Myths About Self-Consumption in MLMs

Recently, legislation has been introduced in Congress (the Blackburn-Veasey bill, H.R. 3409) that seeks to bring clarity and consistency to activities that distinguish illegal pyramids from legitimate multi-level marketing companies (“MLMs”).  A select few interest groups and certain regulators, who project a bias against MLMs, have spoken out against this legislation by relying on a false legal premise.

The false legal premise:  The opponents of the legislation, often non-lawyers, invariably make the bold assertion that for decades the courts have held that the critical difference between a legitimate MLM business and a pyramid scheme is that an MLM’s revenues must come primarily from the sale of products and services to retail customers unaffiliated with the business opportunity.  This assertion misrepresents the law.

The recently issued FTC Business Guidance Concerning Multi-Level Marketing[i] confirms the long-standing Koscot[ii]legal standard that a company is an illegal pyramid where “the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.”[iii]

Critics of MLMs have argued that the italicized language means that the majority of an MLM’s revenue must come from product sales to persons who are not participants in the MLM.  They call these “retail sales,” implying that a “retail sale” does not include a participant buying her vitamins from her MLM company instead of CVS.  That is not what the Koscot opinion says.

Nor does the argument follow from the facts in Koscot.  There, the FTC found that the company was an illegal pyramid because high recruitment fees provided the primary basis for participant compensation.[iv]  The case did not turn on participants’ self-consumption of a large portion of the company’s product sales.  In fact, for over its first year of operation, the company had no products for its distributors to sell or consume.[v]

Shortly after Koscot, the case law clearly debunked the notion that self-consumption is the litmus test for determining if an MLM is an illegal pyramid.  After an exhaustive four-year investigation and extensive trial, the FTC ruled that Amway, the quintessential MLM, was not an illegal pyramid under the Koscot standard.[vi]  In doing so, the FTC acknowledged that a large portion of Amway’s products were “consumed by the distributors themselves rather than resold.”[vii]  

Did the FTC say that self-consumption by distributors were not sales to “ultimate users” as the term is used in Koscot?  No.  To the contrary, the FTC held that Amway was not an illegal pyramid even though its distributors self-consumed (that is, they were “ultimate users” of) a large portion of Amway’s product sales.

In re Amway is the seminal case for establishing that MLMs are not illegal pyramids where distributor compensation flows from product sales, including purchases by the distributors, that are not required as part of the cost to participate in the MLM.  Critics of MLMs often ignore In re Amway, or try to brush it aside with irrelevant distinctions, because it refutes their narrative that a large portion of product sales must come from purchases by non-distributors.

The MLM critics also tend to ignore another critical point in In re Amway:  “‘Pyramid’ sales plans involve compensation for recruiting regardless of consumer sales.In such schemes, participants receive rewards for recruiting in the form of ‘headhunting fees’ or commissions on mandatory inventory purchases by the recruits known as ‘inventory loading.’”[viii]These are the outcome-determinative factors in subsequent cases where companies were adjudged to be illegal pyramids.Yet anti-MLM advocates conflate and confuse these factors with dicta that was not outcome determinative.

Omnitrition[ix]is often misrepresented by those who would like to implicitly overrule In re Amway.  In Omnitrition, to become a “Supervisor,” a distributor was required to purchase thousands of dollars of product each month with only limited ability to return the product for a refund.  In other words, a large recruitment fee was disguised in the form of inventory loading.

The company defended itself by arguing it had written rules similar to those cited with approval in In re Amway.  The 9th Circuit noted a critical distinction:  Amway’s rules “served to encourage retail sales and prevent “inventory loading” by distributors.”[x]  Whereas, Omnitrition’s rules were weaker, and evidence was lacking that they actually worked.  While Omnitrition contains dicta that suggests purchases by distributors for their own use should not be considered “retail sales” to “ultimate users,” the Court’s decision turned on the company’s failure to prevent inventory loading.

MLM critics often seize upon and distort the dicta in Omnitrition to assert that the case established a legal requirement that a majority of an MLM’s sales must come from non-participants.  In fact, the 9th Circuit said no such thing.  Nor did the Court overrule or criticize In re Amway, where distributor self-consumption constituted a large portion of the company’s sales.  The Court repeatedly noted that in In re Amway the company actually “encouraged” retail sales.[xi]  The Court did not say that any particular amount of retail sales is required.

In the years following Omnitrition, repeated misrepresentations about the relevance of internal consumption by MLM participants led the FTC to issue an Advisory Opinion to clarify its position on the subject:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.[xii]

The FTC further explained that “a multi-level compensation system funded primarily by payments made for the right to participate in the venture is an illegal pyramid scheme.”[xiii]  This Advisory Opinion was consistent with decades of case law where the sine qua non of an illegal pyramid scheme is that a participant’s compensation comes primarily from consideration paid by new participants for the right to participate in the enterprise, whether that consideration comes directly from registration fees or disguised as inventory loading.

Unable to refute the FTC Advisory Opinion, some MLM critics try to summarily dismiss it as “poorly worded”, and maintain their legal fiction regarding self-consumption by mischaracterizing subsequent FTC actions, such as BurnLounge, Vemma, and Herbalife.[xiv]  In fact, none of those actions support the MLM critics’ errant notions about internal consumption and sales to non-participants.

Nowhere in BurnLounge did the 9th Circuit say that a particular percentage of an MLM’s sales must be made to non-participants.  In fact, the Court explicitly rejected the FTC’s argument that “internal sales to other [participants known as Moguls] cannot be sales to ultimate users consistent with Koscot.[xv]  The Court also expressly noted that “when participants bought packages in part for internal consumption . . . , the participants were the ‘ultimate users’ of the merchandise.”[xvi]

What made BurnLounge’s Mogul program illegal is that a participant’s compensation actually came from mandatory music package purchases that were tied to an enrollment fee and were non-refundable in practice.  In other words, a participant’s compensation was dependent on the aggregate payments of new recruits to join the Mogul program.  Again, the 9th Circuit distinguished Amway’s MLM business model as legal because it conditioned rewards on voluntary product sales (including internal consumption) and not for “the mere act of recruiting,” and Amway’s rules discouraged inventory loading.[xvii] 

Vemma also does not support the narrative of MLM critics.  There, distributors were required to make large product purchases (a $600 initial purchase plus $150 per month); they were “very likely engaging in inventory loading”; and their bonuses were tied to purchases of products required to stay eligible for those bonuses.[xviii]  Those key findings convinced the court to issue a preliminary injunction.  But, citing BurnLounge, the court also noted that self-consumption by distributors are sales to ultimate users and do not prove that an MLM is a pyramid scheme.  As the 9th Circuit did in Omnitrition and BurnLounge, this court also distinguished Vemma from In re Amway because Amway enforced anti-inventory loading rules.[xix]

Herbalife involves a recent settlement between Herbalife and the FTC.  Any first year lawyer knows that a settlement agreement is not binding precedent on any other party.  The FTC also made this point clear in its 2004 Advisory Letter, where it explained that its consent orders “often contain provisions that place extra constraints upon a wrongdoer that do not apply to the general public. These ‘fencing-in’ provisions only apply to the defendant signing the order and anyone with whom the defendant is acting in concert. They do not represent the general state of the law.”[xx]  The FTC reiterated the same point again in its recently issued Guidance.[xxi]

Finally, the FTC’s new Guidance explicitly confirms that it is still correct “as stated in the 2004 ‘FTC Staff Advisory Opinion – Pyramid Scheme Analysis’ that ‘the amount of internal consumption does not determine whether the FTC will consider the MLM’s compensation structure unlawful.’”[xxii]

The foregoing discussion demonstrates that MLM critics rely on and advocate a false legal premise.  Decades of case law make it clear that internal consumption by MLM distributors constitutes sales to “ultimate users,” and is not a litmus test for an illegal pyramid.  Other court decisions[xxiii] and statute statutes[xxiv], which the MLM critics typically ignore, reach the same conclusion.

The Blackburn-Veasey bill (H.R. 3409) is consistent with decades of precedent that distributors’ purchases for their own consumption is a legitimate sale to an ultimate user.  The legislation also would provide new enforcement tools for the FTC to go after the type of inventory loading that was the crux of the pyramid findings in Omnitrition and Vemma.  Nor does the legislation restrict the FTC from stopping the BurnLounge type of registration-payment-based compensation scheme.  If the proposed legislation had been adopted prior to those cases, the ultimate decision in each case would not have changed.

What the proposed legislation would change is that, going forward, the federal courts would have a uniform legal standard for an illegal pyramid, and legitimate MLMs would not have to expend significant resources defending against lawsuits based on a false legal premise.


[i] Press Release, Fed. Trade Comm’n, FTC Staff Offers Business Guidance Concerning Multi-Level Marketing (Jan. 4, 2018),https://www.ftc.gov/news-events/press-releases/2018/01/ftc-staff-offers-….

[ii] In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1975 FTC LEXIS 24 (1975).

[iii] Id. at *166–67.

[iv] Id. at *162–64.

[v] Id. at *67–69.

[vi] In re Amway Corp., 93 F.T.C. 618, 1979 FTC LEXIS 390 (1979).

[vii] Id. at *95.

[viii] Id. at *97–98 (emphasis added).

[ix] See generally Webster v. Omnitrition Intern., Inc., 79 F.3d 776 (9th Cir. 1996).

[x] Id. at 783 (emphasis added).

[xi] Id. at 783–84 (emphasis added).

[xii] See Letter of James A. Kohm, Acting Dir. of Mktg. Practices at the U.S. Fed. Trade Comm’n, to Neil H. Offen, President of the Direct Selling Ass’n 1 (Jan. 14, 2004), https://www.ftc.gov/system/files/documents/advisory_opinions/staff-advis….

[xiii] Id.

[xiv] FTC v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014); FTC v. Herbalife Int’l of Am., Inc., No. 2:16-cv-05217 (C.D. Cal. July 25, 2016); FTC v. Vemma Nutrition Co., 2015 U.S. Dist. LEXIS 179855 (D. Ariz. Sept. 18, 2015).

[xv] BurnLounge, Inc., 753 F.3d at 887.

[xvi] Id. at 887.

[xvii] Id. at 886.

[xviii] Vemma Nutrition Co., 2015 U.S. Dist. LEXIS 179855, at *11–13.

[xix] Id. at *4–8, *26–28.

[xx] Letter, supra note 13, at 3.

[xxi] Press Release, supra note 2.

[xxii] Id.  The Guidance discusses other factors that it will consider in evaluating MLMs, such as consumer demand, which raise new issues beyond the scope of this article.

[xxiii] See, e.g.Whole Living, Inc. v. Tolman, 344 F. Supp. 2d 739, 745–46 (D. Utah 2004) (“Defendants misread the relevant case law. A structure that allows commissions on downline purchases by other distributors does not, by itself, render a multi-level marketing scheme an illegal pyramid”); State ex rel. Miller v. Am. Prof’l Mktg., Inc., 382 N.W.2d 117, 120 (Iowa 1986) (“Although a supervisor or director obtains a commission by wholesaling to personal representatives and earns bonuses based on their output, these remunerations are directly related to products that are either consumed by the personal representatives or retailed to their customers.”).

[xxiv] See, e.g., Ga. Code Ann. § 16-12-38(b)(2); Idaho Code Ann. § 183101(6); Ky. Rev. Stat. Ann. § 367.830(5); La. Rev. Stat. Ann. § 51:361(1)(a); Mont. Code Ann. § 30-10-324(1)(b)(ii); Neb. Rev. Stat. § 87-302(12); Okla. Stat. tit. 21, § 1072(1)(a); S.D. Codified Laws § 37-33-8; Bus. & Com. § 17.461(1); Utah Code Ann. § 76-6a-2(1)(b); Va. Code Ann. § 18.2-239(1); Wash. Rev. Code Ann. § 19.275.020(1).

© Copyright 2018 Brinks, Gilson & Lione
This article was written by James R. Sobieraj of Brinks, Gilson & Lione

The Trump Administration Proposes A Budget Increase To Fight Healthcare Fraud

The Trump administration proposed a budget increase of 19 million to aid in the fight against health care fraud. This showcases the continued (and heightened) importance of anti-fraud programs, especially compared to the suggested $18 billion in cuts to other health-care related programs. If approved by Congress, the budget increase will result in an increase in fraud and employee investigations, which in recent years, has shown a good return on investment for the Federal government.

The remaining funds will go to the Health Care Fraud and Abuse Control Program (HCFAC). This program manages all federal, state, and local law enforcement activities linked to health-care fraud and abuse. This additional funding will be split between the Centers for Medicare & Medicaid Services, the Department of Justice and the Health and Human Services Office of Inspector General.

The budget proposal included several recommendations to Congress to help reduce the threat of fraud:

  • Cutting Medicare and Medicaid costs.
  • Punishing doctors or physicians filing claims with inadequate documentation.
  • Expanding Medicare’s previous program to include more services that have high risk for health fraud.
  • Permitting Medicaid Fraud to receive equal funds to investigate fraud in home-health care settings.
  • Halting the coverage and reimbursement of drugs prescribed to high risk patients or given by doctors with a history of overprescribing.

At a minimum, the proposal shows the Federal government’s continued emphasis on the importance (both financially and otherwise) of fighting non-compliant conduct. Providers should increase their compliance program efforts and ensure their programs are effective to minimize their risk of running afoul of applicable rules and regulations.

© Copyright 2018 Dickinson Wright PLLC
This article was written by Rose Willis of Dickinson Wright PLLC
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Democratic lawmakers seek information about reorganization of CFPB Office of Fair Lending

A group of Democratic Senators and House members have sent a letter to Mick Mulvaney and Leandra English expressing concern about Mr. Mulvaney’s announcement that he plans to reorganize the CFPB’s Office of Fair Lending (OFLEO).

Earlier this month, Mr. Mulvaney announced that he plans to transfer the OFLEOfrom the Supervision, Enforcement, and Fair Lending Division (SEFL) to the Director’s Office, where it will become part of the Office of Equal Opportunity and Fairness (OEOF).  At that time, Mr. Mulvaney stated that OFLEO “will continue to focus on advocacy, coordination, and education, while its current supervision and enforcement functions will remain in SEFL.”  The OEOF oversees equal employment, diversity, and inclusion at the CFPB, and has no enforcement or supervisory role.

In their letter, the Democratic lawmakers expressed concern that the reorganization will frustrate the CFPB’s efforts to protect consumers from unfair, deceptive, or abusive acts and practices and from discrimination.  They cited OFLEO’s role in “help[ing] design specialized oversight and support[ing] bank examiners in assuring that CFPB’s regulated institutions were complying with anti-discrimination laws” and in “work[ing] with the CFPB’s enforcement lawyers and the Department of Justice to bring lawsuits” when problems identified in examinations could not be resolved. They noted that OFLEO has “also counseled banks in their efforts to build good compliance systems” and comment that of the OFLEO’s functions to date, “only the counseling will be supplied after the reorganization, though in the absence of dedicated anti-discrimination enforcement, it’s not clear whether there will be continuing demand.”

The Democratic lawmakers seek written responses to the questions asked in their letter by March 1, 2018 as well as “a copy of all documents and communications relating to the decision to [reorganize the OFLEO].”  Among the questions asked by the lawmakers are:

  • Whether the CFPB performed “a legal analysis to determine whether stripping the OFLEO of its enforcement authority would hinder the CFPB’s ability to carry out its statutory mandate to provide oversight and enforcement of federal fair lending laws
  • How transferring the OFLEO to the Director’s Office will “modify the Bureau’s decision-making process with regard to enforcement and other actions to protect consumers from unfair discrimination”
  • Whether Mr. Mulvaney or any other CFPB employee discussed the reorganization before it was announced “with any outside entities—including lobbyists or representatives of the banking or financial services industry”
  • Whether the CFPB is considering any substantive changes to its approach to the enforcement of fair lending laws, including changes to the CFPB’s interpretation of such laws
Copyright © by Ballard Spahr LLP
This article was written by Barbara S. Mishkin of Ballard Spahr LLP
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SEC Announces Share Class Selection Disclosure Initiative

On February 12, 2018, the SEC Division of Enforcement announced the Share Class Selection Disclosure Initiative self-reporting initiative (the SCSD Initiative). The SCSD Initiative is in response to numerous enforcement actions filed against investment advisers for disclosure failures relating to advisers’ selection of mutual fund share classes that paid the adviser, or its related entities or individuals, a 12b-1 fee when a lower-cost share class of the same fund was available to clients.

Pursuant to Section 206(2) of the Investment Advisers Act of 1940 (the Advisers Act), advisers are prohibited from engaging in any acts or practices that operate as a fraud upon any client or prospective client. In addition, Section 206(2) imposes a fiduciary duty on investment advisers to act for their clients’ benefit and to make full disclosure of all material facts, including conflicts of interest. Furthermore, Section 207 of the Advisers Act makes it unlawful to willfully make any untrue statement of any material fact in a registration application or report filed with the SEC, or to willfully omit from such a registration application or report any material fact which should be included therein. Relying upon Sections 206 and 207 of the Advisers Act, the SEC recently pursued the numerous actions against investment advisers referenced above.

Who Should Consider Self-Reporting to the Division of Enforcement

The Enforcement Division describes a “Self-Reporting Adviser” as an adviser who received 12b-1 fees in connection with recommending, purchasing or holding 12b-1 paying share classes for its advisory clients when a lower-cost share class of the same fund was available to those clients, and failed to disclose “explicitly” in its brochure/brochure supplement(s) the conflict of interest associated with the receipt of such fees. The investment adviser received 12b-1 fees if:

  • It directly received the fees;
  • Its supervised persons received the fees; or
  • Its affiliated broker-dealer (or its registered representatives) received the fees.

So as to be sufficient, an adviser’s disclosure must clearly describe the conflicts of interest associated with making investment decisions in light of the receipt of 12b-1 fees, and selecting the more expensive 12b-1 fee paying share class when a lower-cost share class was available for the same fund. Additional information regarding adequacy of disclosures is provided in the various enforcement actions referenced in the announcement. In our third quarter 2017 Newsletter, DCS provides information regarding the administrative proceeding In the Matter of SunTrust Investment Services, Inc.,Investment Advisers Act Rel. No 4769 (September 14, 2017). Regarding the inadequacy of disclosures relating to 12b-1 fees retained by an adviser, the SunTrust Order provides the following:

STIS [SunTrust Investment Services] did not adequately inform its advisory clients of the conflicts of interest presented by its IARs’ share class selections and the receipt by STIS and the IARs of 12b-1 fees. STIS disclosed in its Form ADV Part 2A brochures for its investment advisory programs that STIS “may” receive 12b-1 fees as a result of investments in certain mutual funds and – for several STIS programs – that such fees presented a “conflict of interest.” However, STIS did not disclose in its Form ADV Part 2A brochures or otherwise that many mutual funds offered a variety of share classes, including some that did not charge 12b-1 fees and were, accordingly, less expensive for eligible investors. Moreover, STIS failed to disclose to affected clients that an IAR could purchase, hold, or recommend—and in certain instances did purchase, hold or recommend—mutual fund investments in share classes that paid 12b-1 fees to STIS, which STIS ultimately shared with its IARs as compensation, even though such clients also were eligible to invest in share classes of the same mutual funds that did not charge such fees and were less expensive.

When Must Investment Advisers Self-Report

To be eligible for the SCSD Initiative, an investment adviser must self report by notifying the Division of Enforcement by midnight EST on June 12, 2018. Notification can be made by email to SCSDInitiative@sec.gov or by mail to SCSD Initiative, U.S. Securities and Exchange Commission, Denver Regional Office, 1961 Stout Street, Suite 1700, Denver, Colorado 80294.

What Must Investment Advisers Self-Report

Within 10 business days from the date of its notification, an adviser must confirm its eligibility for the SCSD Initiative by submitting a completed questionnaire. Following is a summary of the information included in the questionnaire:

  • Identification and contact information;
  • To the extent applicable, identification and contact information for the affiliate broker-dealer;
  • Identification of the periods during which brochure(s) and brochure supplement(s) failed to include the necessary disclosures and copies of such forms;
  • The following information regarding each mutual fund that paid 12b-1 fees for investing or holding client assets (submitted in a provided Excel format):
    • Fund name;
    • Ticker symbol;
    • CUSIP;
    • Amount of year-end assets held by the adviser’s clients;
    • Total amount of 12b-1 fees incurred by the adviser’s clients (by each share class);
    • Amount of 12b-1 fees (if any) if the adviser’s clients assets had been invested in the lowest cost share class available;
    • Amount of 12b-1 fees in excess of the lowest cost share class;
    • Total 12b-1 fees received by the adviser, its supervised persons, an affiliated broker-dealer and/or the affiliated broker-dealer’s registered representatives; and
    • 12b-1 fees that the adviser plans to disgorge.
  • Any other facts that the adviser determines would be relevant to the Division of Enforcement’s understanding of the circumstances.

The Standardized Terms of Settlement

If an adviser meets the terms of eligibility for the SCSD Initiative and the Division of Enforcement decides to recommend enforcement action against the adviser, the following are the settlement terms to be recommended by the Division of Enforcement.

Types of Proceedings and Nature of Charges

The proceeding will be an administrative cease-and-desist proceeding under Sections 203(e) and 203(k) of the Advisers Act for violations of Sections 206(2) and 207 of the Advisers Act based on the adviser’s failure to disclose the conflict of interest. In an approved settlement, the adviser will neither admit nor deny the findings of the SEC.

Cease-and-Desist Order and Censure

The settlement will include an order to cease-and-desist from committing violations of Sections 206(2) and 207 of the Advisers Act, and a censure.

Disgorgement and Prejudgment Interest

The settlement will include disgorgement of the inappropriately received 12b-1 fees and prejudgment interest on such amounts. For eligible advisers, the Division of Enforcement will not recommend the imposition of a penalty.

Undertakings

Approved advisers will be required to acknowledge taking the following steps within 30 days of an approved settlement order:

  • Review and as necessary correct the disclosure documents;

  • Evaluate whether existing clients should be moved to a lower cost share class and move clients as necessary;

  • Evaluate, update if necessary and review for effectiveness the implementation of policies and procedures designed to prevent violations of the Advisers Act related to disclosures regarding mutual fund class share selection;

  • Notify all affected clients of the settlement terms; and

  • Provide to the SEC, no later than 10 days after completion, a compliance certification regarding the undertakings.

Individual Liability

The SCSD Initiative covers only advisers. The Division of Enforcement is providing no assurances as part of the program that individuals will be offered similar terms if they engaged in violations of federal securities laws. The Division of Enforcement may seek enforcement actions against such individuals and remedies beyond those provided for in the SCSD Initiative.

Entities That Do Not Take Advantage of the SCSD Initiative

For advisers that would have been eligible for the SCSD Initiative but did not participate, the Division of Enforcement expects in any proposed enforcement action to recommend additional charges and the imposition of penalties. The Division of Enforcement and the Office of Compliance Inspections and Examinations plan to continue to make mutual fund share class selection practices a priority.

© 2018 Dinsmore & Shohl LLP. All rights reserved.
This article was written by Kevin S. Woodard of Dinsmore & Shohl LLP
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Documenting Backcharges on Construction Projects

It would be unusual for a large to medium scale construction project to be completed without the general contractor experiencing issues with at least some of its subcontractors or suppliers.

Under such circumstances, it is typical for back charges to be assessed by the general contractor against the subcontractor or supplier who failed to perform properly pursuant to the terms of their contract. If the possibility of litigation looms in the future concerning such issues, or even if it may not, it is suggested that the general contractor carefully document any potential back charges against the subcontractor or vendor.

The process discussed below will ensure that the back charges are appropriately documented and will give the general contractor the best chance of success in any potential future litigation or negotiations.

The most important issue that a contractor must be aware of when documenting back charges, is to provide appropriate notice to the subcontractor or vendor, as may be required by the terms of the subcontract. If the subcontractor is entitled to a time to cure any deficiencies, this opportunity must be given by the general contractor to the subcontractor or vendor. If the subcontractor properly cures the issue, than in that event, the matter is concluded. On the other hand, if the subcontractor or vendor fails to take remedial measures than the general contractor should take the following additional steps before assessing a back charge. It is important that these steps be carefully followed in order to provide the best chance of success in potential future litigation or negotiations.

The first thing that the general contractor should do is to notify the subcontractor or vendor in writing specifically what the issues are with the materials or services which were provided. This letter should spell out in great detail any and all issues with regard to the materials or services.

The next step is for the contractor to provide notice to the subcontractor or vendor and give them the ability to come to the project to inspect the purported issues prior to any remedial measures taking place. Once again, providing the opportunity to inspect is a very important step in this process.

The next step is to advise the subcontractor or vendor as to when the remedial measures will occur to remedy the deficient condition. This notification should be in writing and should also provide the subcontractor or vendor with the opportunity to be present to observe the remedial measures.

This may very well be the most important piece of documentation to be provided to the vendor or subcontractor and should be sent via certified, regular mail, or any other way in which the contractor can provide to the subcontractor or supplier.

While the remediation is proceeding, the general contractor should carefully videotape any and all remedial efforts, and take very detailed photographs with regard to the remediation process. It is also suggested that any and all invoices, timesheets, or other documents with regard to the back charge be stored in a separate folder and that all of these documents be provided to the defaulting subcontractor or vendor once the back charge work is completed.

The final step in the process would be to provide a complete back charge form to the vendor or supplier with all the relevant invoices which detail the total amount of the back charges. Thereafter, the contractor can deduct this amount from any amount which may be due the subcontractor or vendor.

COPYRIGHT © 2018, STARK & STARK
This article was written by Paul W. Norris of Stark & Stark

Federal Enforcement Actions Continue to Focus on Opioid-Related Misconduct

As we predicted in our year-end post on civil and criminal enforcement trends, 2018 is already off to strong start in opioid-related enforcement against individual providers and associated practices.  Earlier this month, the Department of Justice (DOJ) announced that a Michigan physician, Dr. Rodney Moret, was sentenced to 75 months in prison for his role in conspiracies to distribute prescription pills illegally and to defraud Medicare. The conduct alleged against Dr. Moret is particularly extreme, but nevertheless reflects the government’s commitment to ferreting out opioid-related misconduct.

The government contended that Dr. Moret was involved in a scheme in which he was the sole practitioner at a medical clinic that purported to be a pain management and HIV infusion clinic but in fact was just a “pill mill.” As part of this scheme, Dr. Moret allegedly would conduct a cursory (if any) examination of patients, which were billed to Medicare, before writing a prescription for controlled substances. Once those prescriptions were filled, patient marketers would sell those drugs on the street in Southeast Michigan. This clinic operated from 2010 to 2015.

As part of this scheme, Dr. Moret was alleged to be responsible for illegally distributing over 700,000 dosage units of Hydrocodone, more than 240,000 dosage units of Alprazolam, and more than 2 million milliliters of promethazine with codeine cough syrup. These drugs had a street value of more than $15 million. Dr. Moret was also responsible for over $6 million in health care fraud. He pled guilty to one count each of conspiracy to commit health care fraud and conspiracy to illegally distribute prescription drugs. In its comments on this sentencing, the U.S. Attorney’s Office for the Eastern District of Michigan made clear that one of the government’s main concerns with Dr. Moret’s conduct was his role in exacerbating the opioid crisis in his community.

A few weeks before DOJ announced Dr. Moret’s sentencing, DOJ announced that a Tennessee chiropractor and a pain clinic nurse practitioner had entered into settlement agreements to resolve allegations under the False Claims Act that they had improperly billed Medicare and TennCare for painkillers, including opioids.

Matthew Anderson, a chiropractor, and his management company, PMC, LLC, managed four pain clinics in Tennessee. Anderson and PMC entered into a settlement agreement to pay $1.45 million to resolve the claims that from 2011 through 2014 they caused pharmacies to submit requests for Medicare and TennCare payments for pain killers, including opioids, which were dispensed based upon prescriptions that had no legitimate medical purpose. The government also alleged that (1) Anderson caused all four clinics to bill Medicare for upcoded claims for office visits that were not reimbursable at the levels sought and (2) Anderson and PMC caused the submission of Medicare claims for services provided by two nurse practitioners who were not meeting applicable supervision requirements.

The United States will receive $1,040,275 of the $1.45 million at issue, while the State of Tennessee will receive $163,225. Anderson and PMC also agreed to be excluded from billing federal health care programs for five years. In addition, the settlement agreement requires Cindy Scott, a nurse practitioner from Nashville, to pay $32,000 and to surrender her DEA registration until October 2021.

While enforcement focus in the first weeks of 2018 appears to have remained largely on individual providers and practices, it remains to be seen whether the government (and whistleblowers) will turn their attention to larger companies and providers. As we reported in our year-end post, in September of last year Galena Biopharma, Inc. agreed to pay $7.55 million to resolve allegations under the FCA that it paid kickbacks to physicians to encourage them to prescribe an opioid product (Abstral). Last month, DOJ announced that Costco Wholesale agreed to pay $11.75 million to settle allegations that its pharmacies violated the Controlled Substances Act by improperly filing prescriptions for controlled substances. Although the allegations against Costco involved lax controls surrounding compliance with requirements related to filling prescriptions (and not the same kind of misconduct related to opioid prescriptions alleged against other providers), the government emphasized that it was undertaking its enforcement efforts with an eye toward the opioid epidemic.  The U.S. Attorney for the Eastern District of Michigan commented that “[i]n light of the prescription pill and opioid overdose epidemic we are seeing across the country, compliance with regulations governing pharmacies is more important than ever” and applauded Costco for working with DEA and shoring up its compliance efforts “to ensure that prescription pills do not end up on the street market.”

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A short United States Department of Justice memorandum with big legal consequences

On Jan. 25, 2018, the United States Department of Justice (U.S. DOJ) issued a memorandum limiting the use of federal agency guidance documents in civil enforcement actions that could have far reaching consequences in the private sector. See here.

Under the directives contained in this memorandum, U.S. DOJ attorneys are instructed not to use noncompliance with federal agency guidance documents that have not gone through formal rule-making under the Administrative Procedures Act as evidence of violations of applicable law in federal civil enforcement actions. In particular, the U.S. DOJ instructs its attorneys that they may not use a private party’s noncompliance with an agency guidance document for presumptively or conclusively establishing that a party violated an applicable statute or rule that an agency has delegated authority to implement. The memorandum continues by saying “[t]hat a party fails to comply with agency guidance expanding upon statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.”

In the past, federal agency guidance policy has been used by agencies as well as the U.S. Department of Justice as evidence of whether a regulated party has complied with federal statutes. For example, this use of guidance policies for enforcement decision has been regularly used by numerous federal agencies, such as the EPA, OSHA, SEC, Labor, the Treasury, FTC and many other federal agencies, in referring matters to the U.S. DOJ for enforcement of the federal statutes and regulations that these agencies have delegated authority to administer.

The U.S. DOJ memorandum will provide creative lawyers with new ammunition for negotiation with federal agencies when those agencies use noncompliance with their guidance as evidence of violations of laws that carry significant civil penalties for such actions. In addition, these same creative lawyers in the private sector will use the memorandum as evidence that a federal agency should not use guidance documents as evidence for important agency decision making such as permit decision making or related important agency decisions that have important consequences for the regulated community.

 

Copyright © 2018 Godfrey & Kahn S.C.
This post was written by Arthur J. Harrington of Godfrey & Kahn S.C.
Read more of the National Law Review’s  Coverage of Government Regulations.