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Trouble In Paradise: Florida Court Rules That Selling Bitcoin Is Money Transmission

The growing popularity of virtual currency over the last several years has raised a host of legislative and regulatory issues. A key question is whether and how a state’s money transmitter law applies to activities involving virtual currency. Many states have answered this – albeit in a non-uniform way – through legislation or regulation, including regulatory guidance documents. For instance, Georgia and Wyoming have amended their money transmitter statutes to include or exclude virtual currencies explicitly. In other states, such as Texas and Tennessee, the state’s primary financial regulator has issued formal guidance. In New York, the Department of Financial Services issued an entirely separate regulation for virtual currencies. Still, in others, neither the legislature nor the relevant regulator has provided any insight into how the state’s money transmitter law may apply.

In most states, the judicial branch has not yet weighed in on the question. But Florida is an exception. On January 30, 2019, in State v. Espinoza, Florida’s Third District Court of Appeal interpreted the state’s money transmission law broadly and held that selling bitcoin directly to another person is covered under the law. [1] The decision will have broad implications for the virtual currency industry in Florida.

BACKGROUND: MIAMI BEACH POLICE DEPARTMENT AND MICHELL ESPINOZA

In December 2013, the Miami Beach Police Department (“MBPD”) perused an Internet website that provided a directory of buyers and sellers of bitcoin. In an undercover capacity, an MBPD agent contacted one of the users, Michell Espinoza. Shortly thereafter, the agent arranged to meet and purchase bitcoin from Espinoza in exchange for cash. The MBPD agent who purchased the bitcoin implied that he would use the bitcoin to fund illicit activities. One month later, the MBPD made a second purchase from Espinoza, telling him that the bitcoin would be used to purchase stolen credit card numbers. After a third and fourth transaction, the MBPD arrested Espinoza. The State of Florida charged him with two counts of money laundering and one count of engaging in the business of a money transmitter without a license. Espinoza moved to dismiss the charges, arguing, among other things, that Florida’s money transmitter law does not apply to bitcoin. The trial court agreed and dismissed all counts against Espinoza.

THE THIRD DISTRICT COURT’S OPINION: SELLING BITCOIN CONSTITUTES MONEY TRANSMISSION

Florida appealed, and the appellate court reversed the trial court’s ruling. The court started its analysis noting that the state’s money transmitter law requires anyone engaging in a “money services business” to be licensed. [2] A “money services business” is defined as “any person . . . who acts as a payment instrument seller, . . . or money transmitter.” [3] The court held that bitcoin is regulated by Florida’s money transmitter law, and, as a result, Espinoza was both “acting as a payment instrument seller” and “engaging in the business of a money transmitter.”

Under the Florida statute, a “payment instrument seller” is an entity that sells a “payment instrument.” [4] The phrase “payment instrument” is defined to include a variety of instruments, including “payment of money, or monetary value whether or not negotiable.” [5] The phrase “monetary value,” in turn, is defined as “a medium of exchange, whether or not redeemable in currency.” [6] The court interpreted these definitions – which it described as “plain and unambiguous” – to conclude bitcoin falls under the definition of “payment instrument.” To reach that conclusion, it reasoned that bitcoin, which is redeemable for currency, is a medium of exchange, which falls under the definition of “monetary value.” Therefore, it falls under the definition of “payment instrument.” [7] To purportedly bolster its point, the court noted that several businesses in the Miami area accepted bitcoin as a form of payment. It also pointed to a final order from the Florida Office of Financial Regulation (“OFR”) in which OFR granted Coinbase a money transmitter license. The court noted that Coinbase provides a service “where a Coinbase user sends fiat currency to another Coinbase user to buy bitcoins.” “Like the Coinbase user,” the court reasoned, the MBPD detective “paid cash to Espinoza to buy bitcoins.”

The court also concluded Espinoza was acting as a money transmitter. Under the Florida statute, a money transmitter is an entity that “receives currency, monetary value, or payment instruments for the purpose of transmitting the same by any means….” [8] Espinoza argued he fell outside this definition because he did not receive payment for the bitcoin for the purpose of transmitting the same to a third party. The court disagreed. It held that the law does not require the presence of a third party because the definition of money transmitter does not mention a third party, either expressly or implicitly. [9] It also disagreed with the trial court and Espinoza’s “bilateral limitation,” which would require Espinoza to have both received and transmitted the same form of currency, monetary value, or payment instrument. According to the court, Espinoza fell within the ambit of the law because he received fiat for the purpose of transmitting bitcoin. It explained that the phrase “the same” in the definition of “money transmission” modifies the list of payment methods, and the use of “or” in that list of payment methods – “currency, monetary value, or payment instrument” – means that “any of the three qualifies interchangeably on either side of the transaction.”

As additional support for its position, the court distinguished a final order entered into by OFR: In re Petition for Declaratory Statement Moon, Inc. According to the court’s description, Moon sought to establish a bitcoin kiosk program under which a Moon customer would pay fiat to a licensed money services business in exchange for a PIN, and the customer would then enter the PIN into a Moon kiosk, which would initiate a transfer of bitcoins to the user from a Moon bitcoin address. Once the PIN was redeemed, the licensed entity would pay Moon. OFR determined Moon did not a license. The court distinguished the Moon order because “Moon merely facilitated the transfer of bitcoins through the use of a licensed money services business,” whereas “[h]ere, no licensed money services business was utilized in the exchange of U.S. dollars for bitcoins that occurred between Espinoza and” the MBPD agent.

COUNTERPOINTS TO THE COURT’S OPINION

Several state legislatures or regulators have amended or interpreted their money transmitter laws to apply to virtual currency, but those actions do not take the form of a judicial opinion. Here, the Third District Court provided its specific reasoning for reaching its conclusions. It remains to be seen whether Espinoza will seek review from the Florida Supreme Court, but there are at least a few points in the court’s opinion that warrant further review and analysis.

First, Espinoza did not receive money for the purpose of transmitting it. He received it in exchange for selling bitcoin; he received it for the purpose of possessing it. The court rejected Espinoza’s attempt to impose a third-party requirement, but the most natural reading of the phrase “transmitting” would require Espinoza to send onward whatever value he received. Merriam-Webster defines “transmit” as “to send or convey from one person or place to another.” By using the words “receive” and “transmit,” the Florida law focuses on the act of sending money to another person and excludes the act of selling money or monetary value. If simply selling property were sufficient to trigger the money transmitter law, the statute would likely sweep far more broadly than intended. Here, Espinoza was acting as a merchant selling goods. This would not constitute money transmission under any reasonable reading of the law. Indeed, some states (and FinCEN) have recognized that a party selling its own inventory of virtual currency in a two-party transaction is not a money transmitter.

Second, the court’s conclusion is further undercut by considering the Moon proceeding the court discusses. The opinion notes “the PIN provided by the licensed money services business to Moon’s customers provided a mechanism by which the exchange of U.S. dollars for bitcoins could be identifiable.” The PIN could arguably be classified as a payment instrument because it is an “other instrument” or “monetary value.” If transmission to a third party is not required, as the court holds, then Moon should have needed a license when it received the PIN and then transmitted bitcoins back to the user that was redeeming the PIN. But that wasn’t the conclusion OFR reached.

Third, the court’s interpretation of how OFR would treat Espinoza’s actions is questionable. In 2014, OFR issued a consumer alert stating that “[v]irtual currency and the organizations using them are not regulated by the OFR.” [10] In addition, in January 2018, OFR released another consumer alert regarding cryptocurrency, stating that “[cryptocurrencies] are subject to little or no regulation,” which further indicates OFR does not interpret the money transmission law to cover cryptocurrencies. [11] The court does not acknowledge these statements. Although the court focuses on an OFR order regarding Coinbase, that order granted Coinbase a license and listed a variety of activities in which Coinbase was engaged or planned to engage. The order does not specify what specific activity was licensable, but it is likely that a license was granted because of the receipt and transmission of fiat currency.

CONCLUSION

If Espinoza appeals, the case could go to the Florida Supreme Court, where the virtual currency industry will receive a more definitive answer. In the meantime, virtual currency businesses should be aware that the Florida Attorney General’s Office interprets the state’s money transmitter act to regulate bilateral sales of virtual currency for fiat currency and is willing to prosecute at least certain cases of unauthorized sales. As of now, Florida’s Third District Court agrees. How the Espinoza case concludes and whether and how the Florida legislature responds will be important to the virtual currency industry.

NOTES

[1] — So. 3d –, 2019 WL 361893 (Fla. 3d DCA 2019).

[2] FLA. STAT. § 560.125.

[3] Id. § 560.103(22).

[4] Id. § 560.103(30).

[5] Id. § 560.103(29) (emphasis added).

[6] Id. § 560.103(21).

[7] The court principally discusses whether bitcoin falls under Florida’s money transmitter law. In a few instances, it also references “virtual currency” generally, but it is not clear how broadly it was intending to apply its holding.

[8] Id. § 560.103(23).

[9] As a counterpoint, the court noted that the Financial Crime Enforcement Network’s (“FinCEN”) definition of money transmitter explicitly includes a third party requirement because it defines a money transmitter as someone that accepts value from one person and transmits value to “another location or person by any means….” 31 C.F.R. § 1010.100(ff)(5)(i)(A).

[10] Consumer Alert: Update on Virtual Currency, Office of Financial Regulation, Sept. 17, 2014.

[11] Consumer Alert: Cryptocurrency, Office of Financial Regulation, Jan. 17, 2018.

 

Copyright 2019 K&L Gates

The Rise of the Chief Data Officer

There is a new kid on the block . . . the Chief Data Officer (CDO).  There is no surprise in our data-driven world that such a role would exist. Yet, many organizations struggle with defining the role and value of the CDO. Effective implementation of a CDO may be informed by other historical evolutions in the C-Suite.

Examining the rise of the Chief Compliance Officer (CCO) in the 2000’s mirrors some of the same frustrations that organizations faced when implementing the CCO role. While organizations were accustomed to having legal, HR, and internal audit departments working together to ensure compliance, suddenly CCOs stepped in to pull certain functions from those departments into the folds of the newly-minted Compliance department.  Integrating CDOs appears to follow a similar approach. Particularly in health care, the CDO role is still afloat, absorbing functionality from other departments as demand inside of organizations evolves and intensifies to focus on the financial benefits of their data pools.

Corporate evolution is challenging and often uncomfortable, but the writing is on the wall . . . there are two types of companies:  ones that are data-driven and ones that should be.  Which will you be?

What is a Chief Data Officer?

CDO responsibilities will vary depending on the organization. Some organizations position the CDO to oversee data monetization strategies, which requires melding business development acumen with attributes of a Chief Information Officer. In some organizations, the CDO may oversee the collection of all of the company’s data in order to transform it into a more meaningful resource to power analytical tools.

A survey of CDO positions identified three common aspirations that organizations have for the role: Data Integrator, Business Optimizer, and Market Innovator. Data Integrators primarily focus on infrastructure to give rise to innovation. Business Optimizers and Market Innovators focus on optimizing current lines of business or creating new ones. These aspirations will likely vary depending on the nature and maturity of organizations. Regardless of the specific role, CDOs can help organizations bridge the widening gap between business development, data management, and data analytics.

Further, a key component of a CDO’s activity will relate to responsible data stewardship.  CDO activities will heavily depend on developing a data strategy that complies with legal, regulatory, contractual and data governance boundaries around data collection, use and disclosure.  CDOs should work closely with legal counsel and compliance personnel to effectively navigate these challenges.  Further discussion of the legal and regulatory landscape around data use is available here.

The Importance of CDOs in Transforming Healthcare Companies

It is clear that leveraging data will be key to innovating, gaining efficiencies, and driving down costs over time.  Yet, many organizations continue to struggle with making sense of the data they possess.   For some, the CDO may be a critical driving force to advance a business into a new landscape.  Just as the CCO helped address decades of frustration with corporate ethics and practices (and was soon demanded by lawmakers and regulators), the role of the CDO has emerged in response to demand for efficiencies in business practices and the recognition that data has become the world’s most valuable commodity.

In light of the explosion of data in the healthcare industry, organizations should consider whether and how a CDO will fit into the corporate structure. Furthermore, organizations should work to understand how having a person at the table with a keen eye towards giving life to an organization’s data resources can benefit the business long term from internal and external perspectives.  The ultimate question a CDO can help solve is:  What don’t we know that, if we knew, would allow our organization to innovate or operate more efficiently or effectively?

 

©2019 Epstein Becker & Green, P.C. All rights reserved.
This post was written by Alaap B. Shah and Andrew Kuder of Epstein Becker & Green P.C.

Amazon 2-Day Free Shipping to Serve Divorce Papers: The Bezos Divorce through the Lens of New Jersey Law

Earlier this month, Amazon founder Jeff Bezos and his wife Mackenzie announced their plans to divorce, setting off speculation as to what would occur with their estimated $138 billion in net worth.

From a first glance, you may assume that the Bezos divorce would be much more acrimonious and hard fought than a case involving the typical John and Jane Doe case as the thought may be that there is more to fight for financially.

However, wealth in these incredibly high net worth cases actually removes many of the most challenging issues in divorce like payment of legal and expert fees or trying to continue the lifestyle for both parties with insufficient income from both parties to same to occur. The world’s richest couple will not have these challenges.

Instead, high net worth divorces have a whole different set of challenges that middle-class families typically do not need to consider.

First, the logical step-wise process in any division of assets and debts in a divorce is to ascertain, account for and value all of the assets and debts owned by either or both parties. For the Bezoses and other high net worth divorcees, this will likely be a complex, incredibly time-consuming process.

Beyond typical assets like cash, brokerage accounts, and retirement assets, parties like the Bezoses likely have ownership interests in many separate enterprises, corporations, partnerships, subsidiaries, investment trusts, along with extensive real estate, private equity holdings, and even art and jewelry collections all of which need to be accounted for and valued. Trusts and incredibly complex ownership structures will need to be investigated, digested and analyzed.

The Bezoses are going to need all sorts of professionals supervising and drafting documents to make sure that any kind of asset transfer will be well drafted and will protect both parties. If we do find any details about the Bezoses settlement (which I expect to remain private, as further outlined below), it will not likely be completed for years to come.

The most expensive part of the divorce process is not likely to be legal fees, but rather fees and costs for experts and appraisers who must figure out how to divide up the largest tranche of personal assets in the world.

Privacy is paramount in cases dealing with prominent figures and celebrities such as the Bezoses. Millions are chomping at the bit to hear about what they have, how it will be divided, and whether the fight will get ugly. In fact, this blog relies on the assumption that those of you reading this have at least some interest as to their personal lives and the theater of their divorce.

For this reason, it is very unlikely that the Bezos divorce ever sees a courtroom. It’s all but guaranteed that the divorce will be resolved through a private negotiated settlement, mediation or a private arbitration, or some combination all held behind closed doors with gag orders and strict confidentiality.

Lastly for this article, Jeff Bezos’ majority stakeholder status at Amazon brings about its own challenges, as would any high net worth divorcee with controlling interest in a business enterprise. Since the vast majority of Bezos’ wealth is tied up in his ownership stake in Amazon, which he started after marrying his wife, providing for equitable distribution may need to become creative.

Jeff and Mackenzie Bezos are based in the state of Washington, which is a community property state. This means that each spouse equally owns all of the assets either party has acquired over the course of their marriage, including their corporate shares. This differs from equitable distribution states like New Jersey, where division of the assets and debts of spouses are determined by a host of statutory factors meant for a fair allocation, which may not be an equal allocation.

Jeff Bezos, according to Forbes, owns 16% of Amazon, by far the largest shareholder. With major stockholders in a divorce, you want to be sure to effectuate division of the assets in such a way that does not divest control from that shareholder. For example, in the Bezos case, Mackenzie may be entitled to 50% of the total shares (remember, they live in a community property state where 50/50 splits are the presumption).

However, if 50% of Jeff Bezos’ shares are conveyed to Mackenzie and she liquidates a portion, shareholder control of Amazon could be significantly affected and the Bezos may lose their controlling stake. This could stagnate the family fortune which would benefit the Bezos’ children and legacy, which is unlikely to be MacKenzie’s goal or desire.

Instead, what is more likely is that Mackenzie will get “constructive ownership” of 50% of the shares, with Jeff retaining control of the business enterprise. Mackenzie will get the dividends from her portion of the shares and if there is a liquidity event, she might get bought out, but there would not likely be an actual transfer that would divest the family of control of Amazon.

There also may be a division based on exchanging values, meaning that perhaps an agreement is made wherein Mackenzie receives a much larger share or the entirety of other assets that would equal the value of her potential portion of her 50% right to the Amazon shares. However, this option appears to be less likely given that the majority of the Bezos net worth is tied to their Amazon holdings. Depending on how diversified they are, perhaps Jeff can convey more of some other assets and less of Amazon.

Time will tell whether we will ever know the result of the Bezos divorce, but we can be assured that the world will be watching to see what we can in regard to the world’s highest net worth divorce on record.

 

COPYRIGHT © 2019, Stark & Stark.
This post was written by Louis M. Ragone of Stark & Stark.

Three Critical Legal Documents Every Parent Should Get in Place Now to Safeguard Their Adult Children

As a parent, you might not fully appreciate that when your child turns 18 years of age, at least in the eyes of the law, you no longer have certain inherent rights related to medical and financial details about your adult child. For this reason, you’re strongly advised to get three simple legal documents in place to ensure you’re able to intervene on behalf of your adult child in the event your child is injured, becomes ill or is otherwise incapacitated.

These situations aren’t easy to think about, but imagine the following scenarios:

  • Your 19-year-old son, while away at college, is involved in a severe car accident and is rushed to the hospital unconscious.

  • Your unmarried 25-year-old daughter, while vacationing with friends in Hawaii, is unconscious in the hospital following a jet-skiing accident.

  • Your newly divorced 30-year-old son is hospitalized after suffering a brain hemorrhage and is put into a medically induced coma.

In each scenario, when you find out that your adult child is in the hospital, you immediately call for details about your child’s condition. You are horrified when the nurse says, “I’m sorry, but I am not authorized to provide you with any information or allow you to make any decisions.”

Here are insights about the three legal documents that would be prudent to have in place on behalf of your adult child before another day goes by.

1. HIPAA Authorization Form (for Authority to Speak with Healthcare Providers)

HIPAA, or the Health Insurance Portability and Accountability Act of 1996, exists for good reason; it is a federal law that safeguards who can access an adult’s private health data. If you call or visit the hospital to inquire about your adult child, as in the above scenarios, healthcare providers are prohibited by law from revealing health information to you – or anybody else – about your child; healthcare practitioners could face severe penalties if they violate HIPAA laws.

This illustrates why a HIPAA authorization, signed by your adult child and naming you as an authorized recipient, is so critical. It gives you the ability to ask for and receive information from healthcare providers about your child’s health status, progress, and treatment. This is particularly important in the event your adult child is unconscious or incapacitated for a period of time. Without a HIPAA authorization in place, the only other way to obtain information regarding your child’s health would be to go to court.

2. Healthcare Power of Attorney (for Medical Decisions)

If your adult child signs a Healthcare Power of Attorney naming you his/her “medical agent,” you will have the ability to view your child’s medical records and make informed medical decisions on his/her behalf. Without this document or a court-appointed guardianship, healthcare decisions concerning your child’s diagnosis and treatment will be solely in the hands of healthcare providers. While this is not always a bad thing, a physician’s primary duty is to keep the patient alive. So, a healthcare provider might not pursue a risky or experimental course of treatment at the risk of exposure to liability.

Keep in mind that doctors prefer to see one medical agent named rather than multiple medical agents. The concern is that multiple medical agents may not agree on the medical course of action to take on behalf of the incapacitated adult. As a best practice, it’s prudent to name multiple agents in priority order with single authority; for example, the adult child’s mother might be listed first as the medical agent; if the mother is unable or unwilling to serve in that capacity, the second person listed—say the child’s father—would be empowered to step in.

3. General Durable Power of Attorney (for Financial Decisions)

If your adult child were ever incapacitated, you would also benefit greatly from having a General Durable Power of Attorney in place, where you were named as the “agent” authorized to make financial decisions on his/her behalf. This would allow you as the named agent to manage bank accounts, pay bills, sign tax returns, apply for government benefits, break or apply for a lease, and conduct similar activities relating to your child’s financial and legal affairs. Otherwise, you will not be able to assist your child in managing his or her financial affairs without a court-appointed conservatorship.

Important Considerations

There are some important considerations to keep in mind regarding these documents:

  • Update these forms yearly. Be prepared to have your adult child re-sign and re-execute these documents every couple of years. This is especially critical for Powers of Attorney. The institutions where you would be most likely to use these documents – such as hospitals and banks – might refuse to honor them if they perceive them to be outdated.

  • These documents are only as good as the institutions that will accept them. Making sure these documents are properly executed is half the battle; whether they will be accepted by the involved institutions is the other half of the battle—one you don’t have complete control over.

  • These documents can be revoked at any time by your adult child either orally or in writing. Your adult child retains control of the ongoing validity of these documents; therefore, your best bet is to maintain a trusting relationship with your child so he/she sees the benefit of giving you the access and control these documents afford.

  • For adult children attending college at an out-of-state university, parents will want to execute separate documents in both the student’s home state and college state. If your daughter is from Denver but is attending college in Los Angeles, you’ll want one set of documents prepared under and governed by Colorado law and a second set of documents prepared under and governed by California law.

Copyright © 2019 Ryley Carlock & Applewhite. A Professional Association. All Rights Reserved.

They Are Taking Our Common Area!

The power of eminent domain, also referred to as condemnation, refers to the power of the government or other quasi-governmental entity, such as a utility company, to take private property for a public purpose.

The law requires “just compensation” to be paid when a taking occurs.  What happens, however, when the property taken is common area owned by a community association, property owners’ association (“POA”), or homeowners’ association (“HOA”) (collectively, “Association”)?

In a subdivision or planned community managed by an Association, the common area and elements are typically owned by the Association.  However, the individual property owners have easement rights granting them the right to use the common area (for example, parks, playgrounds, swimming pools, tennis courts, streets and walkways, and other commonly shared property).  An easement is a property right that, if taken, requires the payment of just compensation to the holder of the easement; in this case, the various lot owners in the planned community or subdivision.  In the case of a condominium, the condominium unit owners actually own the common area in fee simple as tenants in common.  This fee simple ownership, if taken, would normally require the payment of “just compensation” to the unit owners for the value of the property interest lost as a result of the taking.

The taking of common area and common elements can significantly impair the value of the lots, homes and units in a community.  Picture, for example, a DOT taking where an elevated highway is built where the community’s swimming pool once stood.  Are the lot and unit owners entitled to just compensation for the value of the common area taken and the damage done to their property values in a condemnation proceeding?  The answer is “yes, no, and maybe.”

Uniform Planned Community Act/Uniform Condominium Act

In states such as North Carolina that have enacted legislation that substantially follows the Uniform Planned Community Act (“UPCA”) and the Uniform Condominium Act (“UCA”), the Association is granted the power and authority to act for all of the lot owners or unit owners in a condemnation or eminent domain case where common area is taken.  The Acts provide that the portion of the just compensation award “attributable to the common elements taken” shall be paid to the Association.  The Acts and the governing documents of the planned community or condominium dictate how the just compensation paid to the Association can be used or disbursed.

It would seem that, despite this law, a lot owner or unit owner whose property value has been substantially affected by the taking of common area should also be entitled to compensation for the reduced value of the lot or unit.  In a case decided by the Supreme Court of Kansas, for example, the Kansas DOT took lots in a subdivision that were subject to Restrictive Covenants preventing the construction of anything but single-family homes on the subdivision lots. The Court held that the single-family home restriction was a “property right” of the remaining lot owners in the subdivision that was taken when a highway bridge was constructed on the taken lots.  The Court sent the case back to the trial court with instructions to determine the damage that each lot owner had sustained as a result of the taking.

Fiduciary Duty

The officers and directors of an Association have a fiduciary duty to properly respond to and deal with a taking.  The Association should take advantage of any opportunities that arise before the taking actually occurs for input into the nature and extent of the taking, including, in the case of roads or highways, their location and design.  Typically, the condemning entity will have an appraisal done estimating the value of the property to be taken and the just compensation that should be paid to the property owner or, with common elements, the Association.  Often times it will be incumbent upon the Association to retain its own appraiser to ensure that a fair price is paid.  The condemning entity will certainly have legal counsel, and the Association would be wise to retain its own legal counsel to provide guidance through this process and to ensure that the Association is fulfilling its fiduciary duty.

Conclusion

The taking of a common area or common elements by a condemning entity can be a devastating and traumatic occurrence for an Association and its members.  The Association needs to understand the process and deal with it appropriately.  Having an attorney who is experienced in both the areas of community association law and eminent domain law will be essential.

 

© 2019 Ward and Smith, P.A.. All Rights Reserved.
This post was written by Ryal W. Tayloe and Allen N. Trask, III of Ward and Smith, P.A.

FDA Takes Action Against Retailers Selling Tobacco Products to Minors

On February 7 FDA initiated enforcement action against a Miami, Florida Walgreens and a Charleston, South Carolina Circle K store for repeated sales of tobacco products to minors.  The enforcement action, called a no-tobacco-sale-order (NTSO) would prevent the individual stores from selling any tobacco product for thirty days.

In its press release, FDA noted that Walgreens is the top violator amongst pharmacies that sell tobacco products, having been cited for tobacco sales to minors during 22 percent of the retail compliance check inspections at Walgreens stores since they began in 2010.  These violations have resulted in over 1,550 warning letters and 240 civil money penalties, but this is  the first NTSO at a Walgreens store.  Other stores identified as frequent violators include Walmart (17.5 percent of inspections resulted in sales to minors violations), Dollar General (14 percent), and Rite Aid (9.6 percent).

FDA commissioner Dr. Scott Gottlieb is quoted in the press release as being “deeply disturbed” by the number and frequency of sales to minors at Walgreens stores and he called on Walgreens management to meet with him to discuss why so many Walgreens stores fail to prevent sales to minors.  Dr. Gottlieb speculated that the pharmacy setting might impact consumer perceptions regarding the safety of tobacco products.

 

© 2019 Keller and Heckman LLP.
Read more news on the FDA on the National Law Review’s Biotech, Food and Drug Type of Law page.

After Shutdown, US EPA Announces New Hearing Date for the New WOTUS Rule

As a result of the recent lapse in appropriations, the US EPA and US Department of the Army (Army) delayed a planned January 23, 2019 hearing regarding the proposed new “Waters of the United States” (WOTUS) definition. Publication of the proposed rule and the start of the comment period on the rule were also postponed due to the shutdown. On February 6, 2019, EPA announced that the hearing will now be held on February 27 and 28, 2019.   The Office of the Federal Register has not yet published the proposed rule, which will start the clock on the 60-day comment period.

Because it determines the scope of the Clean Water Act, the definition of “waters of the United States” has been a hot-button issue since it was amended, and significantly broadened, by the Obama administration in mid-2015.  The 2015 rule was challenged by 31 states and numerous other stakeholders in multiple lawsuits. In October 2015, the Sixth Circuit issued a nationwide stay of the rule. The nationwide stay was lifted when the US Supreme Court determined on January 13, 2017, that review of the rule falls within the jurisdiction of the district courts.   Although the nationwide stay is no longer in effect, decisions by the US District Courts for the Districts of North Dakota, Southern District of Georgia, and Southern District of Texas, preliminarily enjoining the 2015 rule in 28 states remain in effect. Thus, the Obama-era rule is in effect in only 22 states, the District of Columbia, and US territories.

In an effort to eliminate or narrow the Obama-era rule and reestablish a consistent nationwide rule, on December 11, 2018, the US EPA and the Army signed a newly proposed rule revising the WOTUS definition. The proposed rule is part of the agencies’ two-step plan to remove and replace the 2015 rule, which the agencies believe exceeds US EPA’s statutory authority. The first step, a rule which suspended the application of the 2015 rule, was enjoined and vacated by two district courts. Despite this roadblock, the agencies moved forward with step two and submitted the new proposed definition rule to the Office of the Federal Register. However, due to the shutdown, it has not yet been published. The 60-day comment period for the rule will begin on the date of publication.

Under the proposed rule “waters of the United States” encompasses “traditional navigable waters, including the territorial seas; tributaries that contribute perennial or intermittent flow to such waters; certain ditches; certain lakes and ponds; impoundments of otherwise jurisdictional waters; and wetlands adjacent to other jurisdictional waters.” Importantly, the agencies propose to eliminate the case-by-case application of the significant nexus test, which under the 2015 rule extends the definition of WOTUS to water, including wetlands, that “significantly affects the chemical, physical, or biological integrity of a water.” The agencies propose instead “the establishment of clear categories of jurisdictional waters.”

The new WOTUS definition would also exclude from regulation some tributaries and waters adjacent to jurisdictional waters. The 2015 rule extends to adjacent waters that are bordering, contiguous or neighboring a jurisdictional water, which broadly encompasses any water within 100 feet of a jurisdictional water or water located within the 100-year floodplain of a jurisdictional water. By contrast, the proposed rule includes only adjacent wetlands that “abut or have a direct hydrological surface connection” to a water. Under the 2015 Obama-era rule, a tributary is a water that contributes flow to a jurisdictional water. The proposed rule eliminates ephemeral flows from being considered a tributary, requiring a water that contributes at least “perennial or intermittent flow.” Given these and other significant differences between the two rules, once published, the proposed rule is certain to draw intense debate over the proper reach of the Clean Water Act.

US EPA is not alone in experiencing delays, as the federal rulemaking process ground to a halt during the shutdown. The Office of the Federal Register (OFR) issued “Government Shutdown FAQs,” stating that in an appropriations lapse the OFR may publish documents from unfunded agencies “directly related to the performance of governmental functions necessary to address imminent threats to safety of human life or protection of property.”   And, in the case of a partial shutdown, where some agencies are funded, the OFR may publish documents from funded agencies “if delaying publication until the end of the appropriations lapse would prevent or significantly damage the execution of funded functions at the agency.”

 

© Copyright 2019 Squire Patton Boggs (US) LLP
This post was written by Weslynn P. Reed of Squire Patton Boggs (US) LLP.
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Compliance Risk Alert: Opioid Warning Letters issued by the U.S. Department of Justice Target Prescribers

U.S. Attorney’s Offices (“USAOs”) across the country are issuing warning letters to physicians and other prescribers (collectively, “Prescribers”) cautioning them about their opioid prescribing practices (the “Warning Letters”). In just the last week, the USAO for the Eastern District of Wisconsin sent warning letters to over 180 prescribers identified by Drug Enforcement Administration (“DEA”) data as prescribing opioids at relatively high levels. The Food and Drug Administration and the Federal Trade Commission have also been issuing their own warning letters to opioid marketers and distributors over the past several months, evidencing a concerted effort to combat the opioid epidemic on a number of fronts through various federal enforcement and regulatory efforts.

The Warning Letters appear to be based entirely on review and analysis of DEA’s data with no other investigation into the patients who received opioid prescriptions or their medical conditions. Importantly, each of these USAOs has recognized explicitly that the prescribers have not necessarily broken any laws and that the prescriptions may all be medically appropriate. Nevertheless, any warning from an office wielding criminal enforcement authority should never be taken lightly, particularly when related to an issue – opioid overprescribing – that remains a top Department of Justice and U.S. government enforcement priority. While the Warning Letters themselves are issued without meaningful investigation, they may often signal that additional investigatory or enforcement action is forthcoming. In some cases, for instance, prescribers may be visited unannounced and in-person by DEA diversion investigators, special agents, or other law enforcement officers.

Prescribers who have already received a Warning Letter should contact legal counsel to assist in taking measures to assess their degree of risk and preparing for potential further government inquiry. Contacting legal counsel early and preserving privilege could be key to prevent an informal inquiry from becoming a protracted criminal investigation. Experienced counsel can help focus the government’s inquiry, provide the information in a manner that is responsive to the government’s request while also providing relevant context, and limit disruption to the provider’s practice. In collaboration with their counsel, contacted Prescribers should consider:

  • An audit of medical records related to patients who have received opioid prescriptions to confirm their propriety in light of medical documentation;
  • Correction and supplementation of any deficient records, consistent with government requirements for medical documentation to support such prescriptions; and
  • Implementing any required process improvements to mitigate future risk.

Prescribers who prescribe opioids as part of their practices but who have not received a Warning Letter should consider taking prophylactic measures in response to this increased government scrutiny, as should their employers and partners. For instance, Prescribers – and those who employ or contract with prescribers – should consider:

  • Reviewing prescribing patterns against local and national benchmarks;
  • Reviewing a sample of documentation related to opioid prescription decisions to ensure that it sufficiently supports medical necessity and provides additional training on documentation practices as needed;
  • Reviewing and implementing the most current standards of care related to opioid prescribing and patient monitoring, including recommendations issued by the Centers for Disease Control and Prevention’s Guideline for Prescribing Opioids for Chronic Pain; and
  • In larger practices, implementing or updating, as necessary, policies and procedures related to opioid prescribing.
Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.
This post was written by Erica J. Kraus, Michael W. Paddock, David L. Douglass, Danielle Vrabie and A. Joseph Jay, III of Sheppard Mullin Richter & Hampton LLP.
Read more health care compliance news on the National Law Review’s Health Care Type of Law page.

IRS Notice Offers Good News for State Colleges and Universities (at Least for Now)

In January 2019, the Internal Revenue Service (IRS) issued Notice 2019-09, which provides interim guidance for Section 4960 of the Internal Revenue Code of 1986. As a reminder, Section 4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee. A “covered employee” is one of the organization’s top-five highest-paid individuals for years beginning after December 31, 2016. An organization must determine its covered employees each year, and once an individual becomes a covered employee, that individual will remain a covered employee for all future years.

Of particular interest to state colleges and universities is the answer to Q–5 of the notice. It provides that the Section 4960 excise tax does not apply to a governmental entity (including a state college or university) that is not tax-exempt under Section 501(a) and does not exclude income under Section 115(l). What does this mean? Basically, if an institution does not rely on either of those statutory exemptions from taxation, the institution will not be subject to the excise tax provisions of Section 4960. This exclusion from Section 4960 means the institution could compensate its athletic coaches (or other covered employees) in excess of the $1 million threshold and not be subject to the 21 percent excise tax.

As we discussed previously, some institutions rely on political subdivision status for tax purposes. Importantly, the notice also provides that any institution relying on its political subdivision status to avoid taxation, as opposed to relying on either of the above-mentioned exemptions, will be subject to the Section 4960 excise tax if the institution is “related” to any entity that does rely on either of the exemptions.

Although the IRS’s guidance is helpful in determining Section 4960’s application to state colleges and universities, it appears not to reflect “Congressional intent.” On January 2, 2019, the Committee on Ways and Means of the U.S. House of Representatives released a draft technical corrections bill that seeks to correct “technical and clerical” issues in the Tax Cuts and Jobs Act of 2017. The corrections bill seeks to clarify Section 4960’s application by stating that any college or university that is an agency or instrumentality of any government or any political subdivision, or that is owned or operated by a government or political subdivision, is subject to Section 4960. Given the current state of affairs in Washington, D.C., we are not confident that the corrections bill’s expanded application to state colleges and universities will ever come to fruition.

 

© 2019, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

State Legislators React to Proposed Federal Title IX Regulations with State Law Proposals

While college, universities and educational professionals await the Department of Education’s (DOE) proposed new Title IX regulations, which will dictate a revised process by which allegations of sexual misconduct must be handled, the state legislatures in Missouri and Arizona are currently considering legislation that would adopt many of Secretary DeVos’s anticipated regulatory modifications.

The proposed Missouri legislation, contained in Senate Bill 259 offered by Senator Gary Romine and House Bill 573 introduced by Representative Dean Dohrman, would allow students involved in Title IX complaints to appeal findings outside of the university system to the Missouri Administrative Hearing Commission, considered a “neutral and independent hearing officer for the state.”

The key elements of the proposed Missouri bill are:

  • All state universities would be required to expedite hearings for students if the investigation and resolution of the complaint deprives their education.
  • Those accused would be provided with the identities of the parties and known witnesses and would have the opportunity to cross-examine parties and witnesses.
  • Denial of appropriate due process in a Title IX complaint would be considered a “breach of contract between the student and the university,” potentially resulting in a $250,000 fine for the institution.
  • If someone is found to have made a false complaint, the accused has the right to seek actual and punitive damages.

The House version of the bill would also “ensure that all parties use the terms ‘complainant’ and ‘respondent’ and refrain from using the term ‘survivor’ or any other term that presumes guilt before an actual finding of guilt.”

Senator Romine commented on his reason for introducing the proposed legislation by stating, “The problem is that a lot of times the accused does not have a proper recourse through the system, and we want to make sure that if there isn’t a proper recourse, that the institution that’s supposed to be upholding Title IX is held accountable for it.”

Representative Dohrman commented on his reasons for introducing the House bill in a press release, stating “due process is vital in both civil and criminal proceedings and Title IX proceedings are no different. I have filed this bill to… protect all students by making sure both the accuser and the accused are in a just proceeding.”

In addition to the proposed legislation in Missouri, Arizona State Representative Anthony Kern has introduced House Bill 2242, the “Campus Individual Rights Act, which is a similar statutory modification to Title IX for students in Arizona. Senator Kern’s proposed legislation would amend existing state law and would provide that an Arizona community college district or university may not prohibit the following:

  • An accused student and an alleged victim from having a legal representative at  disciplinary proceeding
  • The legal representative for the accused student and the alleged victim from having full participation in the disciplinary proceeding

In addition, the bill requires the parties to the disciplinary proceeding to make a good faith effort to exchange any evidence which either party intends to use in the proceeding, without authorizing either party the right to participate in formal discovery. In addition, Senator Kern’s proposed legislation would prohibit a school employee from acting as an adjudicator, hearing officer or appellate officer if that individual has previously served as:

  • An advocate or counselor for an accused student or alleged victim,
  •  An investigator,
  • An administrator presenting arguments and evidence on behalf of the educational institution, or
  • An advisor to a person described in 1-4 above.
Jackson Lewis P.C. © 2019
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