grassley and Kohl “strongly urge[d] CMS to work closely with stakeholders to finalize these rules so that they comprise a feasible approach to providing valuable data that patients deserve.”

Clear Definitions and Guidelines

As we previously reported, the Sunshine Act requires drug and device manufacturers to report certain “payments or other transfer of value” made to physicians. The Sunshine Act also requires CMS to design an “Internet website” where the public can search and view such “payments or other transfer of value” made to physicians by drug and medical device manufacturers. In the letter, the Senators encouraged CMS to be clear and to narrowly define precise payment categories so as to allow all stakeholders to work under the same assumptions. Additionally, they ask CMS to consider removing the proposed “other” payment category “so that it does not obscure the true nature of some payments.”

The Senators also urged clarity with regard to indirect research payments. Specifically, they urged CMS to more clearly define instances when indirect research payments and indirect research payments to third parties are reportable, and how and in which context such payments will be reported on CMSs website that will publically available. According to the Senators, this clarity will be very important if physicians will be contacted directly by pharmaceutical companies and reported publicly, physician participation in research activities could be hindered.

Accurate Data/Errors

The Senators also urged CMS to update the website with the correct information as soon as CMS is made aware of errors in the reported data. The Senators stated that CMS should include mechanisms by which the agency can update errors on a quarterly basis because prolonged errors could cause confusion among the public, physicians, and manufacturers.

In an effort to reduce inaccurate payments and disputes, the Senators asked CMS to consider requiring manufacturers to share the data they plan to report to CMS directly to covered physicians before reporting the data to CMS. When disputes do arise, the Senators agree that CMS must develop a mechanism to which the disputes can be reported as smoothly as possible; but insist that CMS not become the default dispute arbiter between manufacturers and physicians.

Other Issues

In addition to the clarity and accuracy of the data, the Senators also addressed concerns with the website that will be designed to report the payments to physicians and outreach to physicians. Specifically, the Senators insist that the website be designed in a “user friendly” manner and the data should be in an “easy-to-use” format with terms and names that are recognizable to patients. The website should also define the terms of value and provide context so that the public best understands what these payments are for and in what capacity they were made. The Senators also encouraged CMS to work directly with stakeholders to best determine how to release the publicly available data on the website.

The Senators also encouraged CMS to increase its outreach to physicians and other covered recipients about the Sunshine Act. This is important because many physicians and other covered recipients are unaware of the Sunshine Act and how it affects them. A recent survey of 500 compliance officers and physicians in the March 1, 2012 issue of “Inside CMS” reported that 47% had not heard of the Sunshine Act.

Implementation Questions

In addition to their general comments, the Senators request that CMS answer the following questions by April 18, 2012:

  1. Can CMS commit to completing a final rule by this summer so that data collection can begin in 2012?
  2. Since CMS missed the initial required Congressional deadline, has CMS increased the resources or personnel assigned to the implementation of the Sunshine Act, including a dedicated information technology lead?
  3. Will CMS commit to issuing an RFP to begin designing the website?
  4. Does CMS have a dedicated working group assigned to implementation of the Sunshine Act, and what technical expertise and program areas are represented?
  5. Does CMS have a public education and outreach plan to raise awareness of the new law with the provider community and with health care consumers?
  6. Has CMS allocated dedicated implementation funds for the Physicians Payment Sunshine Act?

The public comment period for the proposed rules closed in February. CMS is now reviewing and considering the comments as it promulgates the final rules. We will continue to monitor the Sunshine Act and final rules. For more on payment disclosures and reporting requirements under the Sunshine Act, please contact us at contact@fidjlaw.com or (305) 350-5690.

Park Doctrine Insurance Offered to Cover Responsible Corporate Officer Liability

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The FDA has made clear that prosecuting individuals for strict liability misdemeanors under the Park Doctrine, also known as the “Responsible Corporate Officer Doctrine” (“RCO”), is a priority amid the clamor for the FDA to get “tough” on persons and companies in regulated industries, such as food and drug. The Park Doctrine allows a corporate official to be convicted of a misdemeanor based entirely on his or her position and responsibility in a corporation. There is no requirement that a person had any criminal intent or acted personally in any wrongdoing, or for that matter, was even aware of a violation. We have previously blogged about the re-discovery of the Park Doctrine by the FDA, here and here.

Now, given the heightened risk of Park Doctrine prosecutions by the government, Allied Insurance Company commenced issuing its “RCO Policy,” designed to provide coverage for control group executives for defense costs during an investigation or misdemeanor criminal proceeding, including potential losses resulting from debarment or exclusion from contracting with federal programs as a result of a misdemeanor conviction. Debarments or exclusions would result in substantial loss of income and livelihood for an RCO executive convicted of a misdemeanor under the Park Doctrine. However, the policies do not provide coverage for offenses for which the executive exhibited criminal intent, such as intent to defraud.

Under most current Directors & Officers (D&O) indemnity policies, coverage is provided for defense costs until there is a finding of criminal liability against the insured.  Under the Park Doctrine, such criminal liability can occur without the insured being shown to have intended or even been aware of the existence of the criminal violation. Under such a scenario, the insurer can deny coverage for the executive at the most critical stages of a criminal investigation, thereby leaving the executive to fend for him or herself in funding a defense, to his or her financial ruin.  This is tantamount to having no D&O coverage at all. It is often at the investigation stage where an adequately funded defense is most critical in order to stave off indictment.  Preventing indictment in the first place is paramount since post-indictment approximately 95 % of federal criminal cases result in a criminal conviction, either by plea or verdict.  It appears that this new RCO Policy could go a long way toward ensuring an adequately funded defense and avoiding the worst case scenario for executives.

The recent emphasis on Park Doctrine prosecutions by the Department of Justice and FDA, with the idea of increasing the deterrent effect of criminal prosecutions for violation of our nations food and drug laws, has elevated the potential liability of executives in regulated industries. The market is responding to these liability concerns by offering products insuring against these risks, although it remains to be seen whether the necessary premiums for such coverage will be acceptable to insurance customers.  Perhaps the best medicine is prevention”heightened recurrent training, invigorated compliance programs and revised policies and procedures to prevent violations in the first place.

Fuerst Ittleman PL is experienced in providing legal services to FDA regulated entities to address the prevention of violations and mitigation of potential Park Doctrine liability.  In this heightened enforcement environment, an ounce of prevention is worth more than a pound of cure.

Sackett v. EPA Highlights The Ongoing Debate Over What Actions Are “Final Agency Actions”

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On January 9, 2012, the Supreme Court heard oral argument in the case of Sackett v. United States Environmental Protection Agency. Although the facts of the case concern issues governed by the Clean Water Act (“CWA”), this case is important to all administrative law practitioners because of its potential to more clearly define the line between “final agency action,” which is generally subject to judicial review, and non-final agency actions which are not. Such a clarification will not only serve as a guide in future litigation against federal administrative agencies, but may also dramatically change how such agencies engage in “informal” communications with those subject to their jurisdiction. A copy of the oral argument transcript can be read here.

  1. Background

The Sacketts fight with the EPA centers on a small 0.63 acre property located near Priest Lake, Idaho and an EPA compliance order prohibiting its development. In May of 2007, the Sacketts began to fill in the property with dirt and rocks in preparation for construction of a three-bedroom home. However, in November of that year, the EPA issued a Compliance Order that ordered construction to be halted claiming that the Sacketts land was a wetland, was subject to EPA jurisdiction under the CWA, and that the construction could not continue without first obtaining a permit from the Army Corp of Engineers. The Compliance Order also required the Sacketts to remove all fill material, restore the property to its original condition, and replant the property with wetland vegetation no later than April 30, 2008. Additionally, the Compliance Order threatened civil penalties as high a $32,500 per day for each day the Sacketts did not comply with the Order. A copy of the EPAs news release announcing the issuance of the Compliance Order can be read here.

  1. What is a Compliance Order?

Under the CWA, after the EPA identifies a violation, the agency has three options: 1) the EPA may assess an administrative penalty, in response to which “the alleged violator is entitled to a reasonable opportunity to be heard and to present evidence, the public is entitled to comment, and any assessed penalty is subject to immediate judicial review;” 2) the agency can initiate a civil enforcement action in federal district court; or 3) the EPA can issue, as it did in this case, an administrative compliance order. See Sackett v. United States Environmental Protection Agency, 622 F.3d 1139, 1142 (9th Cir. 2010); see generally 33 U.S.C. § 1319. As explained by the Ninth Circuit, “a compliance order is a document served on [a] violator, setting forth the nature of the violation and specifying a time for compliance with the [CWA].” Sackett, 622 F.3d at 1142.

In order for a compliance order to be enforced, the agency must bring an enforcement action against the individual in federal court. However, pre-enforcement, the CWA does not give the alleged violator any right to a hearing in front of the agency to challenge its issuance, nor does it allow for the alleged violator to sue the agency in court. Instead, an alleged violators only way to challenge a compliance order is to do nothing, face potential mounting fines, wait for the EPA to sue for enforcement of the compliance order, and then argue the jurisdictional merits of the EPAs authority. It is this lack of a pre-enforcement challenge to EPAs authority which is at the heart of the Sacketts Supreme Court case.

  1. Final Agency Action and Review Under the Administrative Procedure Act

Section 10(c) of the Administrative Procedure Act (“APA”), codified at 5 U.S.C. § 704, provides that “final agency action for which there is no other adequate remedy in a court [is] subject to judicial review” under the APA. The APA applies to all final agency actions except to the extent that an enabling statute precludes review. See 5 U.S.C. § 701. However, the statute provides that the judicial review provisions of the APA may not be superseded by subsequent statutes unless such statutes expressly provide so. See 5 U.S.C. § 559. Additionally, the Supreme Court has found that there is a presumption favoring judicial review of administrative actions. Abbott Laboratories v. Gardner, 387 U.S. 136, 140 (1967) overruled on other grounds by Califano v. Sanders, 430 U.S. 99 (1977). However, this presumption is overcome “whenever the congressional intent to preclude judicial review is fairly discernible in the statutory scheme.” Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984).

“The cases dealing with judicial review of administrative actions have interpreted the Ëœfinality element in a pragmatic way.” Abbott Laboratories, 387 U.S. at 149. As first announced in Abbott Laboratories, an agency action will be considered final and a pre-enforcement challenge will be allowed:

Where the legal issue presented is fit for judicial resolution, and where a regulation requires an immediate and significant change in the plaintiffs conduct of their affairs with serious penalties attached to noncompliance, access to the courts under the [APA] and the Declaratory Judgment Act must be permitted, absent a statutory bar or some other unusual circumstance. . . .

Abbott Laboratories, 387 U.S. at 153.

In Bennett v. Spear, 520 U.S. 154, 177-178 (1997), the Court articulated a two part test to determine whether an agency action qualifies as “final” and thus generally subject to judicial review under the APA. As stated by the Court:

As a general matter, two conditions must be satisfied for agency action to be “final”:

First, the action must mark the Ëœconsummation of the agencys decision-making process “ it must not be of a merely tentative or interlocutory nature.

And second, the action must be one by which Ëœrights or obligations have been determined, or from which Ëœlegal consequences will flow.

Bennett, 520 U.S. at 177-178 (emphasis added).

When assessing whether an agency action qualifies as “final,” the Court looks to numerous factors including: 1) whether the administrative order provides the definitive statement of the agencys position; 2) whether the administrative order has a “direct and immediate effect on the day-to-day business of the complaining parties;” 3) whether agency expects immediate compliance with the terms of the order such that the order has “the status of law;” 4) whether the suit challenging the agency action presents a “legal issue fit for judicial review;” and 5) whether the suit challenging the administrative order is calculated to speed enforcement.” See Brief of the American Farm Bureau Federation et al. as Amici Curiae Supporting Petitioners, Sackett v. Environmental Protection Agency, 14-15 (No. 10-1062) (2012) (quoting FTC v. Standard Oil Co. of California, 449 U.S. 232, 239 (1980)).

  1. The Case Below

In this case, in response to the compliance order issued by the EPA, the Sacketts sought an administrative hearing to challenge the EPAs findings that the property is subject to the CWA. However, this request was denied by the EPA. The Sacketts then filed their suit before the United States District Court for the District of Idaho seeking injunctive and declaratory relief arguing: 1) the compliance order was arbitrary and capricious under the APA, 5 U.S.C. § 706(2)(A); 2) the order violated the Sacketts due process rights because it was issued without a hearing; and 3) the standard for issuance of a compliance order under the CWA was unconstitutionally vague. Sackett, 622 F.3d at 1141.

Both the District Court and the Ninth Circuit dismissed the Sacketts pre-enforcement suit challenging the EPAs issuance of the compliance order for lack of subject-matter jurisdiction. In its opinion, the Ninth Circuit ruled that, based upon the structure and objectives of the statutory scheme as well as the legislative history of the CWA, the CWA precluded judicial review of pre-enforcement actions under the APA. Sackett, 622 F.3d at 1143-1147.

The Ninth Circuit additionally held that, although due process is violated when the “practical effect of coercive penalties for noncompliance is to foreclose all access to the courts so that compliance is sufficiently onerous and coercive penalties sufficiently potent that a constitutionally intolerable choice might be presented,” the statutory preclusion of pre-enforcement review of compliance orders does not rise to such a level for two reasons. First, the CWA provides for a permitting process, the denial of which is immediately reviewable in federal district court under the APA. The Ninth Circuit found that the jurisdiction issues raised by the Sacketts could be litigated in that forum. As such, “rather than completely foreclosing the Sacketts ability to . . . challenge CWA jurisdiction, the CWA channels judicial review through the affirmative permitting process.” Sackett, 622 F.3d at 1146. Second, the Ninth Circuit held that, although the violation of the CWA and of a issued compliance order may amount to [$37,500] each per day, the civil penalty is a matter of judicial, not agency, discretion. Thus, “any penalty ultimately assessed against the Sacketts would therefore reflect a discretionary, judicially determined penalty, taking into account a wide range of . . . equitable factors, and imposed only after the Sacketts have had a full and fair opportunity to present their case in a judicial forum.” Id. at 1147.

However, what is noticeably absent from the Ninth Circuits opinion is a discussion of the preliminary issue that has become a focal point of the briefs and oral argument before the Supreme Court: whether the compliance order is considered “final agency action” sufficient to trigger review under the APA.

  1. The Parties Positions Regarding Final Agency Action Before the Supreme Court
    1. The Merit Briefs

In accepting certiorari, the Supreme Court asked the parties to address two questions: 1) Whether the Sacketts may “seek pre-enforcement judicial review of the Administrative Compliance Order pursuant to the Administrative Procedure Act 5 U.S.C. § 704;” and 2) if not, does the Sacketts “inability to seek pre-enforcement judicial review of the Administrative Compliance Order violate their rights under the Due Process Clause?” See Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, at i (No. 10-1062). In order to fully answer these questions, the issue of whether the Administrative Compliance Order constitutes “final agency action” is of critical importance.

In their Initial Brief, the Sacketts, most likely because the Ninth Circuit ignored the issue of whether the compliance order was a “final agency action,” only briefly outline their position as to why the EPAs compliance order qualifies as “final agency action.” First, the Sacketts argue that the compliance order “represents the consummation of the EPAs decision-making process” for three reasons: 1) “there are no further steps for the agency to take with respect to jurisdiction, or with respect to the orders issuance;” 2) “the order does not initiate any administrative process, nor is there any administrative process whereby the Sacketts can seek review of the order;” and 3) the CWA provides that the compliance order is immediately enforceable in court by the agency. See Brief for the Petitioners, at 55. Second, the Sacketts argue that the compliance order satisfies the second step of the Bennett test because failure to comply with the compliance order itself is both actionable and punishable by civil penalties. Thus, according to the Sacketts, independent “legal consequences flow from the compliance order.” Id.

In response, the Government dedicated several pages of its brief to counter the Sacketts claims that the compliance order is a “final agency action” subject to judicial review and argued that the compliance order fails both prongs of the Bennett test. First, the Government argued that the compliance order fails step one of Bennett because it does not mark the consummation of the agencys decision-making process. According to the Government, the order invited the Sacketts to contact the EPA informally regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. Additionally, the compliance order invited the Sacketts to propose alternatives to the remediation plan proposed. Thus, “because EPA indicated that allegations and conclusions underlying the order were subject to revision based on petitioners might provide, and that the prescribed corrective measures were subject to negotiation, the compliance order cannot properly be viewed as representing the agencys final conclusions.” Brief for the Respondent, Sackett v. United States Environmental Protection Agency, 24-25 (No. 10-1062).

The Government also argued that the compliance order failed step two of Bennett because compliance orders merely “express the agencys views of what the law requires” and any factual determinations made within the compliance order would be given no deference by a court in an enforcement action. Brief for the Respondent, at 28. The Government also argued that any potential legal consequences faced by the issuance of a compliance order are not “sufficiently concrete or substantial to render the order Ëœfinal agency action.” Id. at 29. Here, the Governments argument mirrors the Ninth Circuits logic that because the penalties associated with the failure to comply are subject to judicial, not agency discretion, and because an after-the-fact permit process exists which provides for judicial review wherein a potential violator can challenge EPA jurisdiction, the legal consequences are not such that pre-enforcement review is essential. Id. at 29-31.

The Sacketts countered the Governments arguments in their Reply Brief arguing that Bennett is satisfied for several reasons. First, the language of the CWA itself only permits a compliance order to be issued after the EPA has made findings that the CWA has been violated. Reply Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, 13 (No. 10-1062).  Further, the CWA “makes clear that the issuance of the compliance order is one of two equal enforcement options that EPA may take once it Ëœfinds that the statute has been violated.” Id. at 16 (emphasis in original). Thus, “the compliance order is not a prelude to enforcement[,] [r]ather, the compliance order is enforcement.” Id. (emphasis in original). Next, the Sacketts cited numerous circuit court decisions which have found that agency actions can be deemed “final” even though the actions themselves provide for informal consultation between the agency and an effected party. Id. at 15-16. Finally, the Sacketts argued that because the compliance order subjects them to additional penalties for non-compliance and creates additional requirements that must be satisfied before obtaining an after-the-fact permit, the compliance order creates additional legal obligations sufficient to be considered final.

    1. The Governments Policy Rationale for Arguing that Compliance Orders are Non-Final Agency Action and Thus Not Entitled to the Presumption of Reviewability

In addition to arguing in its brief that the compliance order failed to meet the Bennett test, the Government also presented several policy-based arguments as to why compliance orders should not be viewed as “final agency actions.”

The Government argues that compliance orders: 1) inform parties regulated by the administrative agency of requirements imposed by law, and 2) warn parties that the failure to comply with such laws may result in future enforcement actions. See Brief of Respondents, at 14. Contrary to the claims of the Sacketts, the Governments position is that no additional obligations are imposed on parties issued compliance orders. Rather, such orders “set forth the EPAs views as to the steps particular persons must take to achieve prospective compliance with the CWA itself.” Id. at 17.

            Additionally, the Government argues that compliance orders, as well as similar devices used by other agencies, serve an important purpose of “obviate[ing] the need for judicial intervention, either by inducing voluntary implementation of the measures specified therein, or by triggering a process of consultation between the agency and the alleged violator that produces a mutually acceptable alternative resolution.” Id. at 13. The Government further argues that communications such as compliance orders or warning letters provide a benefit similar to that found in settings where administrative exhaustion is required because agencies are given the “opportunity to correct their own mistakes and to refine their views without the need for judicial intervention.” Id. at 22.

The Governments position is that compliance orders are neither entitled to pre-enforcement review nor unlawful merely because they present the “Hobsons choice” of complying with an agency with questionable jurisdiction demands or do nothing and wait to challenge the agencys jurisdiction in an agency brought enforcement order the face of mounting penalties. Id. at 22. Instead, the Government argues that “from the regulated partys perspective, such communications give recipients an opportunity to conform their conduct to the agencies guidance before being subjected to an enforcement action.” Id.

            Given the broad purposes of environmental regulation in general and the CWA in particular, compliance orders allow the agency to achieve a quicker resolution to situations of ongoing environmental damages. The Government believes that if pre-enforcement judicial review is allowed for these communications their effectiveness at achieving voluntary compliance would be substantially weakened and resources of the administrative agency would be drained in litigating cases of minor offenders. Thus, by preventing pre-enforcement judicial review and by allowing agencies to “interact[] with regulated entities outside of more formal administrative-adjudication or judicial-enforcement settings, agencies can conserve resources and prioritize their enforcement efforts to respond to the most sever violations.” Id. at 22.

    1. The Courts Questioning of the Governments Position at Oral Argument

At oral argument, the Justices focused on whether, based on Abbott Laboratories and the presumption of reviewability, challenges to the jurisdiction of an agency issuance of a compliance order require pre-enforcement review. In their questioning, the Justices appeared to clearly distinguish between warning letters, which have long been considered non-final agency action and not entitled to judicial review, and the compliance orders issued by the EPA. In particular, the Justices appeared interested in the language of the compliance order itself and the back and forth between the agency and the alleged violator before and after the issuance of a compliance order. Additionally, the Justices focused on the “Hobsons choice” of either voluntarily complying with an order that the issuing agency may not have the jurisdiction to issue or to not comply, face mounting fines, and wait to assert a jurisdictional challenge at some undetermined time as the agency so chooses to bring an enforcement action. Transcript of Oral Argument, at 42-53, Sackett v. Environmental Protection Agency, (No. 10-1062).

During oral argument, Justice Breyers main concern as to whether the compliance order could be considered non-final turned on the language in the order suggesting that alleged violators should contact the EPA in informal discussions regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. In particular, Justice Breyer appeared concerned with whether such post-issuance communications actually result in the agency changing its position:

Justice Breyer: Is there anything youve got by “ I mean, Im “ Youve got me now into the area, we are applying the APA and the question is Abbott Labs and is it final. Well, here there doesnt seem anything more for the agency to do, and here the person who the order is directed against is being hurt a lot. So the only thing I “ left in my mind here is the order itself does say: Come in and talk to us about this. Which may suggest it isnt final. So do you have any information on that point? That is, have you looked up or has the APA told you that really when we issue these things, people come in and modify them at X percent of the time.

Id. at 45 ln. 9-21. In response the Government argued that although only 3 percent of all compliance orders ever lead to enforcement actions being taken, the Government did not have any statistics as to whether this was because of informal communications between the alleged violator and the agency or whether it was merely because alleged violators have chosen to voluntarily comply. Id. at 46.

However, when pressed by Justice Kagan as to whether post-issuance communications normally result in modifications, the Government conceded that it was unlikely:

Justice Kagan: Mr. Stewart, you suggested that, that some communication occurs before this compliance order [is issued]. And my guess would be that most of the back and forth between the agency and the person does happen before the compliance order rather than after.

And the notion that the person can come in after the compliance order and say you were wrong, well they can, but they can do that with respect to any administrative action. So, am I wrong about that? That really the back and forth here takes place before the compliance order issues rather than after?

Mr. Stewart: I think you are right as a matter of typical agency practice that there would be an invitation well before the compliance order was issued to come in and give your side of the story, and you are probably right that if we got to the point where a compliance order was issued, then the likelihood that further communications would sway the agency substantially might be reduced. So I would take your point there “

Id. at 46 ln 15-25 “ 47 ln. 1-10.

Of particular note was the exchange between Justice Scalia and the Government regarding the jurisdictional challenges to compliance orders. During the Governments argument Justice Scalia posed the question of whether a person can “usually obtain a declaratory judgment if prosecution is threatened and you think that there is no basis for it, and you cant “ you are not “ youre not compelled to just stand there and wait for the prosecutor to, to drop the hammer?” Id. at 48.  In response, the Government argued that, although declaratory judgment actions are available in such situations, because the Governments position is that compliance orders are “informal warnings,” extending a right to a declaratory judgment to compliance orders “would cause a huge upheaval in the practices of many agencies. . . .” Id. at 49.

However, the Justices appeared to reject this rationale and further pressed the issue of whether a compliance order should be considered “final agency action” with Justice Breyer commenting: “You are talking about a huge upheaval. My honest impression is that it is the Government here that is fighting 75 years of practice because “ because the issue is the Abbott Labs issue of finality. And of course a warning isnt reviewable. But this seems to meet the test where that fails.” Id. at 49 ln. 19-23.

  1. Analysis and Conclusion

Based upon the totality of information before the Court, the arguments made by the Sacketts that compliance orders are “final agency action” entitled to pre-enforcement review appears to be strong. The Court pressed the Government on the issue of whether post-issuance discussions between alleged violators and the agency actually effect a change of the agencys position. Additionally, the Government conceded in both its brief and at oral argument that the failure of alleged violators of the CWA to follow the remediation plan outlined in a compliance order potentially subjects the violator to additional penalties above and beyond the penalties for violating the CWA itself.

Moreover, it appears that the Governments strongest argument that compliance orders are not entitled to pre-enforcement review is the “huge upheaval” such a ruling would level on the day-to-day operations of administrative agencies. As explained above, the Government has argued that a decision which classifies compliance orders as “final” could result in increased litigation and decreased voluntary compliance with the result being a more litigious and less effective administrative state.

However, even if the Court does agree with the Sacketts and finds that compliance order are in fact “final” thus entitling recipients to pre-enforcement judicial review, the practical consequences will not likely be as harsh as the Government fears. First, the Court in oral argument appears to have reaffirmed that less formal communications such as warning letters are properly considered non-final agency action to which no pre-enforcement review is required. Other agencies successfully use warning letters to achieve the same goals of voluntary compliance and administrative efficiency. Additionally, despite the actual and incidental consequences which commonly plague recipients who must defend themselves against such letters, the Court consistently denies pre-enforcement review for such agency actions. Furthermore, the Sacketts have not challenged any such less formal actions.

Additionally, the CWA provides for other forms of enforcement for violations, such as a civil enforcement action without the issuance of a compliance order. Thus, should the Supreme Court find that compliance orders are “final,” the most likely “upheaval” would be the seismic shift towards the increased use by agencies of warning letters followed by civil enforcement actions in cases of noncompliance.

Moreover, as explained above, judicial review of a “final agency action” pursuant to the APA can always be expressly superseded by an agencys enabling statute. As such, should the Supreme Court decide favorably for the Sacketts, and mark a trend towards easier access to judicial review of agency actions, there is no reason to think that federal administrative agencies would not lobby Congress for statutory reforms to expressly preclude judicial review of compliance orders.

The debate as to what exactly is “final agency action” has been ongoing for decades. However, until such a time that the Court is willing to take a more concrete and expansive view of what qualifies under Abbott Laboratories and Bennett as “final agency action,” particularly a view based on the real life and practical consequences of the issuance of warning letters, administrative law practitioners, and their clients, will continue to be faced with a Hobsons choice and uncertainty when responding to such non-final actions. In the end, the Courts ultimate decision as to whether a compliance order is considered “final agency action” which entitles recipients to pre-enforcement judicial review may be more of a moral victory for administrative law attorneys and less of a game-changer in litigation against federal agencies.