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Health Care Company Asks U.S. Supreme Court to Find False Claims Act Unconstitutional

If one appellant has its way, the False Claims Act (FCA) would be gutted by way of its qui tam provisions struck down as unconstitutional by the United States Supreme Court. That is the position taken by Intermountain Health Care, Inc. (Intermountain), which found itself on the wrong end of an FCA suit brought by a physician who alleges that one of his colleagues submitted improper requests for reimbursement for unnecessary medical procedures.

The teeth behind the False Claims Act are its qui tam provisions, which enable private individuals (known as “relators”) to pursue FCA actions on a “qui tam” basis. “Qui tam” is shorthand for the Latin phrase, “he who sues on behalf of the King as well as for himself.” These provisions provide a financial incentive to report noncompliance, as successful qui tamplaintiffs are statutorily entitled to share up to 30 percent of the government’s recovery in an FCA case.

Procedural Summary

The underlying details in the matter — Intermountain Health Care, Inc., et al. v. U.S. ex rel. Polukoff et al., Supreme Court petition no. 18-911 — allege that a doctor, Sherman Sorensen, conspired with two hospitals (including Intermountain) to perform unnecessary heart surgeries and receive federal reimbursements by fraudulently certifying that the surgeries were medically necessary. After the district court dismissed the complaint for failure to meet pleading requirements, the relator appealed to the Tenth Circuit. There, Intermountain and its co-defendants raised for the first time that the claims against them could not proceed on the grounds that the qui tam provisions of the FCA violate Article II of the Constitution, among other arguments. The Tenth Circuit did not reach the merits of this argument, finding that defendants had forfeited those challenges by failing to raise them at the district court level. The Tenth Circuit reversed the district court’s order and remanded, holding that the relator’s amended complaint did satisfy pleading requirements.

Intermountain, in response, petitioned the Supreme Court for a writ of certiorari, raising two questions: (1) whether the False Claims Act’s qui tam provisions violate the Appointments Clause of Article II of the Constitution, and (2) whether a court may create an exception to Federal Rule of Civil Procedure 9(b)’s particularity requirement when the plaintiff claims that only the defendant possesses the information needed to satisfy that requirement. This post addresses the constitutional arguments only, i.e., the first question.

Merits of the Arguments Raised: Constitutional Challenge

The Appointments Clause provides that the President “shall nominate, and by and with the advice and consent of the Senate, shall appoint…officers of the United States… [and] that Congress may by Law vest the appointment of…inferior officers…in the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl. 2. Intermountain asserts that the FCA qui tam provisions violate this Clause because (1) relators are officers (not appointed pursuant to the appointments clause and thus in violation of it), or, alternatively because (2) the FCA impermissibly vests a core function of officers in non-officer relators. According to Intermountain, qui tam relators constitute “officers” or “inferior officers” of the United States when they prosecute FCA actions on behalf of the United States, which is unconstitutional without proper appointment.

In support, Intermountain points to qui tam relators’ prosecutorial duties, that they receive compensation from the government, and that they exercise significant authority under federal law. Accordingly, Intermountain claims, relators are in fact “officers” or “inferior officers.” Intermountain posits alternatively that, even if relators are not officers, the FCA still violates the Appointments Clause because it vests the functions of core officers in un-appointed relators.

The relator, Gerald Polukoff, and the Government (which intervened solely on this constitutional issue) opposed, arguing: (1) there is no circuit split on the constitutional argument raised, (2) every circuit that has considered the argument has rejected it, (3) this case is a poor vehicle to consider the issue raised because Intermountain failed to raise it at the district court level, and the Tenth Circuit did not consider it on the merits, and (4) qui tam relators are merely private plaintiffs pursuing a cause of action under federal law and do not constitute “officers.”

The Government’s Opposition details this last point, offering that Intermountain’s position is inconsistent with the Supreme Court’s analysis in Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 772, 120 S. Ct. 1858, 1862, 146 L. Ed. 2d 836 (2000) (discussing relators’ actions as a “private stake” in a “private suit”). The Government also asserts that qui tam relators neither evince the “practical indicia” of federal officers (i.e., “the ideas of tenure, duration, emolument, and duties”) nor are they akin to “independent counsel,” which the Supreme Court considered to be “inferior officers” in Morrison v. Olson, 487 U.S. 654 (1988). The Government posited that a relator “does not occupy a continuing position established by law.” Lastly, the Government responds to Intermountain’s claim that the FCA impermissibly vests “a core officer function” to un-appointed relators on the grounds that relators bring only private suits and do not administer or enforce public law.

On balance, Intermountain faces a steep climb for the Supreme Court to accept review of its constitutional argument. But, if the Supreme Court accepts review, government attorneys, the defense bar, in-house counsel, and relators’ counsel alike have a lot at stake, and all will be watching closely.

 

© 2019 Foley & Lardner LLP
Read more US Supreme Court news on the National Law Review’s Litigation page.

Drone Delivers Human Kidney for Transplant

Last month, a University of Maryland unmanned aerial system (UAS or drone) delivered a donor kidney to surgeons at the University of Maryland Medical Center (UMMC) in Baltimore for an ultimately successful transplant to a patient with kidney failure. The drone flew 2.6 miles in approximately 10 minutes.

This University of Maryland project is important to determine whether this process of delivery works; if it is a proven system of delivery, unmanned organ transport can potentially be done at much greater distances. This would minimize the need for multiple pilots and flight time and address safety issues.

The drone flight was monitored by AiRXOS Air Mobility Platform, which manages the volume, density and variety of UAS traffic data for safe operations while functioning as an apparatus for maintaining and monitoring a viable human organ.

 

Copyright © 2019 Robinson & Cole LLP. All rights reserved.
This post was written by Kathryn M. Rattigan of Robinson & Cole LLP.

CBD Risk Management

Advising companies on CBD (cannabidiol) risk management is made challenging by the rapid pace of developments and frequent confusion caused by often false or misleading online information. This article attempts to provide a concise analysis of critical CBD legal and risk management issues.

Do Not Conflate “Legality” under the 2018 Farm Bill with U.S. Food and Drug Laws

The 2018 Farm Bill, which was signed in to law in December 2018, exempts hemp and hemp-derived products, including hemp-derived CBD, from the Controlled Substances Act (CSA). In the lead-up to passage of the Farm Bill, there was widespread confusion in the public as to the extent of the “legality” of hemp-derived CBD, with many commentators and even some legal experts conflating legality under the CSA with legality under the Food Drug and Cosmetics Act (FDCA) and state food and drug laws. This confusion prompted former FDA Commissioner Scott Gottlieb to issue a public statement clarifying that Congress had explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the FDCA, regardless of whether they are derived from cannabis or hemp. 

Identify How the CBD Product Will Be Defined under the FDCA

A product containing a cannabinoid could be considered a drug, food, food additive, dietary supplement or cosmetic depending on how the product is marketed and sold. How aggressively these products are policed by FDA and state agencies depends on the nature of the product and how it is defined under the FDCA and state law.

CBD as “Food” or “Dietary Supplement”

FDA’s position since at least 2015 is that certain cannabinoids, including CBD, are impermissible additives that adulterate food and dietary supplements for both humans and animals. Under the FDCA’s drug exclusion rule, once a substance that was never previously in the food supply is (1) an active ingredient of an approved drug product or (2) an active ingredient of a product in clinical trials that have been made public, a food or supplement containing that substance cannot be shipped in interstate commerce. FDA has cited Epidiolex® as an example of a clinical investigation regarding CBD that has been made public. Epidiolex was approved by FDA in June 2018 for treatment of childhood seizures associated with two rare forms of epilepsy. FDA has therefore concluded that CBD products are in fact drugs and require FDA approval under the FDCA. The new drug-approval process is exorbitantly expensive; in 2016, the Journal of Health Economics estimated the average cost per approved drug at well over $1 billion.

CBD as a “Cosmetic”

Cosmetics are generally less heavily regulated by FDA than food or drugs, and until recently the agency has remained silent on the use of CBD in cosmetic products. On April 2, 2019, FDA provided much-needed insight, stating that although certain cosmetic ingredients are prohibited or restricted by regulation, “currently that is not the case for any cannabis or cannabis-derived ingredients.” However, FDA warned that no ingredient − including cannabis-derived ingredients – can be used in a cosmetic if “it causes the product to be adulterated or misbranded.” A cosmetic may be considered adulterated “if it bears or contains any poisonous or deleterious substance which may render it injurious to users under the conditions of use prescribed in the labeling.” FDA cautions that a product may be considered both a cosmetic and a drug, even if it affects the appearance, if it is “intended to affect the structure or function of the body, or to diagnose, cure, mitigate, treat or prevent disease.”

Several large national retailers, including CVS, Walgreens and Rite-Aid, recently announced they will begin selling CBD-infused cosmetics in certain stores.

FDA Currently Uses “Enforcement Discretion”

Other than issuing letters to companies that sell CBD-infused oils and food products warning them to refrain from making impermissible health claims, FDA has to date taken no other visible enforcement action in that regard. Former FDA Commissioner Scott Gottlieb recently testified before a Senate appropriations subcommittee that “we are using enforcement discretion right now,” and that “I will take enforcement action against CBD products that are on the market if manufacturers are making what I consider over the line claims.” This would certainly include the egregious health claims at issue in the recent warning letters, such as that CBD can cure cancer or prevent Alzheimer’s disease. Gottlieb nevertheless acknowledged that FDA has not taken action against numerous products on the market given its enforcement priorities and limited resources. He cautioned, however, that FDA’s lack of enforcement is “not an invitation for people to continue marketing these products.”

State Enforcement of CBD

Authorities in several states have stepped up enforcement actions, including unannounced inspections and CBD product embargos ordered by authorities in California, New York, Texas and other states. Several states and cities, including California, Maine, North Carolina, Ohio and New York City, have banned CBD-infused food products under state and local laws.

Notwithstanding this state-led crackdown, certain states are working to provide greater legal access to CBD products under state law. Lawmakers in California and Texas, for example, are working on bipartisan legislation to allow sales of CBD products in those states, notwithstanding FDA’s prohibition.

CBD’s Pathway to Legality

As a result of significant pressure by industry groups and members of Congress, FDA has signaled a willingness to consider a potential easing of restrictions on CBD. On April 2, 2019, FDA issued a press release that announced new steps for advancing the potential regulatory pathways for CBD products. The press release explains that FDA primarily is concerned that permitting widespread commercial availability of CBD products negatively impacts research that may otherwise be performed to support regulatory approval through FDA’s drug review process. Similarly, FDA does not want to incentivize patients to forgo appropriate medical treatment by substituting unapproved products for FDA-approved medicines. Also of concern is the potential for liver injury and cumulative exposure to CBD if accessed by consumers across a range of products.

Notwithstanding the intense pressure on FDA to fast-track the CBD approval process, without congressional action that exempts CBD from FDA’s regular rulemaking process, it is likely that the approval process for use of CBD in foods or supplements will take years. In Gottlieb’s recent Senate testimony, he explained that “we don’t have a clear route to allow [CBD] to be lawfully marketed short of promulgating new regulations.” He noted, however, that there is precedent for Congress to issue legislation in the context of a single ingredient, similar to prior legislation for human growth hormone. Gottlieb also has appeared to embrace the idea of legislation that classifies CBD according to defined concentration levels, whereby CBD would be classified as a dietary supplement up to a defined concentration threshold, above which it would be considered a pharmaceutical drug. This is similar to the way fish oil has been regulated.

A public hearing scheduled to take place on May 31, 2019, will cover a range of CBD-related topics, including (1) health and safety, (2) manufacturing and product quality and (3) marketing/labeling/sales. FDA is encouraging public comments and participation at the hearing.

Acting FDA Commissioner Ned Sharpless is now leading the agency. Some have expressed concern over how Sharpless will approach CBD because he is a former cancer drug researcher who has less experience with the dietary supplement and food regulation side of FDA’s mandate. According to a recent interview with former associate FDA Commissioner Peter Pitts, Sharpless is expected to manage the process already in place with respect to CBD for the time being.  How much attention Sharpless will give to CBD issues in the future “depends on the priorities and the new commissioner’s stomach for battle.”

CBD Risk Management … in the Meantime

Until the legal pathway for CBD is clear, companies that market most CBD products must tread carefully. Some, such as the large national retailers that recently announced the sale of CBD products, are focused on safer cosmetic products. Others choose to market and sell CBD-infused foods and supplements based on a higher appetite for risk and a “safety in numbers” assessment in the face of no visible FDA enforcement.

No matter how a company chooses to participate in the CBD industry, it must be counseled on FDA regulatory risk based on the product type in addition to the risks of marketing and selling CBD products on a state-by-state basis. Because the legality of CBD products varies widely by state and is changing so rapidly, providing accurate counsel can be a challenge. In addition, CBD product labels must be carefully reviewed for compliance under both federal and state law. Some states have specific and onerous labeling requirements for CBD products.

Although many companies tend to downplay the risk and potential financial severity of regulatory enforcement by federal or state agencies when it comes to CBD, they ignore at their own peril the risk presented by potential civil tort exposure. CBD products may be considered adulterated, contaminated or mislabeled under federal and state law. This may give rise to financially ruinous lawsuits, including consumer class actions or competitor suits that allege false advertising or unfair competition under state consumer protection statutes. It is essential for every CBD company to have a solid grasp of both the CBD regulatory risks and the unfair competition laws to fairly compete in the new CBD marketplace, and to avoid unwittingly being named as a defendant in an expensive and potentially company-ending lawsuit.

To this end, it also is important for any company that markets and sells CBD products to conduct an insurance coverage review with an attorney and broker that understand the nuances of the CBD insurance market. With passage of the 2018 Farm Bill, insurance coverage for hemp-derived products, including CBD, is expanding rapidly. Problematic endorsements and exclusions remain, however, with respect to limitations on coverage as a result of regulatory penalties, product seizures, resulting business interruption and tort damages premised on violations of law.

Most importantly, CBD risk management requires constant education and vigilance to stay abreast of an area of the law changing more rapidly than any other in recent history.

 

© 2019 Wilson Elser
This post was written by Ian A. Stewart of Wilson Elser. 
Read more on marijuana and CBD policy on the National Law Review’s Biotech page.

The Natural Segue between Tax Compliance & Estate Planning: Jennifer Tolsky Promoted to Partner at Gould & Ratner

Jennifer Tolsky was recently promoted to partner with the law firm of Gould & Ratner in the Tax & Wealth Transfer Group.  Tolsky is a CPA whose tax knowledge augments her legal practice, giving her a heightened awareness of tax concerns with estate planning, wealth transfer strategies and business succession planning.  Tolsky blends experience in tax compliance with an understanding of the personal nature of estate planning to provide nuanced and well-rounded counsel to clients of Gould & Ratner.

The Importance of Tax Compliance to  Estate Planning

Although “technically” Tolsky received her law degree first, she points out that she began her career as a CPA.  For Tolsky, her work as an attorney is built on a foundation of tax compliance knowledge.  The recession of 2008 influenced her career trajectory, and she says, “My dad, who is also a CPA, urged me to pursue an advanced degree in accounting due to the job shortage.”  This led to work in tax compliance, and she was able to marry the two by becoming an associate at Gould & Ratner.  Tolsky says, “Tax law is ever changing and evolving, and I enjoy the challenges it brings.  My accounting background, and specifically, my tax compliance background, informs my legal practice on a daily basis.”

Tolsky sees her current area of practice in the Tax & Wealth Transfer group as a “natural segue” from her previous experience in tax compliance.  She says, “I always consider how an issue I am reviewing or a provision I am drafting will impact a tax return, as well as how items will be executed once implemented . . . because of my previous role in tax compliance, I was able to see many of the issues I deal with currently manifest themselves in the ‘real world’.”  This practical familiarity is ideal in such a personal area of law such as estate planning, where there is a premium on tax efficiency and clients appreciate an in-depth understanding of the nuances of their individual situations.

With tax laws constantly changing, the challenges confronting estate planning clients continue to evolve.  Tolsky sees her role as an advisory one, helping her clients understand how the changes can impact them on multiple levels.  For example, the increased federal exemption on estate taxes, which has increased steadily since 1997, and according to the Tax Policy Center, the federal estate tax impacted the tax returns of less than 0.1 percent of the 2.7 million people who passed away in 2018.  However, other issues are still in play for clients.  Tolsky says, “Although the increased exemption may allow an individual’s estate to pass estate tax-free, there are other issues, such as probate, creditor protection, and ensuring that your assets pass according to your wishes.”  While the playing field is constantly changing, a strong foundation in tax compliance provides real-world expertise for Tolsky as she guides her clients through these issues.

Value of Relationships with Estate Planning, Wealth Transfer and Business Succession Clients

Estate planning is an area of the law that can get very personal for individuals, and Tolsky knows how important it is that client concerns are addressed with an eye to all the issues in play.  She works to establish trust with her clients by understanding their concerns as well as their goals, and finding solutions that deliver on both as efficiently as possible.  She says, “Due to the individual nature of estate planning, relationships are important, and I believe that’s the best way to invest in building your book of business.” John Mays, the Managing Partner of Gould & Ratner, says, “she [Jennifer Tolsky] brings a wealth of experience to the firm and is a pleasure to work with on matters very personal and thus very important to our clients.”

Copyright ©2019 National Law Forum, LLC.
This post was written by Eilene Spear of the National Law Review.
Read more Business of Law news on our Law Office Management page.

Delta Settles FCRA Class Action for $2.3 Million

We have another multi-million dollar FCRA class action settlement on the books.  In Schofield v. Delta Air Lines, Inc., No. 18-cv-00382-EMC, 2019 U.S. Dist. LEXIS 31535, at *1 (N.D. Cal. Feb. 27, 2019), the district court for the Northern District of California recently issued an order granting Plaintiff’s motion for preliminary approval of class settlement totaling $2.3 million for a class of approximately 44,100 class members.

The plaintiffs in Schofield consist of individuals who applied for employment with Delta Airlines and were allegedly given inadequate disclosure documents when consenting to background checks.  They claim that Delta violated the FCRA; the California Investigative Consumer Reporting Agencies Act (“ICRAA”); the California Consumer Credit Reporting Agencies Act (“CCRAA”); and the California Business & Professions Code by acquiring “consumer, investigative consumer and/or consumer credit reports through background checks from current and former employees without providing proper disclosures and obtaining proper authorizations.”  Plaintiffs argued that the disclosures were inadequate and in violation of the FCRA because they were not clear and unambiguous, contained extraneous information, and did not consist solely of the disclosure.

After the case was removed from San Francisco Superior Court, Delta filed a motion for summary judgment on the basis that the named Plaintiff’s claims under the FCRA, ICRAA, and CCRAA were time-barred by the statute of limitations because he had to bring the action within two years of knowing that background check took place.  Delta’s motion was unopposed as the parties reached a settlement before the opposition was due.

The Settlement Agreement

The settlement agreement released the FCRA and state law claims related to Delta’s “conduct in obtaining background checks on applicants without using a stand-alone authorizing document that complies with the FCRA and accompanying state laws.” Id. at *3-4.  As stated above, the settlement is for $2.3 million for a class of approximately 44,100 class members.

  • Of the $2.3 million, Plaintiff’s counsel is going to seek 25%, but is permitted to seek up to 33.33% of the total settlement amount, or $766,666.66.
  • 60% of the net settlement amount is to be divided evenly among class members on a pro rata basis whose background check Defendant procured or caused to be procured on or after October 17, 2015 through February 14, 2019. Id. at *4.
  • 40% of the net settlement amount is to be divided evenly among class members on a pro rata basis whose background check Defendant procured or caused to be procured from October 17, 2012 through October 16, 2015
  • Finally, if the total number of class members exceeds 46,000, Delta will supplement the settlement fund by $50 per person for each person in excess of 46,000.

Class Certification

As the court notes, where “a class has not yet been certified in [a] case, before determining the fairness of a class action settlement agreement, the Court must determine whether the settlement class meets the requirements for class certification under Federal Rule of Civil Procedure 23.”  Thus, the court had to analyze whether the alleged class satisfies the requirements of FRCP Rule 23(a), which are (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation.

  1. Numerosity

The court quickly checked off this requirement as the class is upwards of 44,100 members.

  1. Commonality

This requirement is met when there are questions of fact and law which are common to the class.  In this case, the motion for preliminary approval defined the common issue as “whether Delta willfully violated the law by using these forms.”  The court found that, “[w]hile some class members may have more specific issues with respect to the statute of limitations, that does not necessarily preclude class certification.”  This requirement was met.

  1. Typicality

To satisfy this requirement, “the claims or defenses of the representative parties must be typical of the claims or defenses of the class.  In this case, the court concluded that all class members, including the class reps, will likely face the same challenge with respect to a statute of limitations defense.  Further, the plaintiff alleged that Delta’s conduct was uniform, so whether Delta obtained consumer reports and when class members should have learned of the report is likely to turn on common evidence or patterns of evidence.  Thus, this requirement was met.

  1. Adequacy of Representation

There are two factors the court looks at here – (1) do the named plaintiffs and their counsel have any conflicts of interest with other class members, and (2) will the named plaintiffs and their counsel prosecute the action vigorously on behalf of the class?  With respect to the first question, the court found no conflicts of interest.  With regard to the second question, the court noted that plaintiff’s counsel moved quickly for settlement, but acknowledged that such a move may very well be the result of the “general weakness of the case rather than a lack of vigorous representation.”

  1. FRCP Rule 23(b)

Finally, the court had to find that the requirements under FRCP Rule 23(b) were satisfied.  Under Rule 23(b), the court must find that questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

First, the court found that there is a single common issue that drives the litigation—that is whether Delta willfully violated the law by using facially inadequate forms predominates over the individual issues.  Thus, the court concluded that liability can be determined on a class wide basis.  Next, the court noted that the amount in controversy is small and that because litigation costs would dwarf potential recovery, a class action is the superior means of adjudicating this case.

Review and Approval of Settlement

Once the court determined that the FRCP Rule 23 requirements for class certification were met, it had to approve the proposed settlement.  The court analyzed (a) the adequacy of the settlement amount; (b) the settlement process; (c) the presence of obvious deficiencies; and (D) procedural guidance for class action settlements.

  1. Adequacy of the settlement amount

The court preliminarily found that the settlement consideration is adequate despite potential vulnerabilities in plaintiff’s case (ex. overcoming statute of limitations defense; litigating unsettled aspects of law related to claims; finding of willfulness)

  1. Settlement process

The settlement was reached as a result of arm’s length negotiations with a mediator, so the court found that the settlement was reached in a procedurally fair manner.

  1. The presence of obvious deficiencies

The court analyzed the notices to be sent to class members, whether the named plaintiff was receiving preferential treatment by way of the large incentive award (requested $10,000 as an incentive award), and attorney’s fees.  The court found no deficiencies that would lead it to not approve the proposed settlement agreement.

  1. Procedural guidance for class action settlements

The court found that the parties appropriately addressed the Northern District of California’s procedural guidance for class action settlements.

Thus, the court granted preliminary approval of the settlement based upon the terms set forth in the settlement agreement.  The final approval hearing is scheduled for July 11, 2019.  Stay tuned!

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
This post was written by Shane Micheil of Womble Bond Dickinson (US) LLP.

That Agreement Isn’t Worth the Paper It’s Printed On: Settlements, Consent Judgments, and Penn-America Insurance Co. v. Osborne

A settlement is in place. The parties to the litigation have executed an agreement that embodies their negotiations. Some walk away with a release. Others walk away with a check. Still others had their heart set on an assignment of claims against a third-party. Once the consideration changes hands, the parties submit a stipulation of dismissal, or the court enters a consent judgment. Does that mean the dispute is over? For most cases, it does. Occasionally, however, the dispute lives on or is inherited by a third-party against whom claims were assigned. This article explores the circumstances in which settlement agreements are subject to attack in West Virginia, either by the parties or by third-parties against whom they are sought to be enforced.

As a general matter, settlement agreements signal the end of a dispute. They are “highly regarded and scrupulously enforced, so long as they are legally sound.”1 Indeed, because “[t]he law favors and encourages the resolution of controversies by contracts of compromise and settlement . . . it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy.”2 In West Virginia, parties to a settlement may only re-open it if they overcome the heavy burden of establishing that the settlement was the result of an accident, mistake, or fraud.3 Given these high hurdles, it is the rare case that a litigant will be successful in directly challenging its own settlement agreement.4

But an agreement that resolves a matter among discrete parties does not necessarily fix the obligations of a non-consenting or non-party insurer. “Most attempts to resolve litigation without the consent of the defendant’s liability carrier involve three components: (1) an assignment of the defendant’s rights against his or her liability insurer to the plaintiff; (2) the plaintiff’s covenant not to execute against the defendant’s assets; and (3) a judgment establishing the defendant’s liability and the plaintiff’s damages.”5 Due to the potential that such agreements will arise from fraud or collusion, many courts “cast a suspicious eye” on them.6

Accordingly, a consent or confessed judgment against an insured party may be subject to attack when it is entered into without the participation of a relevant liability carrier. For instance, in West Virginia, “a consent or confessed judgment against an insured party is not binding on that party’s insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment.”7 This is because,

[w]hen dealing with consent judgments, courts must ensure that circumstantial guarantees of trustworthiness exist concerning the genuineness of the underlying judgment. The real concern is that the settlement may not actually represent an arm’s length determination of the worth of the plaintiff’s claim.8

The judiciary’s circumspect approach to consent judgments is especially heightened when the underlying agreement is coupled with a covenant not to execute. A covenant not to execute is an agreement by “which a party who has won a judgment agrees not to enforce it.”9 Such covenants are suspect because they come with perverse incentives. “When the insured actually pays for the settlement of the claim or when the case is fully litigated, the amount of the settlement or judgment can be assumed to be realistic.”10 But when an insured walks away from the agreement with no practical consequences, it has little reason to challenge the amount of the claim, and the accuracy of the judgment becomes questionable.

One potential circumstance is illustrated by Penn-America Insurance Co. v. Osborne, 11 which was decided by the Supreme Court of Appeals of West Virginia in 2017. There, the plaintiff was injured in a timbering accident while conducting work for his employer, H&H Logging Company, on land owned by Heartwood Forestland Fund, IV, Limited Partnership, and leased by Allegheny Wood Products, Inc., for the purpose of harvesting timber.12 The plaintiff sued his employer for deliberate intent and both Heartwood and Allegheny for negligent failure to inspect and/or maintain the land.13 When it came time for the defendants to arrange the defense among their insurers, communications fell apart. H&H requested a defense from its commercial general liability insurer, Penn-America Insurance Company, but Penn-America declined to defend the case against H&H because deliberate intent claims were excluded under the relevant policy.14

For their part, Allegheny and Heartwood requested a defense from Allegheny’s insurer, which accepted coverage. Some time later, Allegheny and Heartwood realized that H&H was contractually obligated to provide them a defense and wrote H&H to demand that it or Penn-America provide a defense. None of the parties ever notified Penn-America that Allegheny and Heartwood had requested a defense against the plaintiff’s allegations. Nonetheless, Allegheny and Heartwood moved for leave to file a third-party complaint for a declaration that Penn-America had wrongfully failed to provide them a defense. The court never ruled on the motion, and the third-party complaint was never filed.15

Thereafter, without providing notice to Penn-America, the parties entered into a settlement agreement, stipulating that Penn-America had damaged Allegheny and Heartwood by breaching its contractual obligation to provide them a defense against the plaintiff’s allegations.16 The key aspects of the agreement are as follows:

Allegheny and Heartwood consented to a $1,000,000.00 judgment for [the plaintiff’s] leg injury, and they agreed to assign to [the plaintiff] any claims they may have had against Penn-America for failing to provide them a defense in the lawsuit. In return, [the plaintiff] covenanted not to execute on the $1,000,000.00 judgment against Allegheny and Heartwood. Instead, he would collect judgment from Penn-America by asserting his assigned claims.17

The plaintiff dismissed his lawsuit against Allegheny and Heartwood and filed a new lawsuit against Penn-America, seeking to recover $1,000,000 as relief for its alleged failure to provide a defense in the plaintiff’s case against Allegheny and Heartwood.18

Ultimately, the Supreme Court of Appeals of West Virginia decided that “the consent judgment [was] not binding on Penn-America, and the assignment of claims to [the plaintiff was] void.”19 As to the enforceability of the consent judgment itself, the court adhered to its prior reasoning that a consent judgment coupled with a covenant not to execute is especially suspect and deserving of scrutiny. It further reasoned that “[n]one of the parties to the pre-trial settlement agreement had any motive to contest liability or an excessive amount of damages.”20 Moreover, the parties valued the claim at $1,000,000 by reference to Penn-America’s coverage, not the plaintiff’s actual injuries. Because “Penn-America was not a party to the lawsuit in which the consent judgment was entered,” the judgment could not be binding on PennAmerica.21

The assignment of bad faith claims by Allegheny and Heartwood fared no better. The Court found that the assignment was based on falsehoods, and that the parties’ agreement bore the hallmark characteristics of fraud and collusion.22 As the Supreme Court of Appeals summarized:

[T]he facts underlying Mr. Osborne’s assigned claims were misrepresented. Moreover, a $1,000,000.00 valuation of a lawsuit for an injured leg, without any cited evidence regarding permanency of the injury, permanent disability, severity, medical expenses, etc., hardly reflects a “serious negotiation on damages.” Lastly, concealment also characterizes the pre-trial settlement agreement because the parties never notified Penn-America of their pre-trial settlement negotiations. Once Penn-America learned after-the-fact of the pre-trial assignment and covenant not to execute, it was prohibited from conducting discovery on the extent of Mr. Osborne’s injuries and damages. Thus, through secretive means, Allegheny and Heartwood awarded Mr. Osborne a $1,000,000.00 windfall for his injured leg with Penn-America’s money.23

In essence, the consent judgment entered by the putative insureds was ineffective to subject the insurer to liability or exposure in a subsequent case brought by the plaintiff.

The reasoning of the Supreme Court of Appeals of West Virginia in Penn-America is the majority approach as to whether a consent or confessed judgment can be binding on a third party.23 For those engaged in settling cases on behalf of their insureds, Penn-America counsels against using the settlement agreement as an instrument to foist liability onto a non-party, especially one that has not been given notice of the negotiations. Moreover, insurers against whom consent judgments are sought to be enforced should bear in mind that the enforcers face a steep uphill battle. The Supreme Court of Appeals of West Virginia, along with the majority of courts, looks askance on enforcing such judgments against non-parties.

1 DeVane v. Kennedy, 205 W. Va. 519, 534, 519 S.E.2d 622, 637 (1999)

2 Syl. Pt. 6, DeVane, 205 W. Va. 519, 519 S.E.2d 622 (quoting Syl. Pt. 1, Sanders v. Roselawn Mem’l Gardens, 152 W. Va. 91, 159 S.E.2d 784 (1968))

3Syl. Pt. 2, Burdette v. Burdette Realty Improvement, Inc., 214 W. Va. 448, 590 S.E.2d 641 (2003) (quoting Syl. Pt. 7, DeVane, 205 W. Va. 519, 519 S.E.2d 622).

4 See, e.g., Burdette, 214 W. Va. 448, 590 S.E.2d 641 (fi nding that a settlement agreement was unenforceable because a party to the agreement had repudiated his signature before the agreement left his attorney’s offi ce, thus resulting in no meeting of the minds)

5 John K. DiMugno, Consent Judgments and Covenants Not To Execute: Good Deals or Too Good to Be True? Part II: Practical Concerns About Collusion and Fraud, 25 No. 1 INS. LITIG. REP. 5 (2003).

6 Id

7 Syl. Pt. 7, Horkulic v. Galloway, 222 W. Va. 450, 665 S.E.2d 284 (2008).

8 Id. at 460, 665 S.E.2d at 294 (quoting Ross v. Old Republic Ins. Co., 134 P.3d 505 (Colo. App. 2006)).

9 Covenant, BLACK’S LAW DICTIONARY (10th ed. 2014).

10 Horkulic, 222 W. Va. at 460-61, 665 S.E.2d at 294-95 (quoting Ross, 134 P.3d 505).

11 238 W. Va. 571, 797 S.E.2d 548 (2017).

12 Id. at 573, 797 S.E.2d at 550.

13 Id

14 Id

15 Id. at 574, 797 S.E.2d at 551.

16 Id

17 Id

18 Id

19 Id. at 575, 797 S.E.2d at 552.

20 Id. at 576, 797 S.E.2d at 553

21 Id. at 578-79, 797 S.E.2d at 555-56; cf. Strahin v. Sullivan, 220 W. Va. 329, 647 S.E.2d 765 (2007) (reasoning that the assignment of a bad faith claim may not be made when the insured enters a covenant not to execute as the insured was never actually exposed to an excess verdict that would support a bad faith claim against his insurer).

22 Penn-America, 238 W. Va. at 579-80, 797 S.E.2d at 556-57

23 LITIGATION & PREVENTION OF INSURER BAD FAITH § 3:50 (3d ed. 2018) (referring to Penn-America as representative of the majority rule “that the consent or confessed judgment is simply not binding where the party from which indemnity is sought was not a party to the previous proceeding”).

 

© Steptoe & Johnson PLLC. All Rights Reserved.
This post was written by James E. McDaniel of Steptoe & Johnson PLLC. 

Fake Followers; Real Problems

Fake followers and fake likes have spread throughout social media in recent years.  Social media platforms such as Facebook and Instagram have announced that they are cracking down on so-called “inauthentic activity,” but the practice remains prevalent.  For brands advertising on social media, paying for fake followers and likes is tempting—the perception of having a large audience offers a competitive edge by lending the brand additional legitimacy in the eyes of consumers, and the brand’s inflated perceived reach attracts higher profile influencers and celebrities for endorsement deals.  But the benefits come with significant legal risks.  By purchasing fake likes and followers, brands could face enforcement actions from government agencies and false advertising claims brought by competitors.

Groundbreaking AG Settlement: Selling Fake Engagement Is Illegal

On January 30, 2019, the New York Attorney General announced a settlement prohibiting Devumi LLC from selling fake followers and likes on social media platforms.  Attorney General Letitia James announced that the settlement marked “the first finding by a law enforcement agency that selling fake social media engagement and using stolen identities to engage in online activity is illegal.”[i] 

Devumi’s customers ranged from actors, musicians, athletes, and modeling agencies to businesspeople, politicians, commentators, and academics, according to the settlement.  Customers purchased Devumi’s services hoping to show the public that they or their products were more popular (and by implication, more legitimate) than they really were.  The AG said Devumi’s services “deceived and attempted to affect the decision-making of social media audiences, including: other platform users’ decisions about what content merits their own attention; consumers’ decisions about what to buy; advertisers’ decisions about whom to sponsor; and the decisions by policymakers, voters, and journalists about which people and policies have public support.”[ii]

Although the Devumi settlement did not impose a monetary punishment, it opened the doors for further action against similar services, and the AG warned that future perpetrators could face financial penalties.

Buyers Beware

Although the New York AG’s settlement with Devumi only addressed sellers of fake followers and likes, companies buying the fake engagement could also face enforcement actions from government agencies and regulatory authorities.  But the risk doesn’t end there—brands purchasing fake engagement could become targets of civil suits brought by competitors, where the potential financial exposure could be much greater.

Competing brands running legitimate social media marketing campaigns, and who are losing business to brands buying fake likes and followers, may be able to recover through claims brought under Lanham Act and/or state unfair competition laws, such as California’s Unfair Competition Law (“UCL”).[iii] 

The Lanham Act imposes liability upon “[a]ny person who, on or in connection with any goods or services, … uses in commerce any … false or misleading description of fact, or false or misleading representation of fact, which … is likely to … deceive as to the … sponsorship, or approval of his or her goods, services, or commercial activities by another person” or “in commercial advertising … misrepresents the nature, characteristics, qualities, or geographic origin of … goods, services, or commercial activities.”[iv]

Fake likes on social media posts could constitute false statements about the “approval of [the advertiser’s] goods, services, or commercial activities” under the Lanham Act.  Likewise, a fake follower count could misrepresent the nature or approval of “commercial activities,” deceiving the public into believing a brand is more popular among consumers than it is.

The FTC agrees that buying fake likes is unlawful.  It publishes guidelines to help the public understand whether certain activities could violate the FTC Act.  In the FAQ for the Endorsement Guides, the FTC states, “an advertiser buying fake ‘likes’ is very different from an advertiser offering incentives for ‘likes’ from actual consumers.  If ‘likes’ are from non-existent people or people who have no experience using the product or service, they are clearly deceptive, and both the purchaser and the seller of the fake ‘likes’ could face enforcement action.” (emphasis added).[v]  

Although there is no private right of action to enforce FTC Guidelines, the Guidelines may inform what constitutes false advertising under the Lanham Act.[vi]  Similarly, violations of the FTC Act (as described in FTC Guidelines) may form the basis of private claims under state consumer protection statutes, including California’s UCL.[vii]

While the Devumi settlement paved the way for private lawsuits against sellers of fake social media engagement, buyers need to be aware that they could face similar consequences.  Because of the risk of both government enforcement actions and civil lawsuits brought by competitors, brands should resist the temptation to artificially grow their social media footprint and instead focus on authentically gaining popularity.  Conversely, brands operating legitimately but losing business to competitors buying fake engagement should consider using the Lanham Act and state unfair competition laws as tools to keep the playing field more even.

[i]Attorney General James Announces Groundbreaking Settlement with Sellers of Fake Followers and “Likes” on Social Media, N.Y. Att’y Gen.

[ii] Id.

[iii] Cal. Bus. & Prof. Code § 17200, et seq.

[iv] 15 U.S.C. § 1125(a).

[v] The FTC’s Endorsement Guides: What People Are Asking, Fed. Trade Comm’n (Sept. 2017) .

[vi] See Grasshopper House, LLC v. Clean & Sober Media, LLC, No. 218CV00923SVWRAO, 2018 WL 6118440, at *6 (C.D. Cal. July 18, 2018) (“a ‘plaintiff may and should rely on FTC guidelines as a basis for asserting false advertising under the Lanham Act.’”) (quoting Manning Int’l Inc. v. Home Shopping Network, Inc., 152 F. Supp. 2d 432, 437 (S.D.N.Y. 2001)).

[vii] See Rubenstein v. Neiman Marcus Grp. LLC, 687 F. App’x 564, 567 (9th Cir. 2017) (“[A]lthough the FTC Guides do not provide a private civil right of action, ‘[v]irtually any state, federal or local law can serve as the predicate for an action under [the UCL].’”) (quoting Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1168 (9th Cir. 2012)).

 

© 2019 Robert Freund Law.
This post was written by Robert S. Freund of Robert Freund Law.

Best Practices for Class Action Litigators and Why Mediation may be in the Client’s Best Interest: Pierce Atwood Launches new Class Action Mediation Service

Pierce Atwood, is launching a Class Action Mediation service with led by Don Frederico, Boston Partner and chair of the Class Action Defense Practice.  Frederico took some time to share his insights on class action litigation with NLR readers.  He offers some advice to attorneys who are looking for a career working in Class Action Litigation, as well as his insights into why mediation might be the best solution for clients.

Frederico has over three decades of trial and litigation experience.  He says, “I have worked with many attorneys on both sides of the ‘v’ and have litigated, mediated, and settled many different types of class actions.”   This experience gives Frederico the understanding to assist in the negotiation of settlement agreements that achieve client goals, satisfy the standards applicable to class action settlements and ultimately get approved by the courts.  Frederico describes the intricacies of Class Action litigation, some advice for how to succeed in this area based on his experience, why mediation is sometimes the best answer for both plaintiffs and defendants.

Class Actions:  A Complex and Challenging Area of Law and Some Guidelines for Success

Class action litigation offers many unique challenges for attorneys who practice in that area.  Frederico says, “Class action litigation combines many things I like about practicing law.  It is intellectually challenging and procedurally complex, and brings to bear interpretations of a complex set of case law, including many Supreme Court precedents.”  Combine that with high stakes and a result that can impact not just an individual, but a wide group, he says, “You have an opportunity for vigorous courtroom advocacy in connection with the merits of the case, the class certification motion, and often the admissibility of expert testimony in a variety of fields of knowledge.”

In his view, a few elements are key to being successful with class action law.  Though it may seem fundamental, he indicates the first piece for any aspiring class action attorney is to know class action law and know it well.  He says, “So much depends on the class certification motion tha close familiarity with the key rules, principles, and cases is imperative.”  Along those lines, Frederico suggests aspiring class action attorneys “master fundamental litigation skills.  The best class action lawyers are good trial lawyers, and knowing how to try a case, prepare a case for trial, and present oral argument is just as important as knowing the key class action decisions applicable to your case.”

In the courtroom, reading your audience and assessing their familiarity with these knotty procedural guidelines is crucial.  Frederico points out, “Some judges have handled enough class actions that they don’t need you to dwell on the basics, but others need and often want your argument to include an overview of the fundamental principles applicable to the class action motion.”  Discerning what elements to include where and when, and if the judge you are arguing before wants those guideposts can have an impact on your outcome.  Speaking to the procedural roller coaster than class actions can be, Frederico advises: “Fight hard against opposing counsel, but never make it personal.”  In most  class action situations, opposing counsel end up working together on questions of settlement, and he says, “ If you transition from making war to making peace, you and your opponent will need to work together to craft a reasonable settlement and may need to join forces against objectors who would derail it.  Adversaries can quickly become needed allies.”

Mediation in Class Actions

As discussed, Class Action Litigation can be very expensive, time-consuming and risky.  Mediation is attractive because it helps undercut those three downsides, and instead focuses on finding solutions to the disputes at hand.  Frederico says, “Mediation can mean the difference between rationally managing each side’s business and financial goals and simply throwing the dice and hoping for the best.” Frederico points to the risk on both sides that class action litigation can entail–how it can take years for the process to unfurl through trial and appellate courts while defendants risk a large judgement and plaintiffs counsel risk uncompensated time and large costs.  The court system itself is prohibitive, with high costs for expert witnesses and extensive discovery, briefing and argument before any sort of resolution is reached.  While defendants don’t want to reward meritless cases with a settlement, Frederico says, “some defendants will endure high costs of defense as a matter of principle, but defendants also must weigh those costs against the business realities of expensive and distracting litigation as well as the probability and consequences of a bad outcome.”

With the risks inherent in class action litigation, mediation is often in the best interests of the client.   Frederico says, “most class actions settle, and many of them settle after mediation.  As a trial lawyer, I often don’t want my cases to settle, but as a business advisor, I recognize that a class action settlement often may be in my client’s best interest.”

 

Copyright ©2019 National Law Forum, LLC
This post was written by Eilene Spear.

Two Class Actions Alleging Starbucks Violated FCRA’s Background Report Disclosure Requirements Are Grinding Toward Settlement

Two pending class action lawsuits alleging coffee giant Starbucks violated the Fair Credit Reporting Act (“FCRA”) by relying on flawed background reports to decline employment to over 8,000 job applicants will likely settle in the coming months.  The two suits are being consolidated in the U.S. District Court for the Northern District of Georgia for the purpose of a directing notice to a single nationwide class.

Before taking adverse action against an applicant based on a background report, 15 U.S.C. §1681b(b)(3) requires the employer to provide the applicant with a copy of the report and a written summary of the applicant’s rights under 15 U.S.C. §1681g(c)(1).  The purpose of this requirement is to allow the applicant an opportunity to correct any errors on the report before the adverse action is taken.

In the first suit, pending in the U.S. District Court for the Western District of Washington, the lead plaintiff, Jonathan Santiago Rosario (“Rosario”), alleges that he was denied employment as a Starbucks barista based on an inaccurate background report Starbucks obtained from Accurate Background, Inc. (“Accurate Background”).  Rosario claims he was taken out of consideration for the position based on several criminal charges and convictions that appeared on his report.  Rosario maintains that the report was inaccurate and that Starbucks took the adverse action weeks before he was provided with the report and the written summary of rights.  Rosario argues that he never had a meaningful opportunity to dispute the report and that Starbucks never reconsidered him for the position.

Similarly, the lead plaintiff in the second suit, Kevin Wills (“Wills”) of Georgia, alleges that Starbucks took adverse employment action against him without providing proper notice and a written summary of rights under FCRA.  Starbucks allegedly hired Wills pending the results of his criminal background check.  Starbucks allegedly received a report from Accurate Background stating that “Kevin Willis” of Minnesota had two prior convictions for domestic violence.  As a result of the report, Starbucks informed Wills over the telephone that he could not work for Starbucks.  Days later, Wills received a letter enclosing the background report.

According to an April 17, 2019 order issued by Judge Richard Jones, who presides over the Rosario action, the parties from both cases jointly participated in several sessions with a private mediator and have reached an agreement in principle to settle both cases on a class basis.

On April 24, 2019, Magistrate Judge Catherine M. Salinas issued a report and recommendation in the Wills case recommending that the Clerk in the Northern District of Georgia consolidate the Rosario case into the Wills case.  After fourteen days, if no party objects, the cases will likely be consolidated.

To date, no details about the terms of the settlement have been released.

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
This post was written by Nadia Adams of Womble Bond Dickinson (US) LLP.
Read more on FCRA Litigation on the National Law Review’s Litigation Type of Law page.

Arkansas and Kentucky Halt Medicaid Work Requirements

On April 10, 2019, the Department of Justice filed notices[1] appealing two District Court rulings that struck down Medicaid work requirements in both Kentucky[2] and Arkansas[3] to the U.S. Court of Appeals for the District of Columbia Circuit. The rulings, issued on March 27, 2019, by Judge James E. Boasberg of the Federal District Court for the District of Columbia, held that the U.S. Department of Health and Human Services (“HHS”) acted arbitrarily and capriciously in violation of the Administrative Procedure Act (“APA”) when it approved the Arkansas Works Amendments and Kentucky HEALTH programs. Arkansas and Kentucky halted the programs, pending resolution of the appeals.

Background

Arkansas Works Amendments

In 2017, Arkansas Governor Asa Hutchinson proposed substantial amendments to the Arkansas Medicaid program (known as Arkansas Works since 2017) (the “Arkansas Works Amendments”). While States generally must meet specific federal requirements when implementing their Medicaid programs, Federal law allows the Secretary of HHS (the “Secretary”) to waive federal requirements for “experimental, pilot, or demonstration project[s]” proposed by States.[4]   Specifically, if, in the Secretary’s judgment, the proposals would be “likely to assist in promoting [Medicaid’s] objectives,”[5] then the Secretary may waive compliance with certain Federal Medicaid requirements to the extent necessary to enable the State to carry out its proposed project (a “Section 1115 Waiver”).[6]

The Arkansas Works Amendments included a new requirement that adults ages 19 to 49 complete 80 hours of employment, or earn income equivalent to 80 hours of employment, each month as a condition of continued Medicaid coverage.[7] On March 5, 2018, the Secretary approved the work requirements and issued a Section 1115 Waiver allowing Arkansas to implement the new requirements. After the work requirements were implemented, more than 16,900 individuals lost Medicaid coverage for at least some period of time due to not reporting their compliance.[8]

Arkansas Medicaid recipients filed suit against the Secretary in August 2018. They asserted that the Secretary’s approval of the Arkansas Works Amendments was arbitrary and capricious, exceeded the Secretary’s statutory authority, and violated the “Take Care Clause” at Article 2, Section 3 of the Constitution – such clause requiring that the President, “take care that the laws be faithfully executed.”[9]

Kentucky HEALTH

In 2018, Kentucky submitted its own Medicaid proposal – the Kentucky HEALTH program – which CMS approved.[10] Like the Arkansas Works Amendments, Kentucky HEALTH made significant changes to Kentucky Medicaid, including, among other things, the implementation of work requirements. Kentucky HEALTH would require Medicaid beneficiaries to spend at least 80 hours per month on certain qualified activities, including: (i) employment; (ii) job skills training; (iii) education; (iv) community service; and (v) participation in Substance Use Disorder treatment. Failure to meet the 80 hour threshold, or failure to report compliance, would result in loss of Medicaid coverage.[11]

Two weeks after the Kentucky HEALTH program was approved, Kentucky Medicaid recipients sued the Secretary. The plaintiffs argued that the Secretary failed to consider Medicaid’s objectives and exceeded his statutory authority when he approved Kentucky HEALTH. The Federal District Court for the District of Columbia agreed with the plaintiffs, and vacated the Secretary’s approval on June 29, 2018, and remanded to HHS for reconsideration.[12]

Following remand, HHS re-opened public comments for Kentucky HEALTH, and approved a slightly modified proposal on November 20, 2018. Again, Kentucky Medicaid recipients sued the Secretary, arguing that the Secretary still had not considered Medicaid’s core objectives in violation of the APA.[13]

The Administrative Procedure Act

The APA establishes two important frameworks: (1) procedures which executive agencies must follow when developing, reviewing, and promulgating rules and regulations; and (ii) a judicial framework for courts to review executive agency actions.[14] Under the APA, courts must “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[15] An agency must “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made,” or the agency’s action may be stuck down by the courts.[16]

The District Court Held That HHS Failed to Consider Medicaid’s Core Objective

Using the APA framework, the court analyzed whether HHS identified the objectives of Medicaid and explained why the Arkansas Works Amendments and Kentucky HEALTH programs would promote such objectives.[17] The court found that, while HHS had considered several Medicaid objectives, HHS failed to consider one critically important objective – providing medical assistance to needy populations.[18]

While HHS itself admitted that providing health coverage to vulnerable populations is “Medicaid’s core objective,”[19] the court found that HHS failed to consider the impact that the Kentucky and Arkansas projects would have on current and future Medicaid coverage.[20] The court determined this failure alone made the Secretary’s approval of the states’ work requirements arbitrary and capricious.[21] The court vacated HHS’s approval of both the Kentucky and Arkansas programs, and remanded both programs to HHS for reconsideration.[22]

Arkansas and Kentucky Halt Implementation of Work Requirements Pending Appeal

Following the District Court decision, Arkansas suspended the changes made by the Arkansas Works Amendments, which have been in effect since June 2018, and Kentucky halted implementation of its Kentucky HEALTH program, which was scheduled to take effect on April 1, 2019. Governor Hutchinson praised the Justice Department’s decision to appeal the cases, and indicated that the Government will likely seek an expedited appeal.

[1] Notice of Appeal, Stewart v. Azar, Case No. 1:18-cv-152-JEB (D.D.C. Apr. 10, 2019); Notice of Appeal, Gresham v. Azar, Case No. 1:18-cv-1900-JEB (D.D.C. Apr. 10, 2019)

[2] Memorandum Opinion, Stewart v. Azar, Case No. 18-152-JEB (D.D.C. Mar. 27, 2019)

[3] Memorandum Opinion, Gresham v. Azar, Case No. 18-1900-JEB (D.D.C. Mar. 27, 2019)

[4] 42 U.S.C. § 1315(a)

[5] Id.

[6] 42 U.S.C. § 1315(a)(i).

[7] Gresham at 7-9.

[8] Id. at 8-9.

[9] Gresham at 10.

[10] Stewart at 4.

[11] Stewart at 5.

[12] Stewart at 6-7.

[13] Stewart at 5-8.

[14] See generally 5 U.S.C. § 551 et seq.

[15] 5 U.S.C. § 706(2).

[16] Stewart at 10 (quoting Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983))

[17] Gresham at 16; Stewart at 14-15.

[18] Gresham at 17-18; Stewart at 14.

[19] Gresham at 17.

[20] Stewart at 16-17

[21] Stewart at 15

[22] Gresham at 33; Stewart at 48.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.