Tag: Regulatory

Photocopiers – A Recurring Data Security Risk

DrinkerBiddle

In a case that illustrates the data privacy risks associated with modern copiers, the United States Department of Health and Human Resources (HHS) has announced a $1,215,780 settlement with Affinity Health Plan, Inc. (Affinity), arising from an investigation of potential violations of the HIPAA Privacy and Security Rules.

This matter started when Affinity was advised by CBS Evening News that CBS had purchased a photocopier previously leased by Affinity.  CBS explained that the copier’s hard drive contained confidential medical information relating to Affinity patients.  As a result, on August 15, 2010, Affinity self-reported a breach with the HHS’ Office for Civil Rights (OCR).  Affinity estimated that the medical records of approximately 344,000 persons may have been affected by this breach.  Moreover, Affinity apparently had returned multiple photocopiers to office equipment vendors in the past without erasing the data contained upon the internal hard drives of those returned copiers.

After investigating this matter, OCR determined that Affinity had failed to incorporate photocopier hard drives into its definition of electronic protected health information (ePHI) in its risk assessments as required by the Security Rule.  Affinity also failed to implement appropriate policies and procedures to scrub internal hard drives when returning photocopiers to its office equipment vendors.  As a result, OCR determined that Affinity also violated the Privacy Rule.

In discussing this issue, Leon Rodriguez, Director of OCR, stated that, “This settlement illustrates an important reminder about equipment designed to retain electronic information: Make sure that all personal information is wiped from hardware before it is recycled, thrown away or sent back to a leasing agent…HIPAA covered entities are required to undertake a careful risk analysis to understand the threats and vulnerabilities to individuals’ data, and have appropriate safeguards in place to protect this information.”

In addition to the agreed upon settlement payment of $1,215,780, the settlement also requires the implementation of a Corrective Action Plan (CAP).  The CAP requires Affinity to use its best efforts to retrieve all hard drives that were contained on photocopiers previously leased by the plan that remain in the possession of the leasing agent, and take protective measures to safeguard all ePHI going forward.

Points to Consider

Affinity’s case demonstrates the risks presented by the modern copier – they are specialized computers that will store data and retain itindefinitely.  Thus, they pose a security risk for any company that processes and/or possesses personally identifiable information or proprietary information, such as trade secrets, research and development records, marketing plans and financial information.  Clearly, this risk applies to businesses regardless of specific business sector.

Therefore, when acquiring a copier, consider all options available to protect the data processed on that machine, typically through encryption or overwriting.  Encryption will scramble the data that remains stored on the copier’s hard drive.  Overwriting (or wiping) will make reconstructing the data initially on the drive very difficult.

Finally, anticipate the copier’s return to the vendor or other disposition.  Make sure that arrangements are made prior to the copier’s departure to effect the hard drive’s removal and secure disposition so as to make any data on it unusable to third parties.  Often vendors will provide such a service as will IT consultants.

Note that protecting sensitive information is a company’s ongoing responsibility.  Make sure that copiers are considered as part of any comprehensive data security or privacy policy (as are PCs, laptops, smart phones, flash drives and other electronic devices) to avoid an avoidable, but costly and embarrassing, data breach.

For additional information from the FTC on safeguarding sensitive data stored on the hard drives of digital copiers, click here.

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Health Care on the Hill: Week of September 9, 2013

DrinkerBiddle

This week Congress returns to Washington, DC following their August recess and are jumping right back into legislative matters. Listed below are a few health-related hearings scheduled for this week.

Each Monday Capitol Health Record will be providing health-related highlights for the coming week.

Tuesday, September 10, 2013

10:15 a.m.
“PPACA Pulse Check: Part Two”
House Energy and Commerce Subcommittee on Health Hearing
2322 Rayburn House Office Building

Wednesday, September 11, 2013

2:00 p.m.
“The Threat to Americans’ Personal Information: A Look into the Security and Reliability of the Health Exchange Data Hub”
House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection, and Security Technologies Hearing
311 Cannon House Office Building

Thursday, September 12, 2013

10:00 a.m.
“Dental Crisis in America: The Need to Address Cost”
Senate Health, Education, Labor, and Pensions Subcommittee on Primary Health and Aging Hearing
430 Dirksen Senate Office Building

Thursday, September 12, 2013 and Friday, September 13, 2013

In addition to the above Congressional hearings, the Medicare Payment Advisory Commission (MedPAC) will be meeting in Washington, DC on Thursday and Friday to discuss recommendations regarding Medicare payment policies. MedPAC will meet at the Ronald Reagan Building and International Trade Center (1300 Pennsylvania Avenue, NW) from 9:30 a.m. to 5:15 p.m. on Thursday and 9:00 a.m. to 12:00 p.m. on Friday (agenda).

Amy Walker contributed to this article.

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International Group Structures Are Subject to An Ongoing Review for Optimizing Their Tax Position

GT Law

The recent trends show that offshore jurisdictions are off the corporate agenda in view of the increased scrutiny and decreased levels of acceptance from both fiscal and corporate social responsibility perspectives. Client feedback confirms the following rationale for moving corporate tax planning solutions onshore:

  • Increased scrutiny on tax havens and statutory requirements regarding tax substance, potential issues concerning withholding tax and taxation of foreign profits; and
  • Avoiding overtly complicated tax systems with strict CFC (controlled foreign company) regulations, thin capitalization rules and prohibitive transfer tax applicability.

It is a well-known fact that the Netherlands is not a tax haven but a safe haven and a logical choice as an alternative with an extensive double taxation treaty network. In addition, the Netherlands has an extensive bilateral investment protection treaty network that is regarded to provide premium coverage in view of the broad definition of “investor” and “investment” and providing access to dispute resolution through arbitration against independent states and awards that are enforceable against states, often referred to as “the Dutch Gold Standard.” Dutch structures are increasingly a recurring feature in international corporate structures for the purpose of protecting key corporate and personal assets. In this GT Alert, we briefly set out the options for migrating a corporate structure to the Netherlands to benefit from the all of the features that the Netherlands has to offer.

How to Achieve a Corporate Migration

Migrating a corporate entity within the EU into the Netherlands is a straightforward process from a Dutch law perspective. The following options are available:

Registration of an EU member state entity with the Dutch Trade Registry

The tax residence of an existing holding company can often be changed by moving its place of effective management and control outside of its existing jurisdiction for tax purposes. This may trigger a tax charge on exit.

Cross border merger

EU parent companies can migrate to the Netherlands by effecting a statutory merger with a Dutch entity under the cross-border merger regulations. It is also possible for non-EU parent companies to merge with a Dutch company by initially entering into the EU through a conduit EU jurisdiction that permits cross-border mergers with non-EU entities.

Share swap

It is possible to incorporate a holding company in the Netherlands whereby the existing shareholders exchange their existing shares for shares in the newly created Dutch holding company.

Re-registration as Societas Europaea 

An EU parent company can re-register as a European Company (Societas Europaea) and transfer its statutory seat to the Netherlands followed by a re-registration in the Netherlands as a Dutch parent company.

Why migrate to the Netherlands?

Key drivers for migrating the top holding company of an international group structure to the Netherlands are:

  • Low corporate income tax rate of 25% on trading profits (20% up to EUR 200K first band);
  • The Netherlands has an extensive double taxation treaty network with well over 90 jurisdictions;
  • The Netherlands has entered into a vast number of bilateral investment protection treaties (BITS) that offer comprehensive protection against unfair treatment of investments by sovereign states through access to world class dispute arbitration;
  • International and well-recognized jurisdiction with one-tier corporate governance system similar to that of common law countries;
  • Straightforward, cost-efficient and fast incorporation process for Dutch entities;
  • Public company N.V. entities are widely recognized as listing vehicles;
  • The Netherlands is the premier port of entry to mainland Europe with excellent facilities in terms of corporate and financial services;
  • English language optional for proceedings before the Amsterdam courts; and
  • Limited and straightforward corporate reporting requirements.

Taxation

The Netherlands is a gateway to Europe and the rest of the world. For many years, the Netherlands has been a preferred location for foreign companies to establish a business. The location, the political stability and, especially, the beneficial tax regime have turned the Netherlands into one of the go-to countries in this respect. The following tax points are of particular relevance:

  • The general Dutch corporate income tax rate is 25% (20% up to EUR 200K first band). This rate is more than competitive in the region, as all countries surrounding the Netherlands have higher corporate income tax rates.
  • Traditionally, the Dutch participation exemption has been a major attractor of companies to the Netherlands. This facility allows the receipt of dividends and capital gains from subsidiaries free of tax in the Netherlands. The Dutch facility is still one of the most flexible and easy accessible compared to other jurisdictions, especially, with regard to the following conditions: no holding period is required, an interest of 5% is already sufficient to apply, interest in subsidiaries located in tax havens are allowed to benefit from the facility and certain other specific benefits are available.
  • No withholding tax on royalties and no withholding tax on interest.
  • Dividends are taxed at a statutory rate of 15%. However, this rate may be reduced by virtue of tax treaties to 0-10%. In principle, no dividend withholding tax applies to distributions made by a Dutch cooperative pursuant to the domestic rules.
  • No controlled foreign company/Subpart F rules
  • No thin capitalization rules.
  • There is no stamp duty or capital tax.
  • One of the most extensive international tax treaty networks (the Netherlands has concluded over 90 tax treaties, more than most other countries) and the membership of the EU (and corresponding access to EU treaties) ascertain minimal taxation on payments to any group company.
  • Another traditional benefit of the Netherlands is the open attitude of the Dutch tax authorities. The Netherlands offers the possibility to discuss and reach agreement on tax positions in advance with the Dutch tax authorities that can be formalized in agreements (or advance tax rulings) to offer optimum certainty in advance.
  • Currently, the Dutch government´s main focus is on innovation. In 2007, the government was one of the first countries to introduce a special tax regime aimed at innovation (Innovation box). Based on the Innovation box, income earned out of R&D activities can benefit from an 80% exemption, resulting in an effective tax rate of 5%;
  • The Netherlands has extensive experience in the use of hybrid structures (i.e. hybrid entities and hybrid loans). These structures can be used to further optimize the group tax rate.
  • The Netherlands has traditionally not only been very welcoming to foreign companies, but also to expatriates. In the Dutch Personal Income Tax Act, expatriates (with certain skills) can receive 30% of their income as a tax free allowance under the so-called “30%-ruling.” A benefit that also benefits the employer in negotiating (net) salaries.
  • Customs authorities in the Netherlands have a reputation for being cooperative, innovative and exceptionally efficient; all to facilitate the free flow of goods. Customs duties or import charges are charged at a later date, if the goods are stored in accordance with customs procedures in the Netherlands. This leads to considerable cash-flow advantages to foreign shippers.
  • The Netherlands’ position on Value Added Tax (VAT) is also advantageous. In contrast to other EU member states, the Netherlands has instituted a system that provides for the deferment of VAT at the time of import. Instead of paying VAT when the goods are imported into free circulations within the EU, the payment can be deferred to a periodic VAT return. The Dutch VAT system offers companies significant cash-flow and interest benefits.
  • Even though the Netherlands provides several unparalleled tax facilities, it is not blacklisted as a tax haven, but can be considered as a safe haven.
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The Foreign Corrupt Practices Act (FCPA) in the News: Big Scoops, Real Fallout

Sheppard Mullin 2012

In early August, the New York Times reported that the U.S. Securities and Exchange Commission (SEC) is investigating JPMorgan Chase related to alleged violations of the Foreign Corrupt Practices Act (FCPA) in China.  According to the article, the press had not previously reported on the investigation, and the Times knowledge of it was based on a “confidential United States government document.”  The article generated a number of similar news reports.

This is not the first time the media has hopped on the FCPA bandwagon following a juicy story about alleged bribery.  For example, in 2012 and again this year, the New Yorker ran feature articles on alleged corruption in the Macau gambling industry and the Guinean mining industry.  And reports by the Wall Street Journal and other sources, both inside and outside the United States, brought into focus the alleged bribery payments arising from the News Corp phone hacking scandal in the United Kingdom.

The increase in feature reporting on the FCPA makes some sense: stories typically involve racy factual underpinnings, exotic locations, multi-national companies and crooked governments.   Nonetheless, the FCPA may have been underreported in the mainstream press, even as it was being vigorously enforced by the SEC and Department of Justice.

As the press catches up to enforcement, it appears that the stories themselves may in turn have ramifications for the enforcement environment.  One result of more prominent news coverage may be increased pressure on the U.S. government to prosecute alleged FCPA violations.  While it is possible that a news story could trigger a new investigation, coverage of an ongoing investigation would seem to increase scrutiny on it, thereby inciting the government to investigate more thoroughly than might otherwise be the case, or to push harder against potential procedural hurdles like jurisdiction or the statute of limitations.  Given the high cost that has come to be associated with defending against enforcement actions, this type of pressure could lead to major expenditures by companies.  Indeed, some FCPA investigations have reportedly led to $100 million or more in attorneys’ fees.

The FCPA’s heightened visibility in the mainstream press thus brings into relief an issue with which companies need to be particularly aware: bad press.  In fact, the more negative press that accumulates with respect to a particular company and/or allegation, the worse the ramifications for the company.  Investors may start to abandon the company, management changes or other dramatic action may be taken to demonstrate the company’s commitment to addressing perceived problems, and the company may ultimately be more willing to settle the matter on the government’s terms to make the issue go away.

Companies can help protect against violations – and the adverse PR that may come with violations or even allegations of violations – by implementing comprehensive anti-corruption programs.  In addition, companies must foster a “tone from the top” that stresses compliance with anti-corruption laws and open communication about suspected violations.  Potential whistleblowers must feel secure and appreciated for coming forward to report allegations internally, so they are less inclined to report the allegations externally.  In other words, companies that do not want to air their dirty laundry had better keep a clean house.

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and Financial Institutions Anti-Fraud Enforcement Act (FIAFEA): A Novel Approach To Protecting Financial Institutions From Themselves

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In a matter of first impression, Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York ruled that the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) not only prohibits fraud perpetrated by a third party that harms a financial institution, but also renders unlawful fraudulent conduct committed by a financial institution that results in harm to itself. In the case of U.S. v. Bank of New York Melon (“BNYM”), the Government alleged that BNYM violated FIRREA by engaging in a scheme to defraud its clients regarding the pricing of foreign exchange trades and that the bank was ultimately harmed by its own misconduct.

FIRREA was passed in the late 1980s in reaction to the savings and loan crisis, and although it has been around for nearly a quarter century, it has not been utilized very often until recently. The law allows the Government to bring a civil action against any individual or entity for violating a number of criminal statutes prohibiting fraud, including mail and wire fraud, if the fraud affects a federally insured financial institution. In the case against BNYM, the Government asserted that the bank committed mail and wire fraud by making false representations regarding its pricing of foreign currency trades in connection with its “standing instruction” program. Under BNYM’s standing instruction program, the bank automatically set the price of foreign currency trades, relieving the client of the need to contact the bank directly and negotiate a price. BNYM allegedly represented that its standing instruction program provided “best execution” with respect to its foreign currency trades, which within the financial industry was commonly understood to mean that the client received the best available market price at the time the trade was executed. According to the lawsuit, however, BNYM did not provide best execution as the term was understood within the industry and instead priced its currency trades within a range least favorable to its clients.

Over time, BNYM’s clients allegedly learned about its pricing practices, which led to a number of lawsuits being filed against the bank by investors and customers, potentially exposing the bank to billions of dollars in liability. In addition, many of BNYM’s clients allegedly terminated their relationship with the bank in the wake of the revelations about its currency pricing policies. Thus, according to the lawsuit, BNYM’s fraudulent misrepresentations with regard to its currency pricing practices ultimately harmed the bank by causing it to lose customers and exposing it to liability.

In response, BNYM argued that it could not be held liable under FIRREA because the financial institution harmed by the fraud must be the victim of the fraud or an innocent bystander, not the perpetrator of the fraud. The Court rejected this argument explaining that, in passing FIRREA, Congress’s goal was to broadly deter fraudulent conduct that might put a federally insured financial institution at risk. Accordingly, it was entirely consistent with Congress’s intent to render unlawful fraudulent conduct perpetrated by a financial institution and its employees that affects the financial institution itself in order to deter these institutions from engaging in such misconduct in the future.

This decision represents a potentially important breakthrough for whistleblowers. Under the Financial Institutions Anti-Fraud Enforcement Act (“FIAFEA”), a whistleblower that provides information to the Government regarding fraudulent activity affecting a financial institution that constitutes a violation of FIRREA may be entitled to a reward if the Government obtains a monetary recovery. Unlike other whistleblower statutes, a whistleblower recovery under FIAFEA does not hinge on whether the Government has suffered a monetary loss. If a whistleblower is aware of fraudulent conduct affecting a financial institution-even if the only financial institution that is harmed by the fraud is the very same institution that engaged in it-FIAFEA provides an avenue for disclosing the fraud to the authorities with the potential upside of a substantial reward for doing so. Given the recklessness and misconduct that led to the Great Financial Disaster, the Government’s use of FIRREA and FIAFEA to protect financial institutions from their own excesses is not only warranted, but may also deter future misconduct, just as Congress intended.

 

WildTangent Files its Supreme Court Certiorari Petition in Patent Infringement Case – Part 1

Schwegman Lundberg Woessner

In September of 2009, Ultramercial, Inc. sued WildTangent, Inc., Hulu and YouTube in the Central District of California for alleged patent infringement of U.S. 7,346,545 (the ’545 patent).  The ’545 patent claims trading advertisement viewing for access to content over the Internet.  The Abstract of the ’545 patent reads:

The present invention is directed to a method and system for distributing or obtaining products covered by intellectual property over a telecommunications network whereby a consumer may, rather paying for the products, choose to receive such products after viewing and/or interacting with an interposed sponsor’s or advertiser’s message, wherein the interposed sponsor or advertiser may pay the owner or assignee of the underlying intellectual property associated with the product through an intermediary such as a facilitator.

Claim 1 of the ’545 patent is more detailed:

1. A method for distribution of products over the Internet via a facilitator, said method comprising the steps of:

a first step of receiving, from a content provider, media products that are covered by intellectual-property rights protection and are available for purchase, wherein each said media product being comprised of at least one of text data, music data, and video data;

a second step of selecting a sponsor message to be associated with the media product, said sponsor message being selected from a plurality of sponsor messages, said second step including accessing an activity log to verify that the total number of times which the sponsor message has been previously presented is less than the number of transaction cycles contracted by the sponsor of the sponsor message;

a third step of providing the media product for sale at an Internet website;

a fourth step of restricting general public access to said media product;

a fifth step of offering to a consumer access to the media product without charge to the consumer on the precondition that the consumer views the sponsor message;

a sixth step of receiving from the consumer a request to view the sponsor message, wherein the consumer submits said request in response to being offered access to the media product;

a seventh step of, in response to receiving the request from the consumer, facilitating the display of a sponsor message to the consumer;

an eighth step of, if the sponsor message is not an interactive message, allowing said consumer access to said media product after said step of facilitating the display of said sponsor message;

a ninth step of, if the sponsor message is an interactive message, presenting at least one query to the consumer and allowing said consumer access to said media product after receiving a response to said at least one query;

a tenth step of recording the transaction event to the activity log, said tenth step including updating the total number of times the sponsor message has been presented; and

an eleventh step of receiving payment from the sponsor of the sponsor message displayed.

As you can see, there are 11 method steps recited in Claim 1, so it is a very detailed claim and it cannot be summarized in a sentence or two.

The history of the case is not easy to summarize either.  In short, the District Court found that the subject matter of the patent was not patent eligible and dismissed the district court action before interpreting the claims.  In 2011, the Federal Circuit reversed the District Court decision, but the Supreme Court vacated the Federal Circuit’s decision in 2012 based on its recent opinion in Mayo v. Prometheus.  And in June of 2013 the Federal Circuit again reversed the District Court decision, leading to WildTangent’s Petition for Writ of Certiorari filed last week.

WildTangent’s cert petition is attached.  I will be discussing the petition and the ongoing patent eligibility battle in more detail in future posts.

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Treasury Department Recognizes All Legal Marriages for Tax Purposes

Michael Best Logo

On August 29, 2013, the Treasury Department issued Revenue Ruling 2013-17, Internal Revenue Bulletin 2013-38, which states that same-sex couple legally married in jurisdictions that recognize their marriage will be treated as married for ALL federal tax purposes. As a result, legally married same-sex couples are treated the same as legally married opposite-sex couples for federal tax purposes if the state of ceremony of their marriage recognizes same-sex marriage even if their state of residence does not recognize same-sex marriage.

This Ruling has significant impact for legally married same-sex couples and their tax advisors. However, it does not impact state law rules regarding the definition of marriage and may complicate income tax filings for same-sex couples legally married but living in a state that does not yet recognize their marriage, like Wisconsin and Illinois.

Background Leading Up to the Ruling

The Defense of Marriage Act (DOMA) was enacted by President Clinton in 1996. Section Two of DOMA says states do not have to recognize same-sex marriages performed in other states. Section Three of DOMA defined marriage for all federal purposes as only between one man and one woman.

On June 26, 2013, in Windsor v. United States (Windsor), the United States Supreme Court held that Section Three of DOMA was unconstitutional. Therefore, any same-sex married couple that lives in a state that recognizes same-sex marriage is to be treated the same for all purposes as any other married couple, and thereby are entitled to all of the 1,138 rights and privileges under federal law that are granted to married persons, which includes federal tax law.

Section Two of DOMA was unaffected by Windsor. Therefore, a same-sex couple that marries in one of the thirteen states that recognizes same-sex marriage who then moves to one of the thirty-seven states that does not recognize same-sex marriage would not be treated as married if the state of residence determines whether a couples is considered married, as opposed to the state of ceremony determining if a couple is married.

Absent guidance from the Treasury Department, a same-sex couple legally married in a recognition jurisdiction who then move to a state that does not recognize same-sex marriage, would most likely not be treated as married for federal tax law purposes. This is because the majority of federal tax laws are determined by a couple’s state of residence, not the state of ceremony of their marriage.

State of Ceremony Versus State of Residence

Consider the following examples to illustrate Windsor and this Ruling:

Britney and Jason are married in a drive-through chapel by an Elvis impersonator in Las Vegas and then go home to California. Their opposite-sex marriage is recognized for federal tax law purposes in California (and all other states) because California recognizes legal Nevada marriages. Sadly, Britney and Jason’s marriage only lasted 55 hours.

Mitchell and Cam are a same-sex couple married in New York (New York being a state of ceremony that recognizes same-sex marriage) and move back to Milwaukee (Wisconsin being a state of residence that does not recognize same-sex marriage). Prior to the Revenue Ruling, Mitchell and Cam are not married for federal law purposes, even though their marriage would be recognized if they stayed in New York. This is because Article Two of DOMA says that Wisconsin does not have to recognize New York marriages.

After the Revenue Ruling, with an effective date after September 16, 2013, Mitchell and Cam in Wisconsin will be treated as married for federal tax law purposes just like Britney and Jason in California. Mitchell and Cam will be able to utilize all federal tax laws Britney and Jason would be able to utilize (if Britney and Jason had respected the sanctity of their marriage).

Federal Tax Impact of Ruling

As a result of the Revenue Ruling, regardless of a couple’s state of residence, if they are married in a state that legally recognizes their marriage, the couple will be entitled to the following federal tax law benefits (among others): filing status as married filing jointly, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, spousal rollovers of IRA’s, unlimited marital deduction for estate and gift tax purposes, gift tax splitting, and estate tax exemption portability.

The Revenue Ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law that are not considered “marriage” under state law.

Legally married same-sex couples must file their 2013 income tax returns as either “married filing jointly” or “married filing separately.” They may also, but are not required to, file amended returns for open years (generally 2010, 211, and 2012) to be treated as married for federal tax law purposes.

Also, if an employee purchased health insurance coverage from their employer on an after-tax basis for their same-sex spouse, they may now treat the amounts paid for that coverage as pre-tax and excludable from their income, and file amended returns for a refund for open years. Further, if their employer paid Medicare and Social Security tax on those taxable benefits to the employee, the employer may file for a refund for both the employee and employer portions of those overpayments for open years.

Continuing Issues in Non-Recognition States

As of August 30, 2013, the District of Columbia and thirteen states (California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Maryland, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington) recognize same-sex marriage. Therefore, clients who get married in those states or have employees who get married in those states, but subsequently reside in a non-recognition state, need to be aware of the new federal tax law benefits and obligations.

Even though married same-sex couples may now file as “married filing jointly” for federal income tax purposes, states like Wisconsin and Illinois that do not recognize same-sex marriage would still require those couples to either file as single or as married filing separately on their federal returns. This is because most state income tax forms use federal income tax amounts as the starting point for preparing the state return, and most state returns require the federal return to be attached to the state return. Without further guidance from state tax authorities, this could complicate income tax filings for same-sex married couples in non-recognition states.

Estate, gift, and generation skipping transfer tax laws now treat all legally married same-sex couples the same as opposite-sex couples, but, like opposite-sex couples, the Revenue Ruling does not mitigate the need for same-sex married couples to prepare estate plans. Many property law issues are driven by whether someone is classified as a “spouse” under state law, including who inherits under intestacy and other survivorship rights, all of which can be controlled by a will or trust in non-recognition states (like Wisconsin and Illinois). Finally, some states (like Illinois) have state estate and gift tax exemptions that are lower than the current federal estate and gift tax exemptions, which requires careful estate tax planning for all married couples, be they opposite-sex or same-sex.

The impact of Windsor and how same-sex couples are recognized for federal and state laws is a fast changing arena, and additional federal and state guidance will be required.

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Top Whistleblower Settlements of 2013 – To Date

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The theme of the top whistleblower settlements to date in 2013 is, once again, health care fraud. Eight of the largest settlements involve fraud in the health care industry. This is indicative of the number of health care fraud cases being filed in recent years. According to the Department of Justice, since January 2009, over $10.3 billion has been recovered from health care fraud cases. This year, the focus seems to have particularly shifted to cases involving violations of the Anti-Kickback Statute and Stark law, which prohibit the giving of financial incentives for referrals or the use of particular pharmaceuticals or devices. Without further ado, here are the top whistleblower settlements of 2013 to date:

1. Ranbaxy USA Inc. ($500 Million)

Ranbaxy USA Inc., a subsidiary of Indian generic pharmaceutical manufacturer Ranbaxy Laboratories Limited, agreed to pay a total of $500 million to settle criminal and civil allegations filed against the company. Ranbaxy pleaded guilty and agreed to pay a criminal fine and forfeiture of $150 million. The civil settlement, which resolves False Claims Act violations, was for $350 million. Ranbaxy was accused of poor oversight and inadequate testing and maintenance of drugs manufactured at its facilities in Paonta Sahib and Dewas, India. This lead to false claims being submitted to numerous government agencies including the FDA, Medicaid, Medicare, TRICARE, the Federal Employees Health Benefits Program, the Department of Veterans Affairs, and USAID. The whistleblower in this case, former Ranbaxy executive Dinesh Thakur, will receive $48.6 million from the federal share of the civil settlement.

For more information about this settlement, read the DOJ press release.

2. C.R. Bard Inc. ($48.26 Million)

C.R. Bard Inc., a New Jersey-based corporation that develops, manufactures, and markets medical products, agreed to pay $48.26 million to resolve kickback allegations filed against the company. Bard was accused of submitting false claims to Medicare for brachytherapy seeds used to treat prostate cancer. According to the complaint filed in 2006, Bard paid illegal kickbacks in numerous forms to both physicians and customers who used the seeds to perform treatment for prostate cancer. The whistleblower in this case, Julie Darity, was a former Bard manager for brachytherapy contracts administration. She will receive $10,134,600 as her portion of the settlement.

For more information about this settlement, read the DOJ press release

3. Par Pharmaceutical Companies Inc. ($45 million)

Par Pharmaceutical Companies, Inc., one of the top five U.S. generic pharmaceutical companies, pleaded guilty to federal criminal charges and agreed to settle civil allegations involving the company’s promotion of the drug Megace ES. Par was fined $18 million and ordered to pay an additional $4.5 million in criminal forfeiture. The company will also pay $22.5 million to resolve the civil allegations. The civil suit accused Par of promoting Megace ES for non-FDA approved uses that were not covered by federal healthcare programs and of actively ignoring some of the negative side effects the drug has on various patient groups when promoting Megace ES. The settlement resolves three separate whistleblower lawsuits that were filed against the company. Two of the five whistleblowers in the cases, Mr. Michael McKeen and Ms. Courtney Combs will receive $4.4 million as their portion of the settlement. Any payments to the other whistleblowers, Ms. Christine Thomas, Mr. James Lundstrom, and Mr. Elliott, are unknown at this time.

For more information about this settlement, read our blog post.

4. Dr. Steven J. Wasserman ($26.1 Million)

This year, the Department of Justice announced one of the largest ever settlements with an individual under the False Claims Act. Florida dermatologist, Dr. Steven J. Wasserman agreed to settle allegations filed against him for $26.1 million. Dr. Wasserman was accused of performing medically unnecessary services and engaging in an illegal kickback scheme. Dr. Alan Freedman, the whistleblower in this case, was a pathologist at a company involved in the kickback operation. He filed his qui tam lawsuit in 2004 and will receive slightly over $4 million as his share in the settlement.  

For more information about this settlement, read our blog post. 

5. CH2M Hill Hanford Group Inc. ($18.5 Million)

CH2M Hill Hanford Group Inc. and its parent company CH2M Hill Companies Ltd. agreed to settle civil and criminal allegations relating to time card fraud for a total of $18.5 million. CH2M had a contract with the Department of Energy to manage and clean 177 large underground storage tanks that contained radioactive and hazardous waste at a nuclear site in Washington. CH2M employees allegedly regularly overstated the number of hours they worked on time cards submitted to the Department of Energy. As a result, CH2M was overpaid for more hours of work than were actually performed. The civil settlement was for $16.55 million. CH2M will also pay $1.95 million to resolve the criminal liabilities. To date, eight CH2M employees have pleaded guilty to engaging in the time card fraud. The whistleblower in this case, Carl Schroeder, was a former CH2M employee and one of the individuals who pleaded guilty to the scheme. The qui tam provisions of the False Claims Act bar whistleblowers from receiving a portion of the settlements if they are convicted for their role in the fraud scheme. Therefore, Mr. Schroeder will not receive a portion of this settlement.

For more information about this settlement, read the DOJ press release. 

6. American Sleep Medicine LLC ($15.3 Million)

The Department of Justice announced a $15.3 million False Claims Act settlement it reached with American Sleep Medicine LLC. American Sleep is a Florida-based company that owns and operates 19 diagnostic sleep testing centers across the country. Its primary business is to provide testing for patients who suffer from sleep disorders. American Sleep allegedly submitted false claims to Medicare, TRICARE, and the Railroad Retirement Medicare Program for tests that were performed by technicians who lacked the proper certification required by these agencies for reimbursement. The whistleblower in this case, Daniel Purnell, will receive about $2.6 million as his portion of the settlement.

For more information about this settlement, read the DOJ press release.  

7. Adventist Health System & White Memorial Medical Center
   ($14.1 Million)

This month, Adventist Health System and its affiliated hospital White Memorial Medical Center agreed to a $14.1 million settlement. The settlement was the result of a qui tam lawsuit filed against the companies accusing them of violating the Anti-Kickback Act and the Stark Statute. Of the $14.1 million, $11.5 million will go to the federal government and $2.6 million will go to California’s Department of Health Care Services. Adventist Health was allegedly improperly compensating physicians for patient referrals to White Memorial by transferring medical and non-medical supplies and other inventory to the physicians at less than fair market value. White Memorial was also accused of paying referring physicians at a rate above fair market value for teaching services at the family practice residency program. The whistleblowers in this case were Dr. Hector Luque and Dr. Alejandro Gonzalez, who were members and partners of White Memorial. They will collectively receive $2,389,219 as their portion of the settlement.

For more information about this settlement, read our blog post.

8. Cooper Health System ($12.6 Million)

Cooper Health System and Cooper University Hospital, a hospital and health care system in South New Jersey, agreed to a $12.6 million settlement that resolved allegations that Cooper engaged in an elaborate illegal kickback scheme. According to the complaint, Cooper created a sham advisory board to pay high-volume medical practices upwards of $18,500 each to attend four meetings over the course of a year with the true goal of encouraging medical practices to refer patients to Cooper. The whistleblower in this case, Dr. Nicholas L. DePace, is a prominent Delaware Valley cardiologist. Dr. DePace was invited to join the sham advisory board and, after attending one of the meetings, figured out Cooper’s true intentions. Dr. DePace’s whistleblower reward has not yet been determined.

For more information about this settlement, read our blog post.

9. Hospice of Arizona ($12 Million)

Three Arizona hospice companies, Hospice of Arizona LC, American Hospice Management LLC and American Hospice Management Holdings LLC, agreed to settle a False Claims Act lawsuit with the government for $12 million. In order for hospice care to be reimbursed by Medicare, patients are required to have a life expectancy of, at most, six months.The qui tam lawsuit, filed against the companies in 2010, accused the defendants of submitting false claims to Medicare for patients who did not need to be admitted to the Hospice of Arizona. Additionally, they were accused of submitting false claims by overbilling Medicare for some of the hospice’s services. Ellen Momeyer, the whistleblower in this action, was a former Hospice of Arizona employee. Momeyer will receive $1.8 million (approximately 15%) as her share of the settlement.

For more information about this settlement, read our blog post.

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Countdown to HITECH Compliance: How to Redistribute Your Notice of Privacy Practices

Poyner SpruillSeptember 23, 2013 is the fast-approaching compliance deadline for the final omnibus HIPAA/HITECH rules.  Many provisions required revisions to Notices of Privacy Practices (NPPs) maintained and distributed by covered entities.  The U.S. Department of Health and Human Services (HHS) has made clear that these changes are material.  As a result, covered entities must redistribute their NPPs shortly in order to meet HITECH’s requirements.  This alert describes the manner of redistribution dictated by HIPAA.

General Requirements

When revising NPPs, keep in mind that whether paper or web-based, HHS requires them to be accessible to all individuals, including those with disabilities.  Covered providers required to comply with Section 504 of the Rehabilitation Act or the Americans with Disabilities Act must also take steps to ensure effective communication with individuals with disabilities, including making the revised NPP available in Braille, large print, or audio.  HIPAA also requires NPPs to be written in plain language.

Changes to the NPP may not be implemented prior to the NPP’s new effective date, unless otherwise required by law.  Typically, any change to the practices described within the revised NPP may only be applied to PHI created or received after the effective date of the change.  All previous versions of the NPP and any acknowledgments of its receipt must be maintained for six years from the last effective date.

If You Are a Health Care Provider

For existing patients, you must make the revised NPP available upon request on or after the effective date of the changes (for most, this date will be September 23, 2013).  If you have a physical service delivery site (such as a clinic or hospital), you must have copies of the NPP available at the site for individuals to take with them upon request.  You also must post a copy of the NPP or summary of the revisions in a clear and prominent location, where it is reasonable to expect individuals to be able to read the posting.  You must ensure all new patients receive the revised NPP at the time of first service after the effective date of the changes.  The revised NPP must be made available on your website if you have one.  If patients have agreed to receive electronic notice of the NPP, you may e-mail the revised NPP to those patients.  You do not need to obtain acknowledgment of receipt from individuals, except for the initial distribution of the NPP provided at the first time of service.

If You Are a Health Plan

You must distribute the revised NPP to current plan participants.  If you post your NPP on a website, then you must post the revised NPP, or a description of the material changes, prominently on that website by the effective date of the changes.  You also must provide in your next annual mailing to participants either the revised NPP or information regarding material changes and how to obtain a copy of the NPP.  If you do not post your NPP on a website, then you must provide participants with the revised NPP or information about the material changes and how to obtain the revised NPP within 60 days of the material changes.  Note that all health plans also must continue to notify participants of the availability of the NPP and how to obtain a copy at least once every three years.

HHS has stated that if covered entities or health plans amended and redistributed NPPs prior to issuance of the final omnibus rule then they are not required to repeat the process, so long as the current NPP that was redistributed meets all the requirements in the final rule.  For all other covered entities, the NPP must be revised and effective by September 23, 2013, and redistributed as appropriate.

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Healthcare Fraud Case Results in $491 Million Settlement

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On July 30, 2013, Pfizer Inc., one of the world’s largest pharmaceutical companies, announced its finalized agreement to pay $491 million to the U.S. government in order to resolve accusations that the company and one of its subsidiaries defrauded the U.S. healthcare system.  Under the settlement, Pfizer will pay $257 million in order to resolve civil allegations that Wyeth Pharmaceuticals Inc., owned by Pfizer, engaged in illegal marketing that led to false claims being brought to Medicare and similar healthcare programs.  Pfizer will pay the other $234 million of the settlement in order to cover criminal fines and penalties.

According to allegations in the lawsuit, Wyeth Pharmaceuticals had illegally marketed a transplant drug named Rapamune for uses that had not been approved by the U.S. Food & Drug Administration (FDA).  Patients use Rapamune in combination with other drugs following kidney transplants.  However, Wyeth’s advertising campaigns advocated the drug for unapproved applications, such as use after liver, lung, heart, pancreas, and islet transplants.  According to a U.S. attorney, this type of off-label marketing endangers patients and erodes the population’s confidence in the FDA.  In 2002, the FDA required Wyeth to place a “black box warning,” the most stringent type of warning required by the agency, on the Rapamune product label.  This warning would advise people of the risks inherent in using Rapamune after liver transplants.  One year later, the FDA required a similar type of warning with regard to the use of Rapamune after lung transplants.  Nevertheless, claims up to 90% of Wyeth’s Rapamune sales were allegedly for “off-label” uses.

The $491 million settlement resulted from two qui tam lawsuits filed against Wyeth Pharmaceuticals Inc.  Under provisions of the False Claims Act, private citizens with knowledge of fraud committed against the government can file a qui tam lawsuit on behalf of the United States.  The individual filing the lawsuit is known as the relator or whistleblower.  Healthcare whistleblowers, such as the persons who brought the lawsuits against Wyeth, serve an important role in exposing and eradicating healthcare fraud.  Many whistleblowers have personal knowledge of deceptive practices because they work for the companies that submit false claims to the Government.  By relating their knowledge to the appropriate authorities, these individuals can assure that healthcare programs can achieve their intended benefits to Americans with the greatest need of federal assistance.

In the first case, the False Claims Act whistleblowers were Marlene Sandler and Scott Paris.  They jointly filed a lawsuit in Pennsylvania that alleged aspects of off-label marketing.  At the time, the Government declined to intervene and the relators commenced to litigate the case on their own.  Two years later, a second qui tam whistleblower, Mark Campbell, came forward.  Mr. Campbell is a former Wyeth sales representative who worked for the company for twenty years.  Throughout the tenure of his employment, he became aware of Wyeth’s off-label marketing practices.  After he filed his lawsuit against Wyeth in the U.S. District Court for the Western District of Oklahoma, the Department of Justice intervened in the Sandler and Paris action.  The Government then transferred the matter to the Oklahoma court and consolidated the two cases.  The three Medicare fraud whistleblowers have aligned their interests and cooperated to help the investigation into Wyeth’s actions.

Because the whistleblowers took on a personal risk in bringing allegations against their employer and they devoted their time in relaying information vital to the case, they will obtain a significant proportion of the settlement.  False Claims Act whistleblowers typically receive 15% to 25% of settlements.  That means that Ms. Sandler, Mr. Paris, and Mr. Campbell will all potentially receive millions of dollars from Pfizer Inc.

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