Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Jan 07
2013

New Nevada Bill Would Allow for Interstate Gaming Compacts

A bill has been introduced in the Nevada General Assembly, on behalf of the state’s State Gaming Control Board, that would allow for the state governor to enter into interstate gaming compacts with other states. This legislation sets up Nevada to potentially be at the forefront of a compact in which individual states that have passed online gaming bills can work together to offer online gaming without federal legislation.

The bill, titled Assembly Bill 5, would remove language in the previously enacted online gaming bill that stated that an online gaming license does not become effective until a federal law was passed authorizing online gaming or the U.S. Department of Justice (DOJ) provided notice that interactive gaming activities are permissible under federal law. The bill would add language that allows for the governor, on behalf of the state, to enter into agreements with other states.

Assembly Bill 5 has been referred to the Nevada General Assembly Committee on the Judiciary. The upcoming legislative session does not begin until February 4, 2013.

The possibility of gaming compacts became a reality after the DOJ released an opinion in December 2011 stating that the Wire Act applies only to sports betting.

This opinion by DOJ eased fears among state lawmakers that money involved in online gaming could not be sent across state lines without incurring a violation of federal law. With that hurdle removed, the possibility of states entering into online gaming compacts became a reality.

Thus far two states, Delaware and Nevada, have enacted laws legalizing intrastate online gaming. Last month, the New Jersey state legislature passed a law legalizing online gaming and the bill is currently waiting for action to be taken on it by Gov. Chris Christie. Other states have publicly stated that they will consider online gaming legislation in sessions this year.

One potential problem with interstate gaming compacts is the potential for a hodgepodge of different laws and regulations for players and operators. States that lack experience in regulating gambling activities may look to the states that do have such experience, like Nevada and New Jersey, to regulate for them as an alternative to establishing their own regulations for online gaming. Thus far, Nevada is the only state to implement regulations governing online poker.

Nevada may want something in return for helping regulate gaming activities in other states, and it is not clear from the bill what that may be. Compacts like this have the potential to entrust a significant amount of power in a state agency, such as the Nevada Gaming Commission, and it is unclear whether it would be in the best interests of players and operators for that to occur. The concern over one state agency having so much power may serve as an impetus for states that do not currently have regulatory bodies for gaming to decide to establish them.

One other potential problem that gaming compacts address is the size of player pools. While there may not be enough players online at one time in one state for games to be big enough, gaming compacts allow for states to share their player pools, allowing for the possibility of many more players to be online at one time.

Not all states would need to pass a law similar to this Nevada law in order to participate in an interstate gaming compact. Depending on the state law or the powers granted to the state executive based on the state constitution, a state may be able to participate in gaming compacts without any legislative action.

Interstate gaming compacts have the potential to be a good development for gamers, but at this point there are too many unanswered questions about how they would operate. The idea of one state-level agency wielding enormous power over online gaming throughout the country is something that should be studied carefully before it is implemented.

Ifrah Law is a leading white-collar criminal defense firm that focuses on igaming.

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iGaming
posted in:
State Criminal
Jan 04
2013

Are the Feds Enlisting FedEx to Police the Illegal Pharma Market?

The government may be coming up with a new cost-effective measure to help balance the federal budget – enlisting private companies to do their policing. A 2011 settlement between the Justice Department and Google for $500 million is one recent example. Under the settlement, Google acknowledged responsibility for improperly aiding rogue pharmacies by allowing the pharmacies to post ads through the search engine’s AdWords program. Google not only agreed to forfeit this sizable sum (one of the largest in history by a U.S. company), it also agreed to new compliance and reporting measures. And that is after the company, on its own initiative, took steps to block foreign-based pharmacies from advertising in the United States.

Currently in the works are similar investigations by the Drug Enforcement Agency of FedEx and UPS. The shipping companies have been targets of a criminal probe dating more than four years into whether they aided and abetted illegal drug sales from online pharmacies. As the investigations are still ongoing, it is unclear what the extent or type of evidence against them may be. What is clear is that at least one of the targets is asserting its innocence and plans to defend itself vigorously. While UPS has announced that it is in settlement talks that would involve upgrading its compliance program, FedEx has come out with gloves on, pronouncing that “settlement is not an option when there is no illegal activity.”

UPS’ (and Google’s) course of action is understandable: Companies commonly do a cost-benefit analysis between settling and defending and determine that settlement is a better business decision. But it is good to see FedEx taking the higher, though riskier, road. A brief review of relevant law supports FedEx’s stance. For instance, common carriers are specifically excluded from liability under the Prescription Drug Marketing Act (PDMA): the implementing regulations provide that “distributing” under the Act does not include “[d]elivering or offering to deliver a drug by a common carrier in the usual course of business as a common carrier.” Interestingly enough, the FDA “on its own initiative” had revised its final rule to exclude common carriers.

The FDA’s earlier determination to exclude common carriers made sense, as it would be prohibitively expensive and potentially crippling to put shipping companies on the hook for packages that pass through their system. But the tides are changing, and federal agencies seem less concerned with the broad and adverse economic impact upon private companies and are more focused on how they may use those companies to do their bidding. As FedEx spokesman Patrick Fitzgerald noted, the government wants to “deputize” FedEx delivery to help “catch criminals.”

This type of effort by the feds can be quite effective, as can be seen from the Google settlement and impending UPS settlement. A federal enforcement agency launches an investigation that may be both extensive and costly to a company. The company does its cost-benefit analysis and determines it more efficient to simply pay a fine and institute a government-directed compliance program than to defend itself. The government thereby has a direct and simplified road to instituting new policies, company-by-company, through its settlement agreements. And all this can be accomplished without having to trouble itself with notice and rulemaking procedures. This process plays out frequently, which is what makes FedEx’s stance so refreshing.

Ifrah Law is a leading white-collar criminal defense firm that focuses on healthcare.

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Healthcare
Dec 27
2012

Bill Could Put Reins on Prosecutors’ Efforts to Seize Domain Names

Rep. Zoe Lofgren (D-Calif), a senior member of the House Judiciary Committee, has indicated that she is drafting legislation that would seek to increase judicial oversight over prosecutors’ efforts to act against Internet domain names accused of copyright infringement. While the value of such legislation will depend on the details of the bill, the notion of creating greater control over prosecutorial seizure of domain names is laudable.

Lofgren is one of a small number of legislators who voted against the PRO-IP Act of 2008, which authorized the government to shut down websites accused of online piracy or copyright violations by seizing their domain names. Under the enforcement operation that followed passage of that Act – dubbed “Operation In Our Sites” – the U.S. Immigration and Customs Enforcement (ICE) has seized 1,630 domain names, of which 684 have been forfeited to the government. The increasing use of domain name seizures in this area tracks similar use of this tool in other areas of law enforcement such as internet gaming and online pharmaceutical sales.
Specifics about the contemplated legislation have not been disclosed, though Lofgren has been quoted as noting that there are “reasonable arguments” that the way in which the government has seized domain names under the PRO-IP Act violates the Constitution. Lofgren’s bill will apparently propose that the government must provide notice and an opportunity to be heard before domain names are seized or redirected.

The addition of a procedural requirement for notice and hearing prior to domain name seizure would clearly be a favorable development. There have been cases in which the government has seized a domain name and later permitted it to resume operations, under agreed-upon restrictions, pursuant to an arrangement with the affected business. To the extent that businesses may negotiate such arrangements with the government, those arrangements could be reached without the potentially devastating interruption of a seizure. By giving counsel for the affected business the opportunity to be heard, such a requirement may also chill the overuse of domain name seizure by government as a means of gaining unfair leverage in cases involving Internet-based businesses.

The devil, of course, is in the details. Lofgren has reportedly sought input from the online social media community on this bill – particularly from Reddit. Hopefully, she will also seek input from those members of the legal community who have been involved in litigation over domain name seizures as well in order to ensure that the bill presented for consideration is as effective as possible in balancing the interests of all affected parties.

Ifrah Law is a leading white-collar criminal defense firm that focuses on online piracy.

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Online Piracy
posted in:
Civil Remedies
Dec 20
2012

N.J. Again Passes Online-Poker Bill; Decision Now in Governor’s Hands

New Jersey could soon become the third state to legalize online gaming within its borders. Its State Senate on December 20, 2012, voted 33-3 to legalize online poker in the state. The General Assembly had previously approved the bill by a vote of 48-25-3. The bill was able to achieve significant bipartisan support in both houses of the state legislature. The bill will now be sent to Gov. Chris Christie.

“If New Jersey’s casinos wish to compete in the 21st century, we have to give them the freedom to adapt a 21st century marketplace,” said State Senator and sponsor of the bill Raymond Lesniak.

This is the second time that the New Jersey legislature has approved an online poker bill. Last year, Gov. Christie vetoed an online poker bill that had been approved by large margins in both the General Assembly and State Senate.

If the bill is signed by Gov. Christie, New Jersey will become the third state, along with Nevada and Delaware, to legalize online poker. The District of Columbia also did so, but later repealed the law.

Last year in his veto message, Gov. Christie said he had “significant concerns” with the legislation, especially the expansion of casino gaming outside of Atlantic City. The New Jersey state constitution restricts gaming to Atlantic City, with exceptions for horse racing and the lottery. Under this bill, all Internet gaming would be deemed to have taken place in Atlantic City and all equipment used to operate online gambling must be located in Atlantic City, with the exception of backups and a few other items. Since no online bet would be completed until a server in Atlantic City accepted the wager, all bets will take place in Atlantic City.

Last year Gov. Christie also took issue with the subsidy that the bill would give to the state’s racetracks, but those were dropped in this bill.

Also in the time since Gov. Christie vetoed the bill last year the U.S. Department of Justice reversed a long held position and stated that the Wire Act only applied to online sports betting. This opinion by the Department of Justice would allow for individual states that have legalized online gaming to form a compact to allow for bigger player pools and the possibility of generating additional revenue.

There was debate in the state Senate on allowing the state’s racetracks to participate in hosting gaming as well. Sen. Mike Doherty (R) sought more information on why the state’s racetracks could not be allowed to offer online gaming instead of just the state’s casinos. Sen. Lesniak said he would work toward the goal of bringing online gaming to the state’s racetracks.

Sen. Lesniak pointed out that the bill is about job creation and keeping the tax rate lower will help attract companies to the state and allow for the state to become the “Silicon Valley” of online gaming. Sen. Lesniak said he believes that this bill could pump a couple hundred million dollars into the casino industry in Atlantic City. In a statement released after the bill was passed Sen. Lesniak said, “This bill will mean more jobs, more revenues for our casinos, more tax revenues for worthy programs . . . and a healthier gaming industry in the Garden State.” .

This bill protects the interests of New Jersey’s casino industry by requiring that iGaming be offered only through brick and mortar casinos in Atlantic City, which may either offer online gaming independently or in partnership with an iGaming vendor. Revenues generated by online gaming would be taxed at 10 percent of gross gambling revenues.

In addition, the bill also outlines permit fees, provides for contributions to support those affected by compulsive gambling, regulates the process for the placing of Internet wagers, and provides penalties for violations of the law.

Under the bill, casinos or their affiliates would be allowed to offer the same games that are currently offered on Atlantic City casino gaming floors. All players must be physically located in New Jersey.

Thus far, there has been no public indication from Gov. Christie regarding his plans for the bill. Gov. Christie now has up to 45 days to act on the bill. He can sign it into law, veto it, or stand aside and allow the bill to become law because he did not veto it.

We are happy to see that the New Jersey legislature has passed an online gaming bill and we support New Jersey’s efforts to legalize online gaming in the interests of bringing jobs and revenue to the state.

Ifrah Law is a leading white-collar criminal defense firm that focuses on igaming.

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iGaming
posted in:
State Criminal
Dec 18
2012

Court Hears Argument on N.J. Law Permitting Sports Betting

On December 18, 2012, oral arguments were heard in the federal lawsuit filed by the professional sports leagues and the NCAA against New Jersey, after the state passed a law that would legalize sports betting in the state’s casinos and racetracks. Last week, U.S. District Judge Michael Shipp ordered that oral argument would be limited to the issue of whether the sports leagues have standing to bring the suit.

The leagues filed suit in August arguing that the New Jersey law was in direct contravention of the Professional and Amateur Sports Protection Act (PASPA) of 1992, a federal statute that imposes a ban on sports betting unless the individual state had its own sports betting scheme in place between 1976 and 1990.

New Jersey has argued in court papers that the leagues have failed to allege that they will suffer a concrete injury as a result of the sports betting law. New Jersey asserts that the leagues have failed to show a particularized injury. The state has argued that given the proliferation of sports gambling, the harms that the leagues claim would flow from the new gambling law would occur in any case, regardless of the law or any relatively modest increase in legal sports betting that it may cause.

The leagues’ lawyer, Jeffrey Mishkin, started his argument today by stating that the standard for the leagues to show that they have standing is an “identifiable trifle” in how the law would affect them. Mishkin argued that the leagues do not have to prove damages or injury for standing, they only have to show that identifiable trifle.

The leagues’ arguments focused on two main points: that the leagues have standing because their games are the vehicles for the betting and that in passing PASPA Congress explicitly authorized the leagues to bring action against the states.

The leagues argued that they will suffer an injury to their reputations if there is an expansion of legalized gambling. Mishkin argued that the fact that New Jersey chose to exempt professional and collegiate sporting events held in the state, as well as collegiate sporting events held outside the state involving schools from New Jersey, from betting, as evidence that the state believes that gambling on these events can cause problems.

Mishkin argued that when Congress passed PASPA it explicitly acknowledged that the leagues would have a personal stake in gambling laws because the perception of the leagues would be adversely affected by gambling. Mishkin said that “every dropped pass” and “every missed free throw” would raise suspicion.

Ted Olson, a former United States Solicitor General arguing on behalf of New Jersey, said the state would be regulating conduct that is already occurring. Olson cited statistics showing how prevalent sports betting is in this country, both legally and illegally.

Olson said the leagues needed to demonstrate more than just the perception that the law would hurt their business; they needed to show an “actual, identifiable, particularized, concrete injury” from the law to have standing to bring the case. He emphasized that Congress cannot remove Article III standing requirements, as there needs to be a finding by the court that the injury is specific and supported by facts.

Olson argued that the leagues are already thriving amidst a huge sports gambling market and the state would be bringing the black market gambling into the light and regulating it. Olson argued that there is no evidence that gambling has hurt the leagues and pointed out the prevalence of fantasy sports, which the leagues have largely embraced. He also pointed out that the leagues are in regular contact with the Las Vegas sports books to monitor shifts in betting on their games and this cannot happen in places where sports betting is occurring on the black market.

There was extensive discussion of the 2009 Third Circuit ruling in Office of the Commissioner of Baseball v. Markell, where the court held that most of Delaware’s plan to expand its sports betting offerings violated PASPA. Delaware, a state that had a PASPA exemption because it had a betting scheme in place before PASPA’s enactment, sought to offer single game bets and bets on any professional or amateur sporting event other than NFL games. This was rebuffed by the court because these were betting schemes that were not in place at the time that PASPA went into effect. Standing was not an issue discussed by the court in its opinion in Markell, and lawyers for the league implied today that this was because standing of the leagues was so obvious that the court did not need to address it. Judge Shipp also directly asked the state how it could reconcile the state’s argument that the leagues lack standing with the Third Circuit decision.

The Department of Justice has until January 20 to intervene, if it chooses to. New Jersey regulators have stated that they will begin granting licenses to offer sports betting beginning on January 9.

Judge Shipp stated that a written decision on the standing issue would be released by Friday, December 21. It remains to be seen how the court will rule. Based on observations from court today, it seemed the judge is inclined to believe that the leagues have the sufficient “identifiable trifle” to challenge the law.

If the court does find that the leagues have standing to bring the suit, the court will proceed to hear the case on the merits and will likely have to decide the constitutionality of PASPA.

Ifrah Law is a leading white-collar criminal defense firm that focuses on igaming.

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iGaming
Dec 17
2012

Did Netflix’s Facebook Posting Disclose Too Much — to Too Few?

People these days use Facebook to tell their “friends” about all kinds of things – a favorite TV show, a political bent, a new relationship and all kinds of other details about their lives. But recent enforcement action by the U.S. Securities and Exchange Commission should make clear to corporate officers and boards that Facebook may not be the best place to talk about company operations.

Netflix and its Chief Executive Officer, Reed Hastings, both received so-called “Wells” Notices from the SEC last week arising from Facebook postings that Hastings made in June about the company’s success. An SEC Wells notice notifies a company or individual that the agency intends to recommend enforcement action and invites the company or individual to submit an explanation to the SEC why it should not proceed.

In July, Hastings wrote on his Facebook page that Netflix users streamed more than 1 billion hours of video in June. The SEC is questioning whether that disclosure – access to which would be limited to those who are “friended” with Hastings on Facebook — violated fair disclosure regulations known as “Reg FD”. Reg FD states that, when an issuer discloses material, nonpublic information to certain individuals or entities – generally, securities market professionals such as stock analysts or holders of the issuer’s securities who may well trade on the basis of the information – the issuer must make public disclosure of that information. The purpose of these restrictions is to prevent issuer companies from disclosing material information preferentially to certain traders or securities market professionals.

Over the years, the SEC has periodically issued guidance about how Reg FD should be applied to developing technologies – first in the context of websites and then in the context of blogs. It does not appear, however, that the agency has previously issued formal guidance for the use of other forms of social media such as Facebook. The general requirements for the use of such technologies in compliance with Reg FD is that the information must be published through a “recognized channel” of distribution, and it must be disseminated in a manner designed to reach the public in general.

In public statements, Netflix and Hastings note the large number of people with access to the Facebook post (which they set at 200,000) included a number of reporters and bloggers, and argue that the size and composition of this audience make the Facebook posts fully compliant. They noted that many people re-posted the post (making it available to an even broader audience) and that there was press coverage thereafter as well. They have also asserted that the fact disclosed was not “material” to investors, noting that there had been a previous statement on Netflix’s blog as few weeks earlier that they were serving nearly 1 billion hours per month. While the value of Netflix stock did rise on the day of the Facebook post, Netflix and Hastings note that the increase started well before that mid-morning post, and assert that it was likely due to a positive Citigroup research report issued the previous evening.

It very well may be that the SEC accepts the explanation proffered by Netflix and Hastings and decides not to proceed with its civil enforcement action. Nevertheless, the story is a good object lesson for corporate personnel regarding the care that must be taken with statements in social media, and perhaps a sign of how government regulators are beginning to scrutinize social media as a new forum in which they may find violations of the regulations under their purview. To the extent that the SEC anticipates policing Facebook or other social media as part of its regulatory oversight of information disclosure, the agency should, in fairness, make clear to issuers the parameters of acceptable statements in those fora.

Ifrah Law is a leading white-collar criminal defense firm that focuses on financial services.

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Financial Services
Dec 11
2012

Court’s Strict Interpretation of Bank Fraud Law May Rein In Prosecutors

A recent interpretation of the federal bank fraud statute by the United States Court of Appeals for the Second Circuit may prove to be a useful check to overreaching by federal prosecutors, who have tended to use that statute in the past as a catch-all law enforcement tool.

In United States v. Nkansah, the Court reviewed the conviction of a defendant for bank fraud and other crimes arising from a scheme in which the defendant and others stole identification information and used that information to file fraudulent tax returns from which they obtained tax refunds. The depositing of the refund checks involved forgery of endorsements and/or the use of false identification.

On appeal, the defendant challenged his bank fraud conviction on the ground that the government had failed to carry its burden of proof that he intended to victimize the banks, as opposed to the U.S. Treasury that issued the refund checks. Defendant argued that no such evidence of intent to defraud a bank was presented, nor did the government prove that the banks themselves actually lost any money.

The court agreed. In its opinion reversing the bank fraud conviction, the appeals court noted that “the bank fraud statute is not an open-ended, catch-all statute encompassing every fraud involving a transaction with a financial institution” but rather “a specific intent crime requiring proof of an intent to victimize a bank by fraud.” For this reason, the court specifically held that “[t]he government had to prove beyond a reasonable doubt that appellant intended to expose the banks to losses,” and noted that, if that intent were proved, there was no need for proof of actual or even possible loss.

The court noted that the evidence upon which the government relied – conversations among the participants about avoiding detection by the banks – was not sufficient to satisfy this required element of proof. The court acknowledged that, in some cases, the fact that a bank may suffer a loss based on the negotiation of a check with a forged endorsement permits an inference of intent. But, in this case, given that the checks at issue were genuine Treasury checks, the actual exposure of a bank to losses is “unclear, remote, or non-existent” because the banks could be deemed to be holders in due course of the checks, with the risk of loss borne entirely by the Treasury. Under such circumstances, the permissible inference urged by the government was far from sufficient to constitute proof beyond a reasonable doubt of the defendant’s intent.

The Second Circuit’s holding in this case is significant because of federal prosecutors’ frequent use of bank fraud charges when banks were part of the transactions included in the allegedly wrongful conduct but were not the intended victims of that conduct. Prosecutors like the bank fraud statute because it carries a hefty maximum statutory sentence of 30 years imprisonment. Bank fraud can also form the predicate (as it did in Nkansah) for other charges such as aggravated identity theft – a crime for which probation is prohibited and for which a defendant must receive a consecutive sentence to the punishment he receives for conviction of any other offense. By holding prosecutors to the strict requirements of the bank fraud statute, the Second Circuit may limit the ability of federal law enforcement to use that statute as leverage in its prosecutions.

Ifrah Law is a leading white-collar criminal defense firm that focuses on financial services.

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Financial Services
Dec 06
2012

‘Off-Label’ FDA Cases Can Run Afoul of First Amendment, Appeals Court Holds

A recent decision by the U.S. Court of Appeals for the Second Circuit may significantly curtail enforcement efforts relating to the so-called “off-label” use of drugs approved by the Food and Drug Administration for specific uses and/or populations. Finding that the government’s prosecution of promotional statements supporting off-label use of an FDA-approved drug would violate the First Amendment, the court ruled that the Federal Drug and Cosmetic Act (FDCA) must be construed narrowly to avoid unconstitutionally prohibiting such statements.

As we have explained in previous blog posts, when the FDA approves use of a drug, it does so for a specific illness or condition and/or for certain populations. It is not illegal for physicians to prescribe approved drugs for off-label use, and such uses sometimes constitute commonly recommended courses of treatment. Law enforcement efforts (both criminal and civil) have focused on the marketing and promotion of drugs for off-label use by pharmaceutical manufacturers and their representatives.

Civil and criminal enforcement against promotion of off-label use has been extensive in recent years and has resulted in some massive fines for pharmaceutical manufacturers. But in United States v. Caronia, decided December 3, 2012, the government’s enforcement efforts ran smack into the First Amendment’s protection of speech, including commercial speech.

The government prosecuted Alfred Caronia, the representative of a pharmaceutical manufacturer, for conspiracy to introduce a misbranded drug into interstate commerce, a misdemeanor violation of the FDCA, 21 U.S.C. sections 331(a) and 333(a)(1). Under this section of the FDCA, a drug is “misbranded” if, among other things, its labeling fails to bear “adequate directions for use,” 21 U.S.C. section 352(f), and FDA regulations define this term as “directions under which the lay[person] can use a drug safely and for the purposes for which it is intended.” 21 C.F.R. section 201.5.

FDA regulations permit the use of promotional statements as evidence of the intended use for this purpose and, because off-label use is (by definition) neither approved by the FDA nor addressed on the label authorized for the drug by the FDA, the FDA has concluded that “[a]n approved drug that is marketed for an unapproved use . . . is misbranded because the labeling of such drug does not include ‘adequate directions for use.’ ” The prosecution of Caronia was based on his statements to a government cooperator in which he promoted the use of a drug for off-label use by a segment of the population for which the FDA had not approved the drug.

After rejecting the government’s claim on appeal that it had used Caronia’s statements merely as evidence of intent, the appeals court found that the government’s interpretation of the FDCA as criminalizing Caronia’s statements would violate the First Amendment’s protection of free speech. The court began with the expression of principle in the Supreme Court’s decision in Sorrell v. IMS Health, Inc., 131 S.Ct. 2653 (2011) that “[s]peech in aid of pharmaceutical marketing . . . is a form of expression protected by the Free Speech Clause of the First Amendment.”

The court found that the restriction on speech that would result if the FDCA were read as prohibiting Caronia’s statements was content-based because it disfavored the point of view he expressed (supporting off-label use) and was speaker-based because other actors (such as physicians and academics) were free to make similar statements without fear of prosecution. Accordingly, the court found that the restriction on the speech was subject to heightened scrutiny.

The court then found that it was unnecessary to determine what level of heightened scrutiny would apply because the government’s proposed restriction did not satisfy even the least exacting level of heightened review. First, the court found that the restriction on off-label promotional speech did not directly and effectively advance the government’s justifiable interest in drug safety. The court noted that the FDA’s approval process contemplates that there will be off-label use of approved drugs and even includes a safe harbor for manufacturers to make statements about such uses. The court concluded that a prohibition of truthful statements about off-label use paternalistically interfered with the ability of doctors and patients to make well-informed choices about treatment and did not reduce the risk that patients would be exposed to unsafe or ineffective drugs. Second, the court found that a prohibition on such statements – and criminalization of that conduct – was not a narrowly drawn restriction on speech, and noted a number of other approaches that could more narrowly limit such speech in the interest of promoting the FDA’s goals.

The court unequivocally rejected the ability of the government to pursue criminal prosecution of this conduct, writing;

Accordingly, even if speech can be used as evidence of a drug’s intended use, we decline to adopt the government’s construction of the FDCA’s misbranding provisions to prohibit manufacturer promotion alone as it would unconstitutionally restrict free speech. We construe the misbranding provisions of the FDCA as not prohibiting and criminalizing the truthful off-label promotion of FDA-approved prescription drugs. Our conclusion is limited to FDA-approved drugs for which off-label use is not prohibited, and we do not hold, of course, that the FDA cannot regulate the marketing of prescription drugs. We conclude simply that the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.

The court’s decision clearly leaves the FDA with significant power to regulate and punish pharmaceutical companies in connection with its oversight over the approval and marketing of prescription drugs – for example, in cases in which manufacturers make false statements about off-label use of their products. But, assuming that other courts reach similar conclusions, the ability of the federal government to act against off-label promotion may be significantly diminished.

Ifrah Law is a leading white-collar criminal defense firm that focuses on healthcare.

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Healthcare
Dec 05
2012

D.C. Circuit: Restitution Order Must Involve Victim’s Loss, Not Defendant’s Gain

On November 9, 2012, in a unanimous opinion in United States v. Fair, the U.S. Court of Appeals for the D.C. Circuit found that the district court had abused its discretion in ordering restitution in the amount of $743,000 in a criminal copyright infringement case. The appeals court vacated the lower court’s restitution order, finding that the order was based on “a clear legal and factual error.”

The appeals court emphasized that a restitution order may not be based solely on the ill-gotten gain of the defendant but must be directly related to the victim’s actual loss, which is not always the same thing.

In this case, Gregory Fair had offered customers an appealing but illegal way to acquire up-to-date Adobe software at less than half the retail price. Fair’s company sold outdated Adobe software (Photoshop and PageMaker) on eBay and included numerical codes that the buyers could use to purchase an update of the same software directly from Adobe. This scheme lasted from February 2001 until September 2007, when Fair was shut down by the United States Postal Inspection Service.

In 2009 Fair pleaded guilty to charges in exchange for a reduced sentence. Although Fair admitted to receiving roughly $1.4 million in revenue from the sale of pirated software on eBay, his plea agreement was based on an infringement category of greater than $400,000 but less than $1 million. Based on the Sentencing Guidelines for that category, Fair was sentenced to 41 months in prison followed by three years of supervised release. At sentencing, the prosecution also insisted that the court order the maximum restitution. The district judge ordered restitution of $743,000 to Adobe, based on prosecutors’ calculations of Fair’s ill-gotten gains.

At first blush that makes sense, right? Not so quick; there is a fatal flaw. Under federal law, restitution is not based on what the defendant gained; it’s based on what the victim actually lost. In many cases those are the same, but here it certainly was not.

At sentencing, Fair’s attorney raised this point in several different ways, emphasizing that the prosecution had completely failed to prove any actual harm to Adobe. This was a critical issue in this case, because Fair was actually directing each of his buyers to make a legitimate $200 purchase from Adobe. Fair’s attorney argued, correctly, that the burden was on the prosecution to show actual, provable loss (i.e., that purchasers of Fair’s outdated material, which Adobe no longer offered for sale, would have actually purchased the full-price, up-to-date merchandise from Adobe AND that the aggregate sales that Fair directed to Adobe were less than the sales that he supposedly thwarted).

The trial judge ignored Fair’s arguments, referred to the prosecution’s unsubstantiated calculation as “hard proof,” and fallaciously based the restitution order on his belief that it was “undisputed that Fair’s revenue from the sale of pirated products was at least $767,000.”

In so doing, the trial judge overstated the weight of the prosecution’s evidence and misinterpreted the law regarding restitution. As the appeals court explained, the purpose of the Mandatory Victim Restitution Act (MVRA) is “to compensate victims for the loss caused by the defendant’s criminal conduct.” Thus the trial court’s restitution order must be “limited to the actual, provable loss suffered by the victim” at the hands of the defendant. The appeals ruling made it clear that the prosecution must “articulate specific factual findings underlying its restitution order,” and it “may not substitute the defendant’s ill-gotten gains for the victim’s actual, provable loss.”

Prosecutors and judges must not lose sight of the fact that victims are free to seek full restitution in separate civil lawsuits. In fact, civil restitution suits actually allow for the disgorgement of all of the defendant’s profits, including those in excess of the victim’s loss. The Fair case is a perfect example of federal prosecutors and criminal trial courts losing sight of their role in the justice system. Fortunately, the appeals court stepped up to rein them in. In the words of D.C. Circuit Judge Judith Rogers, “the abuse-of-discretion standard may be generous, but it is not one that will countenance the clear legal and factual error present here.”

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

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Dec 04
2012

Are Medicaid Claims Becoming the Next Battleground for FCA Cases?

A qui tam case that was recently dismissed on summary judgment may signal the next front in the legal enforcement war arising from off-label use of prescription medications.

In United States ex rel. Watson v. King-Vassel et al., filed in the U.S. District Court for the Eastern District of Wisconsin, the complaint alleged that defendant Dr. Jennifer King-Vassel violated the Federal False Claims Act and Wisconsin False Claims Law by prescribing medications to a minor patient receiving Medicaid assistance for off-label purposes – that is, for purposes other than the specific ones for which the Food and Drug Administration has authorized use. The complaint also alleged that the company that employed Dr. King-Vassel was liable under a theory of respondeat superior.

On October 23, 2012, the court granted summary judgment to the defendants on the ground that there was no specific allegation that Dr. King-Vassel had submitted a Medicaid claim (or made any other false claim) specifically arising from the prescription of the medication in question, and on the ground that Dr. King-Vassel was actually an independent contractor, and not an employee, of the corporate defendant.

The Watson case was clearly resolved in the way it was because of specific deficiencies in the pleadings and proof in that case, and the court’s order dismissing the case was also highly critical of ethically questionable behavior committed by the relator as a means of creating and supporting the qui tam case. Nevertheless, the case raises the specter of a whole new series of legal actions that appear likely to arise from off-label use of FDA-approved medications.

We have written before about the massive fines paid by pharmaceutical companies for promotion of off-label use of medications. The Watson case focuses on a whole other universe of potential deep-pocket defendants: medical professionals and institutions involved in the prescription of the medications in question. Notwithstanding the dismissal of the Watson case, its operative theory – that a Medicaid claim relating to off-label use of a medication may constitute a false claim – may still be viable, though it is largely untested. Going forward, in any case in which a medical professional or institution faces civil or criminal legal action based on such a theory, counsel will have to scrutinize carefully whether the claims on which liability purports to be based truly fall within the scope of the false claims statute.

Ifrah Law is a leading white-collar criminal defense firm that focuses on healthcare.

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Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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