Category: Administrative & Regulatory

What Have We Learned from Audits under the Medicare Electronic Health Record (EHR) Incentive Program?

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Through the first half of this year, the Centers for Medicare & Medicaid Services auditor has conducted numerous pre- and post-payment audits of meaningful use attestations submitted by eligible providers to the Medicare Electronic Health Record Incentive Program.  This newsletter provides an overview of pre- and post-payment audit activity as well as recommendations for how Eligible Providers should prepare themselves for audits.

Through the first half of this year, Figliozzi & Company (Figliozzi), the audit contractor for the Medicare Electronic Health Record (EHR) Incentive Program (EHR Incentive Program), has conducted numerous pre-payment and post-payment audits of meaningful use attestations submitted by eligible professionals, eligible hospitals and critical access hospitals (collectively, Eligible Providers).  This experience navigating pre-payment and post-payment audits has generated several recommendations that Eligible Providers should consider, whether or not they are under audit.

The following sections of this On the Subject provide an overview of Medicare EHR Incentive Program pre- and post-payment audit activity, an overview of the more recently implemented pre-payment audit program and recommendations for how Eligible Providers should prepare themselves for audits.

Overview of Incentive Program Audit Activity

The Centers for Medicare & Medicaid Services’ (CMS) EHR Incentive Program regulations authorize CMS to review an Eligible Provider’s meaningful use attestation to determine whether the Eligible Provider has met the requirements for an incentive payment.  Since its inception, CMS has incorporated automatic pre-payment edit checks into the EHR Incentive Program attestation and payment systems.  According to a February 2013 publication from CMS titled “EHR Incentive Programs Supporting Documentation for Audits” (CMS Audit Publication), CMS uses such pre-payment edit checks “to detect inaccuracies in eligibility, reporting and payment.”  Beginning with attestations submitted in January 2013, CMS also conducts pre-payment audits, which are “random and may target suspicious or anomalous data.”

In addition to pre-payment edit checks and audits, CMS also conducts post-payment audits, amounting to approximately 5 percent to 10 percent of Eligible Providers receiving incentive payments.  Eligible Providers selected for post-payment audits must present supporting documentation to validate their submitted attestation data, and CMS will withhold payment of the incentive payment for the Eligible Provider’s subsequent EHR incentive payment year until the audit is resolved.

Pre-Payment Audit Program

Implementation of pre-payment audits was widely anticipated in response to criticism from the Department of Health and Human Services Office of Inspector General (OIG).  In November 2012, the OIG released a report titled “Early Assessment Finds That CMS Faces Obstacles in Overseeing the Medicare EHR Incentive Program” (OIG Report).    The OIG Report noted that “CMS does not verify the accuracy of professionals’ or hospitals’ self-reported meaningful use information prior to payment.”

In recommending pre-payment audits, the OIG Report states that “[a]lthough CMS is not required to verify the accuracy of this information prior to payment, doing so would strengthen its oversight of the anticipated $6.6 billion in incentive payments.  Verifying self-reported information prior to payment could also reduce the need to identify and recover erroneous payments after they are made.”

CMS initially resisted the implementation of pre-payment audits in an October 2012 letter from CMS Acting Administrator Marilyn Tavenner to the OIG, speculating that implementation of pre-payment audits could significantly delay payments to Eligible Providers and, further, that requesting additional documentation from Eligible Providers would also impose an increased upfront burden.

Notwithstanding the initial resistance, CMS began conducting pre-payment audits for attestations submitted in 2013.  Figliozzi, which was previously appointed as a CMS contractor for purposes of conducting post-payment audits, conducts pre-payment audits on behalf of CMS.

As with the post-payment audits, CMS intends to conduct pre-payment audits of approximately 5 percent to 10 percent of Eligible Providers submitting attestations for meaningful use; according to the CMS Audit Publication, some Eligible Providers will be selected at random, while others will be audited based on submission of “suspicious or anomalous data.”  Given the unrelated process for selecting Eligible Providers for pre- and post-payment audits, it is possible that CMS may audit up to 20 percent of Eligible Providers submitting attestations for meaningful use in a given year.

Eligible Providers selected for pre-payment audits must present supporting documentation to validate data submitted during attestation before CMS will release their incentive payments.  The CMS regulations for the Medicare and Medicaid Program provide that Eligible Providers must keep documentation supporting their demonstration of meaningful use for six years.

Pre-Payment Audit Preparation Best Practices

Based on Eligible Providers’ experience with the pre-payment and post-payment audits, we recommend the following practices to improve the chance of a successful audit:

  • Understand Core and Menu Set Measures.  An Eligible Provider should review and be familiar with the specification sheets and frequently asked questions (FAQs) for the core and menu set meaningful use measures published by CMS on the EHR Incentive Program website.  The specification sheets and FAQs resolve many ambiguities created by the measures themselves and the auditors rely upon them as interpretive guidance to the measures.
  • Use Multi-Disciplinary Teams.  Eligible Providers should utilize a multi-disciplinary team of information technology and clinical personnel for the implementation and management of their EHR systems and meaningful use requirements to ensure the system is properly configured for measures (such as the drug-drug and drug-allergy interaction checks measure) that simply require functionality to be activated during the Eligible Provider’s meaningful use reporting period.
  • Documenting Measure Compliance.  Eligible Providers should retain documentation for each of the measures.  Such documentation may include: dated screen captures that demonstrate the Eligible Provider met the measure during the reporting period or otherwise by the applicable deadline, security risk assessment reports or an e-mail from an immunization registry confirming receipt.
  • Security Assessment. If an Eligible Provider relies upon a vendor hosting its EHR to conduct the security risk analysis required for the protection of electronic health information meaningful use measure, then the Eligible Provider should request a letter from the vendor stating the timing of the vendor’s assessment in order to demonstrate that the security assessment was completed before the end of the Eligible Provider’s meaningful use reporting period.
  • Certification of EHR System.  Eligible Providers should be prepared to provide documentation that they have implemented the version of a vendor’s EHR that has been certified as supporting meaningful use by the Office of the National Coordinator for Health Information Technology rather than an earlier uncertified version.  Eligible Providers using an EHR system that is provided on a “software-as-a-service” (SaaS) basis or otherwise from a cloud environment should be prepared for the auditor to request verification regarding the version number of the EHR system in use during the applicable reporting period.  Eligible Providers must obtain such verification from their EHR vendor and, as such, should maintain a relationship with an appropriate contact person at the vendor.  Eligible Providers should also monitor upgrades and version changes pushed by EHR vendors to ensure any upgrade does not affect the certified status of the EHR technology.  A significant change to an EHR system may require the vendor to seek re-certification of the system.
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Securities and Exchange Commission (SEC) Sanctions Revlon Financial Makeover; Tips for Setting a Strong Foundation for Going Private Transaction Success

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On June 13, 2013, the SEC entered into a cease and desist order and imposed an $850,000 civil money penalty against Revlon, Inc. (Revlon) in connection with a 2009 “going private” transaction (the Revlon SEC Order).  This article identifies some of the significant challenges in executing a going private transaction and highlights particular aspects of the Revlon deal that can serve as a teaching lesson for planning and minimizing potential risks and delays in future going private transactions.

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Background of Revlon Going Private Transaction.

The controlling stockholder of Revlon, MacAndrews & Forbes Holdings Inc. (M&F), made a proposal to the independent directors of Revlon in April of 2009 to acquire, by way of merger (the Merger Proposal), all of the Class A common stock not currently owned by M&F (the Revlon Minority Stockholders).  The Merger Proposal was submitted as a partial solution to address Revlon’s liquidity needs arising under an impending maturity of a $107 million senior subordinated term loan that was payable to M&F by a Revlon subsidiary.  A portion of this debt (equal to the liquidation value of the preferred stock issued in the Merger Proposal) would be contributed by M&F to Revlon, as part of the transaction.  This was submitted as an alternative in lieu of potentially cost-prohibitive and dilutive financing alternatives (or potentially unavailable financing alternatives) during the volatile credit market following the 2008 sub-prime mortgage crisis.

In response to the Merger Proposal, Revlon formed a special committee of the Board (the Special Committee) to evaluate the Merger Proposal.  The Special Committee retained a financial advisor and separate counsel to assist in its evaluation of the Merger Proposal.  Four lawsuits were filed in Delaware between April 24 and May 12 of 2009 challenging various aspects of the Merger Proposal.

On May 28, 2009, the Special Committee was informed by its financial advisor that it would be unable to render a fairness opinion on the Merger Proposal, and thereafter the Special Committee advised M&F that it could not recommend the Merger Proposal.  In early June of 2009, the Special Committee disbanded, but the independent directors subsequently were advised that M&F would make a voluntary exchange offer proposal to the full Revlon Board of Directors (the Exchange Offer). Revlon’s independent directors thereafter chose to continue to utilize counsel that served to advise the Special Committee, but they elected not to retain a financial advisor for assistance with the forthcoming M&F Exchange Offer proposal, because they were advised that the securities to be offered in the Exchange Offer would be substantially similar to those issuable through Merger Proposal.  As a result, they did not believe they could obtain a fairness opinion for the Exchange Offer consideration.  The Board of Directors of Revlon (without the interested directors participating in the vote) ultimately approved the Exchange Offer without receiving any fairness opinion with respect to the Exchange Offer.

On September 24, 2009, the final terms of the Exchange Offer were set and the offer was launched.  The Exchange Offer, having been extended several times, finally closed on October 8, 2009, with less than half of the shares tendered for exchange out of all Class A shares held by the Revlon Minority Stockholders.  On October 29, 2009, Revlon announced third quarter financial results that exceeded market expectations, but these results were allegedly consistent with the financial projections disclosed in the Exchange Offer.  Following these announced results, Revlon’s Class A stock price increased.  These developments led to the filing of additional litigation in Delaware Chancery Court.

The Revlon SEC Order and Associated Rule 13e-3 Considerations.

A subset of the Revlon Minority Stockholders consisted of participants in a Revlon 401(k) retirement plan, which was subject to obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a trust agreement (the Trust Agreement) between Revlon and the Plan’s trustee (the Trustee).  Provisions of ERISA and the Trust Agreement prohibited a 401(k) Plan participant’s sale of common stock to Revlon for less than “adequate consideration.”

During July of 2009, Revlon became actively involved with the Trustee to control the flow of information concerning any adequate consideration determination, to prevent such information from flowing back to Revlon and to prevent such information from flowing to 401(k) participants (and ultimately Revlon Minority Stockholders); certain amendments to the Trust Agreement were requested by Revlon and agreed to by the Trustee to effect these purposes.  This also had the additional effect of preventing the independent directors of Revlon from being aware that an adequate consideration opinion would be rendered for the benefit of Revlon’s 401(k) Plan participants.

On September 28, 2009, the financial advisor to the 401(k) Plan rendered an adverse opinion that the Exchange Offer did not provide adequate consideration to 401(k) Plan participants.  As a result, the Trustee informed 401(k) Plan participants, as previously directed by Revlon, that the 401(k) Plan Trustee could not honor tender instructions because it would result in a “non-exempt prohibited transaction under ERISA.”  Revlon Minority Stockholders, including 401(k) Plan participants, were generally unaware that an unfavorable adequate consideration opinion had been delivered to the Trustee.

In the Revlon SEC Order, the SEC concluded that Revlon engaged in a series of materially misleading disclosures in violation of Rule 13e-3.  Despite disclosure in the Exchange Offer that the Revlon Board had approved the Exchange Offer and related transactions based upon the “totality of information presented to and considered by its members” and that such approval was the product of a “full, fair and complete” process, the SEC found that the process, in fact, was not full, fair and complete.  The SEC particularly found that the Board’s process “was compromised because Revlon concealed from both minority shareholders and from its independent board members that it had engaged in a course of conduct to ‘ring-fence’ the adequate consideration determination.”  The SEC further found that “Revlon’s ‘ring-fencing’ deprived the Board (and in turn Revlon Minority Stockholders) of the opportunity to receive revised, qualified or supplemental disclosures including any that might have informed them of the third party financial advisor’s determination that the transaction consideration to be received by the 401(k) members . . . was inadequate.”

Significance of the Revlon SEC Order.

The Revlon Order underscores the significance of transparency and fairness being extended to all unaffiliated stockholders in a Rule 13e-3 transaction, including the 401(k) Plan participants whose shares represented only 0.6 percent of the Revlon Minority Stockholder holdings.  Importantly, the SEC took exception to the fact that Revlon actively prevented the flow of information regarding fairness and found that the information should have been provided for the benefit of these participants, as well as all Revlon Minority Stockholders.  This result ensued despite the fact that Revlon’s Exchange Offer disclosures noted in detail the Special Committee’s inability to obtain a fairness opinion for the Merger Proposal and the substantially similar financial terms of the preferred stock offered in both the Merger Proposal and the Exchange Offer transactions.

Going Private Transactions are Subject to Heightened Review by the SEC and Involve Significant Risk, Including Personal Risk.

Going private transactions are vulnerable to multiple challenges, including state law fiduciary duty claims and wide ranging securities law claims, including claims for private damages as well as SEC civil money penalties.  In the Revlon transaction, the SEC Staff conducted a full review of the going private transaction filings.  Despite the significant substantive changes in disclosure brought about through the SEC comment process, the SEC subsequently pursued an enforcement action and prevailed against Revlon for civil money penalties.

Although the SEC sanction was limited in scope to Revlon, it is worth noting that the SEC required each of Revlon, M&F and M&F’s controlling stockholder, Ronald Perelman, to acknowledge (i) personal responsibility for the adequacy and accuracy of disclosure in each filing; (ii) that Staff comments do not foreclose the SEC from taking action including enforcement action with regard to the filing; and (iii) that each may not assert staff comments as a defense in any proceeding initiated by the SEC or any other person under securities laws.  Thus, in planning a going private transaction, an issuer and each affiliate engaged in the transaction (each, a Filing Person) must make these acknowledgements, which expose each Filing Person (including certain affiliates who may be natural persons) to potential damages and sanctions.

The SEC also requires Filing Persons to demonstrate in excruciating detail the basis for their beliefs regarding the fairness of the transaction.  These inquiries typically focus on the process followed in pursuing and negotiating the transaction, the procedural fairness associated with such process, and the substantive fairness of the overall transaction, including financial fairness.  As a result of this, each Filing Person (including certain natural persons) in a going private transaction should be prepared to diligently satisfy cumbersome process and fairness requirements as part of the pre-filing period deliberative process, and later stand behind extensive and detailed disclosures that demonstrate and articulate the basis of the procedural and substantive fairness of the transaction, including financial fairness.

Damages and Penalties in Going Private Transactions Can Be Significant.

It is worth noting that civil money penalties and settlements that have been announced to date by Revlon for its Exchange Offer going private transaction is approximately $30 million.  After factoring in professional fees, it would not be surprising that the total post-closing costs, penalties and settlements approach 50 percent of the implied total transaction value of all securities offered in the Exchange Offer transaction.  From this experience, it is obvious that costs, damages and penalties can be a significant component of overall transaction consideration, and these risks must be factored in as part of overall transaction planning at the outset.

Given the risks of post-transaction damages and costs, it is essential that future going private transactions be structured and executed by Filing Persons with the foregoing considerations in mind in order to advance a transaction with full transparency, a demonstrably fair procedural process and deal consideration that is substantively fair and demonstrably supportable as fair from a financial point-of-view.

New York State Court of Appeals Backs Starbucks Policy on Tip-Pooling

Sheppard Mullin 2012

Starbucks shift supervisors can legally participate in tip-sharing with other store employees, but the coffee chain’s assistant managers have enough managerial responsibility to disqualify them from sharing in customer tips, according to the New York State Court of Appeals.

Starbucks’ policy provides for weekly distribution of gratuities to the company’s two lower ranking categories of employees, baristas and shift supervisors, but not to its two higher ranking categories of employees, assistant managers and store managers. In addressing questions certified by the Second Circuit regarding the validity this policy, the Court of Appeals concluded that since shift supervisors, like baristas, directly serve patrons, they remain tip-pool eligible even if their role also involves some supervisory responsibility. But assistant managers, because they are granted “meaningful authority” over subordinates, are not eligible to participate in the tip pool.

The decision provides guidance to the Second Circuit as it hears appeals of two suits, Barenboim et al. v. Starbucks Corporation, No. 10–4912–cv, and Winans et al. v. Starbucks Corporation, No. 11–3199–cv, each brought by a different putative class of Starbucks workers. The plaintiffs in Barenboimare Starbucks baristas who argue that only baristas, and not shift supervisors, are entitled to participate in tip-sharing. The Winans plaintiffs are assistant managers who claim that they should be allowed a share of the tips. In both cases, the Southern District of New York awarded summary judgment to Starbucks, and the plaintiffs appealed. The Second Circuit certified questions to the New York Court of Appeals regarding the interpretation of New York Labor Law §196-d, which governs tip-pooling.

Shift Supervisors Are Not Company “Agents”

New York Labor Law §196-d prohibits an “employer or his agent or an officer or agent of any corporation, or any other person” from accepting or retaining any part of the gratuities received by an employee. It also states, “Nothing in this subdivision shall be construed as affecting the… sharing of tips by a waiter with a busboy or similar employee.”

According to the plaintiff baristas in Barenboim, Starbucks’ policy of including shift supervisors in the stores’ tip pools violates §196-d because the shift supervisors are company “agents” and therefore not permitted to “demand or accept, directly or indirectly, any part of the gratuities, received by an employee.” Starbucks argues that shift supervisors are sufficiently analogous to waiters, busboys and similar employees, and should therefore be permitted to share in the gratuities pursuant to §196-d.

The Court of Appeals, in deciding that shift supervisors are entitled to share in the tip pool, deferred to the New York State Department of Labor’s (“DOL”) long-standing view that “employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory responsibility.” The Court compared the shift supervisors to restaurant captains who have some authority over wait staff, but are nonetheless eligible to participate in tip pools pursuant to the DOL’s Hospitality Industry Wage Order and DOL guidelines dating back to 1972.

“Meaningful Authority” Standard

In Winans, the Starbucks assistant store managers argue that they should be deemed similar to waiters and busboys under §196-d (and therefore eligible for tip-sharing) because they do not have full or final authority to terminate subordinates. The Court of Appeals disagreed: “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d.” That line is drawn, according to the decision, at “meaningful or significant authority or control over subordinates.”

Examples of meaningful authority, according to the decision, are the ability to discipline subordinates, the authority to hire and terminate employees, and input into the creation of employee work schedules. Contrary to the plaintiffs’ claim, authority to hire and fire is not the exclusive test for determining whether an employee is similar to wait staff for the purposes of §196-d.

Tip-Sharing Required?

In addition to the question of which employees are eligible for tip-sharing, the Second Circuit asked the Court of Appeals to consider whether an employer may deny tip pool distributions to an employee who is eligible to split tips under §196-d. The Court held that §196-d excludes certain employees from tip pools, but does not require employers to include all employees who are not legally barred from participating.

Conclusion

The Court of Appeals decision provides specific guidance to the Second Circuit Court of Appeals in connection with the two Starbucks cases pending on appeal, but it also provides helpful clarity to any employers with tip-sharing policies. In particular, the decision confirms that employees who regularly provide direct service to patrons may still participate in tip-sharing, but are not required to do so, even if they exercise a limited degree of supervisory responsibility. On the other hand, employees with meaningful authority over subordinates are not eligible to participate in tip-sharing. Employers should carefully review their tip-sharing policies in light of this guidance from the Court of Appeals.

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Department of State Releases August 2013 Visa Bulletin

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EB-2 category for individuals chargeable to India advances by more than three years.

The U.S. Department of State (DOS) has released its August 2013 Visa Bulletin. The Visa Bulletin sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications. Foreign nationals may file applications to adjust their status to that of permanent resident or to obtain approval of an immigrant visa at a U.S. embassy or consulate abroad, provided that their priority dates are prior to the respective cutoff dates specified by the DOS.

What Does the August 2013 Visa Bulletin Say?

The cutoff date in the EB-2 category for individuals chargeable to India has advanced by three years and four months in an effort to fully utilize the numbers available under the annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

EB-1: All EB-1 categories remain current.

EB-2: A cutoff date of January 1, 2008 is now in effect for individuals in the EB-2 category from India, reflecting forward movement of three years and four months. A cutoff date of August 8, 2008 remains in effect from the July Visa Bulletin for individuals in the EB-2 category from China. The cutoff date remains current for individuals in the EB-2 category from all other countries.

EB-3: There is continued backlog in the EB-3 category for all countries, with minor forward movement for EB-3 individuals from the Philippines and no forward movement for EB-3 individuals from the rest of the world.

The relevant priority date cutoffs for foreign nationals in the EB-3 category are as follows:

China: January 1, 2009 (no forward movement)
India: January 22, 2003 (no forward movement)
Mexico: January 1, 2009 (no forward movement)
Philippines: October 22, 2006 (forward movement of 21 days)
Rest of the World: January 1, 2009 (no forward movement)

Developments Affecting the EB-2 Employment-Based Category

Mexico, the Philippines, and the Rest of the World

In November 2012, the EB-2 category for individuals chargeable to all countries other than China and India became current. This meant that EB-2 individuals chargeable to countries other than China and India could file AOS applications or have applications approved on or afterNovember 1, 2012. The August Visa Bulletin indicates that the EB-2 category will continue to remain current for these individuals through August 2013.

China

As with the July Visa Bulletin, the August Visa Bulletin indicates a cutoff date of August 8, 2008 for EB-2 individuals chargeable to China. This means that EB-2 individuals chargeable to China with a priority date prior to August 8, 2008 may continue to file AOS applications or have applications approved through August 2013.

India

From October 2012 through the present, the cutoff date for EB-2 individuals chargeable to India has been September 1, 2004. The August Visa Bulletin indicates forward movement of this cutoff date by more than three years to January 1, 2008. This means that EB-2 individuals chargeable to India with a priority date prior to January 1, 2008 may file AOS applications or have applications approved in August 2013. The August Visa Bulletin indicates that this cutoff date has been advanced in an effort to fully utilize the numbers available under the EB-2 annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

This significant advancement in the cutoff date for EB-2 individuals chargeable to India will quite possibly be followed by significant retrogression in the new fiscal year. Consequently, AOS applications filed in September 2013 may be received and receipted by U.S. Citizenship and Immigration Services; however, adjudication could be delayed. Applications for interim benefits, including employment authorization and advance parole, should be adjudicated in a timely manner notwithstanding any possible retrogression of cutoff dates.

Developments Affecting the EB-3 Employment-Based Category

In May, June, and July, the cutoff dates for EB-3 individuals chargeable to most countries advanced significantly in an attempt to generate demand and fully utilize the annual numerical limits for the category. The August Visa Bulletin indicates no additional forward movement in this category, with the exception of the Philippines, which advanced by 21 days.

China

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to China. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to China with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

India

Additionally, the July Visa Bulletin indicated a cutoff date of January 22, 2003 for EB-3 individuals chargeable to India. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to India with a priority date prior to January 22, 2003 may file AOS applications or have applications approved through August 2013.

Rest of the World

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to the Rest of the World. The August Visa Bulletin indicates no movement of this cutoff date. This means that individuals chargeable to all countries other than China, India, Mexico, and the Philippines with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

How This Affects You

Priority date cutoffs are assessed on a monthly basis by the DOS, based on anticipated demand. Cutoff dates can move forward or backward or remain static. Employers and employees should take the immigrant visa backlogs into account in their long-term planning and take measures to mitigate their effects. To see the August 2013 Visa Bulletin in its entirety, please visit the DOS website here.

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On Heels of European Raids, Energy Companies Face U.S. Class Actions

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White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.

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A Short-Lived Victory for Generic Drug Manufacturers?

Sheppard Mullin 2012

On June 24, 2012, the U.S. Supreme Court handed down its decision in Mutual Pharmaceutical Co. Inc. v. Bartlett, 570 U.S. ____ (2013), finding that design-defect claims against generic drug companies are pre-empted where federal law prohibits an action required by state law. The Supreme Court had previously held in Pliva v. Mensing, 564 U.S. ____ (2011) that failure to warn claims against generic drug manufacturers are pre-empted by the Federal Food Drug and Cosmetic Act since generic drug makers must copy innovator drug labeling precisely in order to obtain approval of their products by the U.S. Food and Drug Administration (“FDA”). The Court in Mutual rejected the argument of lower courts that the generic manufacturer could comply with both federal and state law by choosing not to make and distribute the product at all.

The case in question involved the drug sulindac, a non-steroidal anti-inflammatory drug product marketed by the innovator as Clinoril®. The plaintiff in the case had been prescribed sulindac for treatment of shoulder pain. She subsequently developed a case of toxic epidermal necrolysis following taking an FDA approved generic product equivalent to Clinoril®, which resulted in significant and permanent disability (including blindness) and disfigurement. Subsequent to the event, the FDA required a more specific warning as to this possible side effect on sulindac products. A jury found the generic manufacturer liable under a theory that there was a design defect with the product, and the First Circuit affirmed, holding that the generic manufacturer could have complied with both federal and state law by not manufacturing and distributing the product. This was the method by which the lower courts overcame prior precedent that a state law may be impliedly pre-empted when it is not possible to comply with both federal and state law.

The Supreme Court in Mutual noted that the generic manufacturer could not comply with the state law, since federal law requires that the active ingredient, the amount of the active ingredient, the dosage form, and the labeling had to be identical to the innovator product. In this case, it was not possible to redesign the product, and the only way, under New Hampshire law, to remedy the design defect would have been to strengthen the product’s warnings. That too could not be done, as FDA rules require the labeling of the generic to be identical to that of the innovator. The Court ruled that in such a case the state law is without effect, and relevant New Hampshire warning-based design defect cause of action was pre-empted with respect to FDA-approved generic drugs sold in interstate commerce.

The scope of the Mutual decision may be limited to those states where design-defect claims allow for a risk-utility approach such as that the New Hampshire requires. The New Hampshire standard requires, among other things in determining whether there is a valid cause of action for a design defect, a determination as to whether there is a possible warning to avoid unreasonable risk of harm from the design defect and the efficacy of such warning. So not every design-defect claim may be pre-empted, depending on each state’s laws are interpreted. But given the Court’s reasoning, even state laws that do not take into effect the presence of and efficacy of a warning, may be pre-empted, as the generic must copy the formula of the innovator in all respects, except for the inactive ingredients in the product. (It should be noted that generics of some dosage forms – ophthalmic products and injectable products – must, in most cases, contain the same inactive ingredients as in the innovator product in the same amounts).

Furthermore, the FDA may amend its rules to permit ANDA holders to make changes in labeling. See “FDA Rule Could Open Generic Drug Makers to Suits,” The New York Times, Business, July 4, 2013, at B2. As stated in the posting on the OMB website (RIN 0910-A694):

Abstract: This proposed rule would amend the regulations regarding new drug applications (NDAs), abbreviated new drug applications (NDAs), abbreviated new drug applications (ANDAs), and biologics license applications (BLAs) to revise and clarify procedures for changes to the labeling of an approved drug to reflect certain types of newly acquired information in advance of FDA’s review of such change. The proposed rule would describe the process by which information regarding a “changes being effected” (CBE) labeling supplement submitted by an NDA or ANDA holder would be made publicly available during FDA’s review of the labeling change. The proposed rule also would clarify requirements for the NDA holder for the reference listed drug and all ANDA holders to submit conforming labeling revisions after FDA has taken an action on the NDA and/or ANDA holder’s CBE labeling supplement. These proposed revisions to FDA’s regulations would create parity between NDA holders and ANDA holders with respect to submission of CBE labeling supplements.

The expected date for a Notice of Proposed Rulemaking is September 2013. It could, of course, take FDA quite some time to propose a rule, and put it into effect, given the requirements of the Administrative Procedure Act. And Congressional action is also a possibility.

For the present, however, generic drug manufacturers appear to be shielded from liability under the doctrine of pre-emption from most, if not all, failure to warn and design defect claims under state law. Whether that victory is short-lived or not remains to be seen.

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New Requirement for Long-Term Care (LTC) Facilities That Arrange Hospice Services through a Medicare-Certified Hospice

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Effective August 26, 2013, the Centers for Medicare & Medicaid Services require that a long-term care, or LTC, facility that chooses to arrange for the provision of hospice services through a Medicare-certified hospice must have a signed agreement with the hospice delineating the services that will be provided by each.

New Condition of Participation Requirement for Long-Term Care Facilities

The Centers for Medicare & Medicaid Services (CMS) has added a new Condition of Participation (CoP) that requires that long-term care (LTC) facilities (that is, Medicare-certified skilled nursing and Medicaid-certified nursing facilities) that choose to arrange for the provision of hospice services through a Medicare-certified hospice must have in place a written agreement delineating the respective roles and responsibilities of each.  The CoP requires that the agreement, signed by an authorized official of the LTC facility and the hospice, must be in place before any hospice services can be provided through the arrangement by the hospice.  The new CoP requirement is effective August 26, 2013.

In its description of the requirement, published in the June 27, 2013, Federal Register, CMS explains that where LTC facilities and hospices provide many of the same services to residents who have elected the hospice benefit, the purpose of the agreement is to ensure that duplicative or conflicting services are not provided to the resident as part of the hospice benefit, and that there will be no missing hospice services.  CMS believes that the written clarification of the responsibilities of the LTC facility and the hospice will increase coordination of care for patients as well as foster communication between the two providers assisting patients and their families.  CMS also believes that the clear division of responsibilities and increased communication required by this new rule will help address the duplication of services criticized by the Office of Inspector General in a July 2011 report, and address situations where neither the LTC facility nor the hospice are providing a needed hospice service.

Options and New Requirement

An LTC facility has two options under the newly added CoP: it may arrange for the provision of hospice services through a written agreement with a Medicare-certified hospice specifying the services to be provided by the LTC facility and the hospice, or it may assist the resident in transferring to a facility that will arrange for the provision of hospice services when a resident requests a transfer.

If the hospice care is furnished in an LTC facility through an agreement with a Medicare-certified hospice, the agreement must ensure, among other things, that the hospice services meet professional standards and principles that apply to individuals providing services in the facility and to the timeliness of the services.  The regulations prescribe what must be addressed in the agreement.  For example, the agreement would specify that it is the LTC facility’s responsibility to furnish 24-hour room and board care, meet the resident’s personal care and nursing needs in coordination with the hospice representative, and ensure that the level of care provided is appropriately based on the resident’s needs.  The hospice’s responsibilities are delineated to include providing medical direction and management of the patient, nursing, counseling (including spiritual, dietary and bereavement), social work and medical supplies and drugs necessary for palliative care associated with the terminal illness.  The final regulation and CMS’ commentary published in the Federal Register provide considerable guidance to providers in developing new agreements, or amending existing agreements with hospices, to address the new requirement.

LTC facilities choosing to provide hospice services through arrangements with hospices without the required written agreement can face sanctions for their failure to meet the requirement of this new CoP.  While one commenter suggested extending the deadline for implementation of the rule to allow hospices and LTC facilities more time to develop agreements, CMS believes that the August 26, 2013, effective date is an adequate timeframe.

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Does a Valid Copyright Exist in the Song “Happy Birthday To You”?

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Ownership of a copyright in one of the most popular songs in the English language has recently been challenged in several lawsuits around the country.  At the heart of the dispute is whether the music publisher Warner Chappell legitimately owns a copyright in, and thus has the right to license (and enforce) the rights to, the ubiquitous song “Happy Birthday to You.”  Since it acquired a company in 1998 that claimed to own the rights in this song, some have estimated that Warner makes as much as $2M per year licensing the rights to use this song in various movies and television shows.  Two recently filed lawsuits are challenging this ownership claim and seek a ruling that the rights to the song have passed into the public domain.

The long and tortured history of the song, which has been methodically detailed by Professor Robert Brauneis in his excellent article on the topic, begins with the melody of the song which was originally written in the late 19th Century by two sisters, Mildred and Patty Hill.  Although there is still some dispute over the originality of the melody, Professor Bauneis’s research indicates it may have been wholly original even if loosely based on prior folk songs. What is undisputed, however, is that the Hill sisters’ melody was first published in a collection of children’s songs in 1893.  That melody (with different lyrics) was originally titled “Good Morning to All,” and was intended to be used as a greeting by teachers to their students.  What may be forever lost to history is who combined the current words with the Hill sisters’ melody and when. There is evidence from as early as 1911 that the current words and melody (i.e., the “Good Morning to All” melody) were being used together.

 Warner argues that its rights stem from two principal sources acquired over the years through many corporate mergers: (1) a 1935 piano arrangement of the melody of the song, which critics have noted is a specific arrangement of the song that is not the popular version known today, and (2) a copyright registration in a 1924 songbook containing the lyrics.

The suits challenge Warner’s claimed rights on several grounds. One is lack of originality. To be protected by copyright, a work must be sufficiently “original.”  Plaintiffs allege that Warner’s claimed versions of the song are not original enough, and do not protect the version of the song we know today.  Second, they allege that the version of the music in which Warner claims rights, the specific 1935 piano arrangement of the song, is not sufficiently similar to the current version to enable it to claim any rights in the current version. Finally, according to the Plaintiffs, any copyright in the prior versions expired long ago, either through term limits on copyright protection or through the failure of the original owners to properly renew those rights many years ago.

Since the license fees Warner charges for use of the song are not exorbitant, there has been little financial incentive for anyone to take Warner to court over the rights to the song. Since multiple litigations are now pending, there will likely be amicus briefs filed on plaintiffs’ side from many sources. This “crowdsourcing” of history, knowledge and effort (and cost) in re-creating as accurate a picture as possible of the history of the rights of this song is probably the best chance yet of getting to the bottom of the long open question regarding the ownership of “Happy Birthday to You.”

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Financial Innovation for Clean Energy Deployment: Congress Considers Expanding Master Limited Partnerships for Clean Energy

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Technological innovation is driving renewable energy towards a future where it is cost competitive without subsidies and provides a growing share of America’s energy. But for all the technical progress made by the clean energy industry, financial innovation is not keeping pace: access to low-cost capital continues to be fleeting, and the industry has yet to tap institutional and retail investors through the capital markets. This is why a bipartisan group in Congress has proposed extending master limited partnerships (MLPs), a financial mechanism that has long driven investment in traditional energy projects, to the clean energy industry.

Last month Senators Chris Coons (D-DE) and Jerry Moran (R-KS) introduced the Master Limited Parity Act (S. 795); Representatives Ted Poe (R-TX), Mike Thompson (D-CA), and Peter Welch (D-VT) introduced companion legislation (H.R. 1696) in the House of Representatives. The bills would allow MLP treatment for renewable energy projects currently eligible for the Sec. 45 production tax credit (PTC) or 48 investment tax credit (ITC) (solar, wind, geothermal, biomass, hydropower, combined heat and power, fuel cells) as well as biofuels, renewable chemicals, energy efficient buildings, electricity storage, carbon capture and storage, and waste-heat-to-power projects. The bill would not change the eligibility of projects that currently qualify as MLPs such as upstream oil and gas activities related to exploration and processing or midstream oil and gas infrastructure investments.

MLPs have been successfully utilized for traditional fossil-fuel projects because they offer an efficient means to raise inexpensive capital. The current total market capitalization of all energy-related MLPs exceeds $400 billion, on par with the market value of the world’s largest publicly traded companies. Ownership interests for MLPs are traded like corporate stock on a market. In exchange for restrictions on the kinds of income it can generate and a requirement to distribute almost all earnings to shareholders (called unitholders), MLPs are taxed like a partnership, meaning that income from MLPs is taxed only at the unitholder level. The absence of corporate-level taxation means that the MLP has more money to distribute to unitholders, thus making the shares more valuable. The asset classes in which MLPs currently invest lend themselves to stable, dividend-oriented performance for a tax-deferred investment; renewable energy projects with long-term off-take agreements could also offer similar stability to investors. And since MLPs are publicly traded, the universe of potential investors in renewable projects would be opened to retail investors.

The paperwork for MLP investors can be complicated, however. Also, investors are subject to rules which limit their ability to offset active income or other passive investments with the tax benefits of an MLP investment. Despite the inherent restrictions on some aspects of MLPs, the opportunities afforded by the business structure are generating increasing interest and support for the MLP Parity Act.

Proponents of the MLP Parity Act envision the bill as a way to help renewable energy companies access lower cost capital and overcome some of the limitations of the current regime of tax credits. Federal tax incentives for renewable energy consist primarily of two limited tools: tax credits and accelerated depreciation rates. Unless they have sizeable revenue streams, the tax credits are difficult for renewable project developers to directly use. The reality is only large, profitable companies can utilize these credits as a means to offset their income. For a developer who must secure financing though a complicated, expensive financing structure, including tax equity investors can be an expensive means to an end with a cost of capital sometimes approaching 30%. Tax credits are a known commodity, and developers are now familiar with structuring tax equity deals, but the structure is far from ideal. And as renewable energy advocates know all too well, the current suite of tax credits need to be extended every year. MLP treatment, on the other hand, does not expire.

Some supporters have noted that clean energy MLPs would “democratize” the industry because private retail investors today have no means to invest in to any meaningful degree in clean energy projects. Having the American populace take a personal, financial interest in the success of the clean energy industry is not trivial. The initial success of ‘crowd-funded” solar projects also provides some indication that there is an appetite for investment in clean energy projects which provide both economic and environmental benefits.

Sen. Coons has assembled a broad bipartisan coalition, including Senate Finance Energy Subcommittee Chair Debbie Stabenow (D-MI) and Senate Energy and Natural Resources Ranking Member Lisa Murkowski (R-AK). Republican and Democratic cosponsors agree that this legislation would help accomplish the now-familiar “all-of-the-above” approach to energy policy.

However, some renewable energy companies that depend on tax credits and accelerated depreciation are concerned that Republican supporters of the legislation will support the bill as an immediate replacement for the existing (but expiring) suite of renewable energy tax credits. Sen. Coons does not envision MLP parity as a replacement for the current production tax credits and investment tax credits but rather as additional policy tool that can address, to some degree, the persistent shortcomings of current financing arrangements. In this way, MLPs could provide a landing pad for mature renewable projects as the existing regime of credits is phased out over time, perhaps as part of tax reform.

So would the clean energy industry utilize MLP structures if Congress enacts the MLP Parity Act? The immediate impact may be hard to predict, and some in renewable energy finance fear MLP status will be less valuable than the current tax provisions. This is in part because the average retail investor would not be able to use the full share of accompanying PTCs, ITCs, or depreciation unless Congress were also to change what are known as the “at-risk” and “passive activity loss and tax credit” rules. These rules were imposed to crack down on perceived abuse of partnership tax shelters and have tax implications beyond the energy industry. Modifying these rules is highly unlikely and would jeopardize the bipartisan support the bill has attracted so far. But other renewable energy companies believe they can make the structure work for them now, and industries without tax credits — like renewable chemicals, for instance — would not have the same concerns with “at-risk” and “passive activity loss” rules. Furthermore, over the long term, industry seems increasingly confident the structure would be worthwhile. Existing renewable projects that have fully realized their tax benefits and have cleared the recapture period could be rolled up into existing MLPs. Existing MLP infrastructure projects could deploy renewable energy assets to help support the actual infrastructure. Supporters of the legislation see the change as a starting point, and the ingenuity of the market will find ways to work within the rules to deliver the maximum benefit.

The future of the MLP Parity Act will be linked to the larger conversation in Congress regarding tax reform measures. The MLP Parity Act is not expected to pass as a stand-alone bill; if it were to be enacted, it would most likely be included as part of this larger tax-reform package. Congress currently is looking at ways to lower overall tax rates and modify or streamline technology-specific energy provisions. This has many renewable energy advocates on edge: while reform provides an opportunity to enact long-term policies (instead of one-year extensions) that could provide some level of stability, it also represents a chance for opponents of renewable energy to exact tough concessions or eliminate existing incentives. As these discussions continue in earnest this year, the reintroduction of the MLP Parity Act has already begun to generate discussions and mentions in policy white papers at both the House Ways and Means Committee and the Senate Finance Committee. Whether a highly partisan Congress can actually achieve such an ambitious goal as tax reform this year remains uncertain. But because of its bipartisan support, the MLP Parity Act certainly will be one of the many potential reforms Congress will consider seriously.

Senate Finance Committee Leadership Releases Tax Reform Framework

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A major step forward on tax reform occurred today with Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) releasing their tax reform framework.  They are planning a “blank-slate” approach:  stripping the tax code of all current tax deductions, credits, and expenditures in place of a lower individual and corporate tax rate.

In their “Dear Colleague” letter sent out today, Senators Baucus and Hatch announced their plan to hold a markup on a bill after the August recess.  Members of the Senate have been invited to submit by July 26th a “wish list” of which tax provisions they would like to keep alive, and the Senators are encouraging the submission of legislative language.  This approach, requiring Senators to defend the provisions they would like retained, rather than cut breaks they don’t support, is a departure from current practice.  Baucus and Hatch did note that any benefit that ends up in the tax code will reduce the amount of revenue that could go towards reducing the overall rate or reducing the deficit.