On February 1, 2012, the Florida House of Representatives’ Insurance and Banking Subcommittee approved HB 1277 which is designed to combat MSB facilitated workers’ compensation fraud in Florida. Over the past year, MSB facilitated workers’ compensation fraud has been in the crosshairs of the Florida government.

As we previously reported, on August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation (“OFR”) issued a report to Governor Rick Scott and his Cabinet regarding workers’ compensation fraud in the State of Florida. The cabinet report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers’ compensation insurance market. A complete overview of the fraud scheme can be read here.

At the time of our prior report on this matter, Florida C.F.O. Jeff Atwater announced the creation of the “MSB Facilitated Workers’ Compensation Fraud Workgroup” to develop comprehensive reforms to combat the fraud scheme. The efforts of the Workgroup culminated with its report and recommendations which were presented to the Insurance and Banking Subcommittee on November 2, 2011. A summary of the Workgroup’s report and recommendations can be read in our previous report here.

Many of the Workgroup’s recommendations were adopted by the Subcommittee in drafting HB 1277. First, HB 1277 would allow the Office of Financial Regulation (“OFR”) to make unannounced visits to inspect MSBs. This change would eliminate the requirement under § 560.303, Fla. Stat. that state regulators give check cashers 15 days notice before conducting an examination of their records. The goal of this revision is to prevent those MSBs that are facilitating the fraud from hiding, destroying, or tampering with records and evidence prior to an OFR inspection.

Second, HB 1277 eliminates the requirement that new MSB licensees be inspected by OFR within six months of the issuance of its license. However, the bill still requires that all MSBs undergo an examination every five years. The hope is that by eliminating the mandatory six-month inspection, OFR can better allocate its resources to investigating suspected fraudulent and high risk MSBs first then moving on to investigate lower risk MSBs at a later time.

HB 1277 also adopted two other recommendations of the Workgroup requiring that check cashers deposit all checks into a single commercial bank account maintained at a federally insured financial institution, and eliminating the ability of companies to cash third-party checks in check cashing facilities. The Workgroup believes that these changes will enhance fraud detection because the Workgroup perceives banks to be in a stronger position to monitor and filter out unlawful transactions. The bill will now proceed to the House floor for reading and debate.

Fuerst Ittleman will continue to monitor the progress of HB 1277 with a keen eye as the passage of HB 1277 will result in changes to regulatory compliance for the Florida MSB industry. If you have questions pertaining to HB 1277, the Florida Office of Financial Regulation, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fuerstlaw.com.

On February 2, 2012, the U.S. Department of Justice announced the indictment of Wegelin & Co., a Swiss private bank, for conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret accounts and the income these accounts generated from the Internal Revenue Service (IRS).  This is the first time an overseas bank has been charged by the United States for facilitating tax fraud by U.S. taxpayers.

The Justice Department press release  also notes that the U.S. Government seized more than $16 M from Wegelin’s U.S. correspondent bank accounts, pursuant to a civil forfeiture complaint.  The press release details the allegations in the criminal indictment, the thrust of which are succinctly summarized as follows:

In the wake of the IRS investigation of UBS, members of Wegelin’s senior management affirmatively decided to capture the illegal business that UBS exited.   To capitalize on the business opportunity this presented and to increase the assets under management, along with the fees earned from managing those assets, Berlinka, Frei, Keller and others, acting on behalf of Wegelin, told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. authorities because the bank had a long tradition of secrecy.   They also persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing, among other things, that unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement pressure.   Members of the Swiss bank’s senior management approved efforts to capture the clients who were leaving UBS and also participated in meetings with U.S. taxpayer-clients who were fleeing UBS.

However, the timing of indictment is conspicuous.  On January 30, 2012, eight Swiss banks (Credit Suisse, Julius Baer, and Basler Kantonalbank, among others) handed over to the United States government data on U.S. clients  suspected of evading U.S. income taxes.  This disclosure was made in order to avoid prosecution in the United States.  However, remarkably, the data was encrypted at the Swiss government’s request, and Switzerland has indicated that it will not provide the encryption key to unlock the data  until the Swiss and the United States reach a broader agreement on exchange of information.

The clear implication of the Wegelin indictment is that the Department of Justice is making good on its threats of prosecution.  Indeed, in taking the unprecedented move to indict a foreign bank that has no branches to the United States, the Justice Department is sending a clear message to foreign banks, and U.S. taxpayers, that income tax evasion, and assisting those that evade income taxes, will not go unpunished.

The press release is available here.

The attorneys at Fuerst Ittleman have extensive experience dealing with IRS audits and Justice Department prosecutions.  You can reach an attorney by emailing us at contact@fuerstlaw.com.

In Telebright Corp. v. Director, Division of Taxation, the State of New Jersey used a single employee’s act of telecommuting while in New Jersey as the jurisdictional basis to tax the income of a corporation that had no offices in the State of New Jersey. The employee received and completed her work assignments from her home in New Jersey using a company-provided computer. Based on these indirect contacts, the business was held to be "doing business" in New Jersey. Thus, the business’s income was subject to taxation in New Jersey under New Jersey law.

In its decision, the full text of which is available here, the Tax Court of New Jersey ruled that such taxation was consistent with both the Due Process Clause and Commerce Clause. The Court held that New Jersey’s attempt to tax did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. The court also held that the employee’s presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey’s labor markets.

The significance of this decision is that when an employee is located outside of the jurisdiction where the business is incorporated and/or doing business, the foreign jurisdiction may have a claim to tax the business.  Consequently, businesses must be cognizant of the fact that they may have filing obligations and tax liabilities to jurisdictions that they had not previously considered.

The attorneys at Fuerst Ittleman have extensive experience advising clients to minimize or reduce the ability of state and local governments to tax businesses.  Additionally, the attorneys at Fuerst Ittleman have extensive experience litigating against the government when it assesses additional tax, penalties, and interest.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

On January 6, 2012, the U.S. Food and Drug Administration (“FDA”) denied a citizen petition (Docket No. FDA-2008-P-0291) requesting the FDA to require manufacturers and distributors of prescription drug products to include the new drug application (“NDA”) number on drug product labels.

PRN Publishing, a company that distributes a monthly newsletter for community pharmacists, filed this citizen petition in 2008 over concerns about pharmacists’ ability to determine the equivalency status of prescription drug products. (See the full text of PRN’s citizen petition here.) When filling prescriptions, pharmacists often refer to the list of Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book, to determine the equivalence status of brand and generic drug products in the United States. Where substitution is not prohibited by a prescriber, pharmacists have a duty to dispense only those generic products which appear in the Orange Book and are rated “A.” The citizen petition argued that, due to frequent changes in drug manufacturers and distributors of particular drugs, pharmacists may have difficulty matching drug products on the shelves with the corresponding listing in the Orange Book. As a solution, PRN suggested that all prescription drug manufacturers and distributors should include a drug product’s NDA number on the label of each bottle. Thus, this system would allow pharmacists “to quickly and easily determine the equivalence status of any drug product by simply comparing the NDA number on the bottle to the NDA numbers listed in the Orange Book under the heading of the particular drug in question.”

Currently, 21 C.F.R. part 314 requires that all drug manufacturers obtain FDA approval of a drug application in order to market a new drug or generic drug. Manufacturers and distributors, however, are not required to place this approved application number on drug product labels. Section 10.30 of the Code of Federal Regulations provides citizens the opportunity to submit a petition to the FDA requesting the Agency to add, remove, or change its regulations. (See 21 C.F.R. § 10.30.) In its citizen petition, PRN suggested that the change to Agency requirements would benefit all stakeholders because it would 1) protect patients from inadvertent illegal substitution; 2) relieve pharmacists of the undue burden of having to research the provenance of each drug product before dispensing generics; and 3) guarantee drug makers that a company’s NDA is “firmly attached to its product in whatever form it is distributed.”

Upon reviewing this citizen petition, the FDA did not find PRN’s recommendation to be an effective means of communicating drug equivalence to pharmacists. (See the full text of FDA denial here.) In its denial, the FDA pointed out that authorized generic drugs share the same NDA numbers as the branded innovator product and would not be identified separately from the branded drug in the Orange Book. The FDA addressed this issue in the introductory section of the 28th edition of the Orange Book. There, the FDA specifically indicated that distributors and repackagers of products in the Orange book are not identified “because [they] are not required to notify FDA when they shift their sources of supply from one approved manufacturer to another.” Consequently, “it is not possible to maintain complete information linking product approval with the distributor or repackager handling the product.”

Further, the FDA asserts that PRN’s recommendation may result in confusion because “[p]harmacists could be confused when they look up an NDA number in the Orange Book and find only a listing for the innovator product.” The FDA noted that the citizen petition lacked sufficient data or information to support the claims listed. After balancing PRN’s claims against the Agency’s statutory mandate, space limitations, alternatives, potential for confusion, and potential safety risk, the FDA concluded that it would not be necessary to amend the current drug labeling requirements at this time and denied PRN’s citizen petition.

Fuerst Ittleman will continue to monitor the developments in the regulation of drug products. For more information, please contact us at contact@fuerstlaw.com. 

After conducting inspections of American Red Cross facilities between April 2010 and October 2010, the FDA found that 16 blood collection sites did not meet the FDA’s standards for safety. These “significant violations” included inadequate managerial control, record-keeping and quality assurance. According to the FDA, however, the lapses did not lead to serious health consequences for blood recipients. The Red Cross has announced that it has taken corrective action to address the FDA’s concerns. On January 18, 2012, the U.S. Food and Drug Administration (FDA) fined the American Red Cross $9.59 million for failing to comply with blood safety regulations.

The FDA, through the Center for Biologics Evaluation and Research (CBER) and Office of Regulatory Affairs (ORA), is responsible for the regulation of the collection of blood and blood components used for transfusion or for the manufacture of pharmaceuticals derived from blood and blood components.  Pursuant to Section 351 of the Public Health Service Act (“PHS Act”) and the Food, Drug, and Cosmetic Act (“FDCA”), the FDA oversees and enforces quality standards, conducts inspections of blood establishments, and monitors reports of errors, accidents and adverse clinical events.

The FDA inspects blood establishments to ensure that products are manufactured safely and in a way that protects the purity, potency and quality of the blood products. In addition, the FDA requires blood establishments to properly screen donors, maintain good manufacturing practices (cGMPs), maintain accurate records, investigate any breaches of establishment safeguards, and correct system deficiencies. Licensed blood facilities may engage in the sale, transport, and exchange of blood and blood products across state lines.

Failure to comport with the FDA’s regulations may result in enforcement action in the form of a fine, as in the Red Cross’s case, regulatory action letters, or revocation of establishment licensure.  In previous years, the FDA has entered into Consent Decrees with several blood bank establishments, such as the American Red Cross and the New York Blood Center, for violations of cGMPs and inadequate quality assurance programs. The FDA has also suspended the license of a blood center (Intermountain Health Care) due to numerous cGMP violations. Although the FDA has expressed its continued commitment to upholding high standards for blood collection and blood bank establishments, the onus of compliance with the FDA’s regulations and the safety of the nation’s blood supply rest in the hands of the individual blood establishments.

Fuerst Ittleman will continue to monitor the FDA’s regulation of biologics products and establishments. For more information, please contact us at contact@fuerstlaw.com

On January 9, 2012, the Supreme Court heard oral argument in the case of Sackett v. United States Environmental Protection Agency. Although the facts of the case concern issues governed by the Clean Water Act (“CWA”), this case is important to all administrative law practitioners because of its potential to more clearly define the line between “final agency action,” which is generally subject to judicial review, and non-final agency actions which are not. Such a clarification will not only serve as a guide in future litigation against federal administrative agencies, but may also dramatically change how such agencies engage in “informal” communications with those subject to their jurisdiction. A copy of the oral argument transcript can be read here.

1. Background

The Sacketts’ fight with the EPA centers on a small 0.63 acre property located near Priest Lake, Idaho and an EPA compliance order prohibiting its development. In May of 2007, the Sacketts began to fill in the property with dirt and rocks in preparation for construction of a three-bedroom home. However, in November of that year, the EPA issued a Compliance Order that ordered construction to be halted claiming that the Sacketts’ land was a wetland, was subject to EPA jurisdiction under the CWA, and that the construction could not continue without first obtaining a permit from the Army Corp of Engineers. The Compliance Order also required the Sacketts to remove all fill material, restore the property to its original condition, and replant the property with wetland vegetation no later than April 30, 2008. Additionally, the Compliance Order threatened civil penalties as high a $32,500 per day for each day the Sacketts did not comply with the Order. A copy of the EPA’s news release announcing the issuance of the Compliance Order can be read here.

2. What is a Compliance Order?

Under the CWA, after the EPA identifies a violation, the agency has three options: 1) the EPA may assess an administrative penalty, in response to which “the alleged violator is entitled to a reasonable opportunity to be heard and to present evidence, the public is entitled to comment, and any assessed penalty is subject to immediate judicial review;” 2) the agency can initiate a civil enforcement action in federal district court; or 3) the EPA can issue, as it did in this case, an administrative compliance order. See Sackett v. United States Environmental Protection Agency, 622 F.3d 1139, 1142 (9th Cir. 2010); see generally 33 U.S.C. § 1319. As explained by the Ninth Circuit, “a compliance order is a document served on [a] violator, setting forth the nature of the violation and specifying a time for compliance with the [CWA].” Sackett, 622 F.3d at 1142.

In order for a compliance order to be enforced, the agency must bring an enforcement action against the individual in federal court. However, pre-enforcement, the CWA does not give the alleged violator any right to a hearing in front of the agency to challenge its issuance, nor does it allow for the alleged violator to sue the agency in court. Instead, an alleged violator’s only way to challenge a compliance order is to do nothing, face potential mounting fines, wait for the EPA to sue for enforcement of the compliance order, and then argue the jurisdictional merits of the EPA’s authority. It is this lack of a pre-enforcement challenge to EPA’s authority which is at the heart of the Sacketts’ Supreme Court case.

3. Final Agency Action and Review Under the Administrative Procedure Act

Section 10(c) of the Administrative Procedure Act (“APA”), codified at 5 U.S.C. § 704, provides that “final agency action for which there is no other adequate remedy in a court [is] subject to judicial review” under the APA. The APA applies to all final agency actions except to the extent that an enabling statute precludes review. See 5 U.S.C. § 701. However, the statute provides that the judicial review provisions of the APA may not be superseded by subsequent statutes unless such statutes expressly provide so. See 5 U.S.C. § 559. Additionally, the Supreme Court has found that there is a presumption favoring judicial review of administrative actions. Abbott Laboratories v. Gardner, 387 U.S. 136, 140 (1967) overruled on other grounds by Califano v. Sanders, 430 U.S. 99 (1977). However, this presumption is overcome “whenever the congressional intent to preclude judicial review is fairly discernible in the statutory scheme.” Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984).

“The cases dealing with judicial review of administrative actions have interpreted the ‘finality’ element in a pragmatic way.” Abbott Laboratories, 387 U.S. at 149. As first announced in Abbott Laboratories, an agency action will be considered final and a pre-enforcement challenge will be allowed:

Where the legal issue presented is fit for judicial resolution, and where a regulation requires an immediate and significant change in the plaintiffs conduct of their affairs with serious penalties attached to noncompliance, access to the courts under the [APA] and the Declaratory Judgment Act must be permitted, absent a statutory bar or some other unusual circumstance. . . .

Abbott Laboratories, 387 U.S. at 153.

In Bennett v. Spear, 520 U.S. 154, 177-178 (1997), the Court articulated a two part test to determine whether an agency action qualifies as “final” and thus generally subject to judicial review under the APA. As stated by the Court:

As a general matter, two conditions must be satisfied for agency action to be “final”:

First, the action must mark the ‘consummation’ of the agency’s decision-making process – it must not be of a merely tentative or interlocutory nature.

And second, the action must be one by which ‘rights or obligations have been determined,’ or from which ‘legal consequences will flow.’

Bennett, 520 U.S. at 177-178 (emphasis added).

When assessing whether an agency action qualifies as “final,” the Court looks to numerous factors including: 1) whether the administrative order provides the definitive statement of the agency’s position; 2) whether the administrative order has a “direct and immediate effect on the day-to-day business of the complaining parties;” 3) whether agency expects immediate compliance with the terms of the order such that the order has “the status of law;” 4) whether the suit challenging the agency action presents a “legal issue fit for judicial review;” and 5) whether the suit challenging the administrative order is calculated to speed enforcement.” See Brief of the American Farm Bureau Federation et al. as Amici Curiae Supporting Petitioners, Sackett v. Environmental Protection Agency, 14-15 (No. 10-1062) (2012) (quoting FTC v. Standard Oil Co. of California, 449 U.S. 232, 239 (1980)).

4. The Case Below

In this case, in response to the compliance order issued by the EPA, the Sacketts sought an administrative hearing to challenge the EPA’s findings that the property is subject to the CWA. However, this request was denied by the EPA. The Sacketts then filed their suit before the United States District Court for the District of Idaho seeking injunctive and declaratory relief arguing: 1) the compliance order was arbitrary and capricious under the APA, 5 U.S.C. § 706(2)(A); 2) the order violated the Sacketts’ due process rights because it was issued without a hearing; and 3) the standard for issuance of a compliance order under the CWA was unconstitutionally vague. Sackett, 622 F.3d at 1141.

Both the District Court and the Ninth Circuit dismissed the Sacketts’ pre-enforcement suit challenging the EPA’s issuance of the compliance order for lack of subject-matter jurisdiction. In its opinion, the Ninth Circuit ruled that, based upon the structure and objectives of the statutory scheme as well as the legislative history of the CWA, the CWA precluded judicial review of pre-enforcement actions under the APA. Sackett, 622 F.3d at 1143-1147.

The Ninth Circuit additionally held that, although due process is violated when the “practical effect of coercive penalties for noncompliance is to foreclose all access to the courts so that compliance is sufficiently onerous and coercive penalties sufficiently potent that a constitutionally intolerable choice might be presented,” the statutory preclusion of pre-enforcement review of compliance orders does not rise to such a level for two reasons. First, the CWA provides for a permitting process, the denial of which is immediately reviewable in federal district court under the APA. The Ninth Circuit found that the jurisdiction issues raised by the Sacketts could be litigated in that forum. As such, “rather than completely foreclosing the Sacketts’ ability to . . . challenge CWA jurisdiction, the CWA channels judicial review through the affirmative permitting process.” Sackett, 622 F.3d at 1146. Second, the Ninth Circuit held that, although the violation of the CWA and of a issued compliance order may amount to [$37,500] each per day, the civil penalty is a matter of judicial, not agency, discretion. Thus, “any penalty ultimately assessed against the Sacketts would therefore reflect a discretionary, judicially determined penalty, taking into account a wide range of . . . equitable factors, and imposed only after the Sacketts have had a full and fair opportunity to present their case in a judicial forum.” Id. at 1147.

However, what is noticeably absent from the Ninth Circuit’s opinion is a discussion of the preliminary issue that has become a focal point of the briefs and oral argument before the Supreme Court: whether the compliance order is considered “final agency action” sufficient to trigger review under the APA.

5. The Parties Positions Regarding Final Agency Action Before the Supreme Court

1. The Merit Briefs

In accepting certiorari, the Supreme Court asked the parties to address two questions: 1) Whether the Sacketts may “seek pre-enforcement judicial review of the Administrative Compliance Order pursuant to the Administrative Procedure Act 5 U.S.C. § 704;” and 2) if not, does the Sacketts’ “inability to seek pre-enforcement judicial review of the Administrative Compliance Order violate their rights under the Due Process Clause?” See Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, at i (No. 10-1062). In order to fully answer these questions, the issue of whether the Administrative Compliance Order constitutes “final agency action” is of critical importance.

In their Initial Brief, the Sacketts, most likely because the Ninth Circuit ignored the issue of whether the compliance order was a “final agency action,” only briefly outline their position as to why the EPA’s compliance order qualifies as “final agency action.” First, the Sacketts argue that the compliance order “represents the consummation of the EPA’s decision-making process” for three reasons: 1) “there are no further steps for the agency to take with respect to jurisdiction, or with respect to the order’s issuance;” 2) “the order does not initiate any administrative process, nor is there any administrative process whereby the Sacketts can seek review of the order;” and 3) the CWA provides that the compliance order is immediately enforceable in court by the agency. See Brief for the Petitioners, at 55. Second, the Sacketts argue that the compliance order satisfies the second step of the Bennett test because failure to comply with the compliance order itself is both actionable and punishable by civil penalties. Thus, according to the Sacketts, independent “legal consequences flow from the compliance order.” Id.

In response, the Government dedicated several pages of its brief to counter the Sacketts claims that the compliance order is a “final agency action” subject to judicial review and argued that the compliance order fails both prongs of the Bennett test. First, the Government argued that the compliance order fails step one of Bennett because it does not mark the consummation of the agency’s decision-making process. According to the Government, the order invited the Sacketts to contact the EPA informally regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. Additionally, the compliance order invited the Sacketts to propose alternatives to the remediation plan proposed. Thus, “because EPA indicated that allegations and conclusions underlying the order were subject to revision based on petitioners might provide, and that the prescribed corrective measures were subject to negotiation, the compliance order cannot properly be viewed as representing the agency’s final conclusions.” Brief for the Respondent, Sackett v. United States Environmental Protection Agency, 24-25 (No. 10-1062).

The Government also argued that the compliance order failed step two of Bennett because compliance orders merely “express the agency’s views of what the law requires” and any factual determinations made within the compliance order would be given no deference by a court in an enforcement action. Brief for the Respondent, at 28. The Government also argued that any potential legal consequences faced by the issuance of a compliance order are not “sufficiently concrete or substantial to render the order ‘final agency action.’” Id. at 29. Here, the Government’s argument mirrors the Ninth Circuit’s logic that because the penalties associated with the failure to comply are subject to judicial, not agency discretion, and because an after-the-fact permit process exists which provides for judicial review wherein a potential violator can challenge EPA jurisdiction, the legal consequences are not such that pre-enforcement review is essential. Id. at 29-31.

The Sacketts countered the Government’s arguments in their Reply Brief arguing that Bennett is satisfied for several reasons. First, the language of the CWA itself only permits a compliance order to be issued after the EPA has made findings that the CWA has been violated. Reply Brief for the Petitioners, Sackett v. United States Environmental Protection Agency, 13 (No. 10-1062).  Further, the CWA “makes clear that the issuance of the compliance order is one of two equal enforcement options that EPA may take once it ‘finds’ that the statute has been violated.” Id. at 16 (emphasis in original). Thus, “the compliance order is not a prelude to enforcement[,] [r]ather, the compliance order is enforcement.” Id. (emphasis in original). Next, the Sacketts cited numerous circuit court decisions which have found that agency actions can be deemed “final” even though the actions themselves provide for informal consultation between the agency and an effected party. Id. at 15-16. Finally, the Sacketts argued that because the compliance order subjects them to additional penalties for non-compliance and creates additional requirements that must be satisfied before obtaining an after-the-fact permit, the compliance order creates additional legal obligations sufficient to be considered final.

2. The Government’s Policy Rationale for Arguing that Compliance Orders are Non-Final Agency Action and Thus Not Entitled to the Presumption of Reviewability

In addition to arguing in its brief that the compliance order failed to meet the Bennett test, the Government also presented several policy-based arguments as to why compliance orders should not be viewed as “final agency actions.”

The Government argues that compliance orders: 1) inform parties regulated by the administrative agency of requirements imposed by law, and 2) warn parties that the failure to comply with such laws may result in future enforcement actions. See Brief of Respondents, at 14. Contrary to the claims of the Sacketts, the Government’s position is that no additional obligations are imposed on parties issued compliance orders. Rather, such orders “set forth the EPA’s views as to the steps particular persons must take to achieve prospective compliance with the CWA itself.” Id. at 17.

            Additionally, the Government argues that compliance orders, as well as similar devices used by other agencies, serve an important purpose of “obviate[ing] the need for judicial intervention, either by inducing voluntary implementation of the measures specified therein, or by triggering a process of consultation between the agency and the alleged violator that produces a mutually acceptable alternative resolution.” Id. at 13. The Government further argues that communications such as compliance orders or warning letters provide a benefit similar to that found in settings where administrative exhaustion is required because agencies are given the “opportunity to correct their own mistakes and to refine their views without the need for judicial intervention.” Id. at 22.

The Government’s position is that compliance orders are neither entitled to pre-enforcement review nor unlawful merely because they present the “Hobson’s choice” of complying with an agency with questionable jurisdiction demands or do nothing and wait to challenge the agency’s jurisdiction in an agency brought enforcement order the face of mounting penalties. Id. at 22. Instead, the Government argues that “from the regulated party’s perspective, such communications give recipients an opportunity to conform their conduct to the agencies guidance before being subjected to an enforcement action.” Id.

            Given the broad purposes of environmental regulation in general and the CWA in particular, compliance orders allow the agency to achieve a quicker resolution to situations of ongoing environmental damages. The Government believes that if pre-enforcement judicial review is allowed for these communications their effectiveness at achieving voluntary compliance would be substantially weakened and resources of the administrative agency would be drained in litigating cases of minor offenders. Thus, by preventing pre-enforcement judicial review and by allowing agencies to “interact[] with regulated entities outside of more formal administrative-adjudication or judicial-enforcement settings, agencies can conserve resources and prioritize their enforcement efforts to respond to the most sever violations.” Id. at 22.

3. The Court’s Questioning of the Government’s Position at Oral Argument

At oral argument, the Justices focused on whether, based on Abbott Laboratories and the presumption of reviewability, challenges to the jurisdiction of an agency issuance of a compliance order require pre-enforcement review. In their questioning, the Justices appeared to clearly distinguish between warning letters, which have long been considered non-final agency action and not entitled to judicial review, and the compliance orders issued by the EPA. In particular, the Justices appeared interested in the language of the compliance order itself and the back and forth between the agency and the alleged violator before and after the issuance of a compliance order. Additionally, the Justices focused on the “Hobson’s choice” of either voluntarily complying with an order that the issuing agency may not have the jurisdiction to issue or to not comply, face mounting fines, and wait to assert a jurisdictional challenge at some undetermined time as the agency so chooses to bring an enforcement action. Transcript of Oral Argument, at 42-53, Sackett v. Environmental Protection Agency, (No. 10-1062).

During oral argument, Justice Breyer’s main concern as to whether the compliance order could be considered non-final turned on the language in the order suggesting that alleged violators should contact the EPA in informal discussions regarding the terms and requirements of the order itself as well as any factual allegations that the Sacketts believed to be false. In particular, Justice Breyer appeared concerned with whether such post-issuance communications actually result in the agency changing its position:

Justice Breyer: Is there anything you’ve got by – I mean, I’m – You’ve got me now into the area, we are applying the APA and the question is Abbott Labs and is it final. Well, here there doesn’t seem anything more for the agency to do, and here the person who the order is directed against is being hurt a lot. So the only thing I – left in my mind here is the order itself does say: Come in and talk to us about this. Which may suggest it isn’t final. So do you have any information on that point? That is, have you looked up or has the APA told you that really when we issue these things, people come in and modify them at X percent of the time.

Id. at 45 ln. 9-21. In response the Government argued that although only 3 percent of all compliance orders ever lead to enforcement actions being taken, the Government did not have any statistics as to whether this was because of informal communications between the alleged violator and the agency or whether it was merely because alleged violators have chosen to voluntarily comply. Id. at 46.

However, when pressed by Justice Kagan as to whether post-issuance communications normally result in modifications, the Government conceded that it was unlikely:

Justice Kagan: Mr. Stewart, you suggested that, that some communication occurs before this compliance order [is issued]. And my guess would be that most of the back and forth between the agency and the person does happen before the compliance order rather than after.

And the notion that the person can come in after the compliance order and say you were wrong, well they can, but they can do that with respect to any administrative action. So, am I wrong about that? That really the back and forth here takes place before the compliance order issues rather than after?

Mr. Stewart: I think you are right as a matter of typical agency practice that there would be an invitation well before the compliance order was issued to come in and give your side of the story, and you are probably right that if we got to the point where a compliance order was issued, then the likelihood that further communications would sway the agency substantially might be reduced. So I would take your point there –

Id. at 46 ln 15-25 – 47 ln. 1-10.

Of particular note was the exchange between Justice Scalia and the Government regarding the jurisdictional challenges to compliance orders. During the Government’s argument Justice Scalia posed the question of whether a person can “usually obtain a declaratory judgment if prosecution is threatened and you think that there is no basis for it, and you can’t – you are not – you’re not compelled to just stand there and wait for the prosecutor to, to drop the hammer?” Id. at 48.  In response, the Government argued that, although declaratory judgment actions are available in such situations, because the Government’s position is that compliance orders are “informal warnings,” extending a right to a declaratory judgment to compliance orders “would cause a huge upheaval in the practices of many agencies. . . .” Id. at 49.

However, the Justices appeared to reject this rationale and further pressed the issue of whether a compliance order should be considered “final agency action” with Justice Breyer commenting: “You are talking about a huge upheaval. My honest impression is that it is the Government here that is fighting 75 years of practice because – because the issue is the Abbott Labs issue of finality. And of course a warning isn’t reviewable. But this seems to meet the test where that fails.” Id. at 49 ln. 19-23.

6. Analysis and Conclusion

Based upon the totality of information before the Court, the arguments made by the Sacketts that compliance orders are “final agency action” entitled to pre-enforcement review appears to be strong. The Court pressed the Government on the issue of whether post-issuance discussions between alleged violators and the agency actually effect a change of the agency’s position. Additionally, the Government conceded in both its brief and at oral argument that the failure of alleged violators of the CWA to follow the remediation plan outlined in a compliance order potentially subjects the violator to additional penalties above and beyond the penalties for violating the CWA itself.

Moreover, it appears that the Government’s strongest argument that compliance orders are not entitled to pre-enforcement review is the “huge upheaval” such a ruling would level on the day-to-day operations of administrative agencies. As explained above, the Government has argued that a decision which classifies compliance orders as “final” could result in increased litigation and decreased voluntary compliance with the result being a more litigious and less effective administrative state.

However, even if the Court does agree with the Sacketts and finds that compliance order are in fact “final” thus entitling recipients to pre-enforcement judicial review, the practical consequences will not likely be as harsh as the Government fears. First, the Court in oral argument appears to have reaffirmed that less formal communications such as warning letters are properly considered non-final agency action to which no pre-enforcement review is required. Other agencies successfully use warning letters to achieve the same goals of voluntary compliance and administrative efficiency. Additionally, despite the actual and incidental consequences which commonly plague recipients who must defend themselves against such letters, the Court consistently denies pre-enforcement review for such agency actions. Furthermore, the Sacketts have not challenged any such less formal actions.

Additionally, the CWA provides for other forms of enforcement for violations, such as a civil enforcement action without the issuance of a compliance order. Thus, should the Supreme Court find that compliance orders are “final,” the most likely “upheaval” would be the seismic shift towards the increased use by agencies of warning letters followed by civil enforcement actions in cases of noncompliance.

Moreover, as explained above, judicial review of a “final agency action” pursuant to the APA can always be expressly superseded by an agency’s enabling statute. As such, should the Supreme Court decide favorably for the Sacketts, and mark a trend towards easier access to judicial review of agency actions, there is no reason to think that federal administrative agencies would not lobby Congress for statutory reforms to expressly preclude judicial review of compliance orders.

The debate as to what exactly is “final agency action” has been ongoing for decades. However, until such a time that the Court is willing to take a more concrete and expansive view of what qualifies under Abbott Laboratories and Bennett as “final agency action,” particularly a view based on the real life and practical consequences of the issuance of warning letters, administrative law practitioners, and their clients, will continue to be faced with a Hobson’s choice and uncertainty when responding to such non-final actions. In the end, the Court’s ultimate decision as to whether a compliance order is considered “final agency action” which entitles recipients to pre-enforcement judicial review may be more of a moral victory for administrative law attorneys and less of a game-changer in litigation against federal agencies.

On December 20, 2011, the U.S. Food and Drug Administration (FDA) published guidance entitled “Enforcement Policy for Premarket Notification Requirements for Certain In Vitro Diagnostic and Radiology Devices.” The guidance exempts certain Class I and Class II in vitro and radiology devices from premarket notification (510(k)) requirements. A complete list of the specified devices can be found in the guidance document. The FDA received five public comments on the draft guidance that was published on July 12, 2011. Please see our previous report for more information regarding the draft guidance document.

The FDA classifies medical devices based on perceived risk using a 3-tier system. Class I medical devices have the lowest perceived risk, and generally do not require a formal FDA review before marketing. Class II medical devices have a higher perceived risk than Class I, and require the submission of a 510(k) or premarket notification application (PMA) to establish the safety and effectiveness of the device. Class III medical devices have the highest perceived risk, and require the submission of a PMA. The Agency believes the safety and effectiveness of the newly exempt devices is sufficiently well established and a 510(k) review is not necessary.

The guidance states that the FDA intends to propose an amendment to the classification regulations to exempt the specified Class I devices from the 510(k) requirements that apply pursuant to section 510(I) of the Federal Food, Drug, and Cosmetic Act. In addition, the FDA intends to propose the downclassification and exemption from the 510(k) requirements for the specified Class II devices. The FDA states that the in vitro and radiology Class II devices now receiving a 510(k) exemption are sufficiently well-established and have sufficiently controlled the risks that are necessary to assure the safety and effectiveness; thus, those devices can now be reclassified as Class I. In the interim period while the FDA finalizes such exemption and downclassification, the FDA intends to exercise enforcement discretion with regard to 510(k) submission requirements for the devices listed in the guidance.

The FDA’s review of medical devices through the 510(k) process is complex. Fuerst Ittleman has extensive experience successfully navigating medical devices through FDA review. For more information on FDA’s review of medical devices, please contact us at contact@fuerstlaw.com.

Last month, the U.S. Food and Drug Administration (FDA) issued a draft guidance on the issue of responding to unsolicited requests for information about off-label use of prescription drugs and medical devices. (For the full text of the draft guidance, click here.) As we previously reported here, manufacturers and distributors of medical drugs and devices have pushed the FDA to release more concrete guidance on communications pertaining to off-label use, especially in light of the rapid growth of the internet and other social media tools and technologies. Off-label use occurs when a healthcare professional prescribes a product for a use or treatment indication not included in the product’s approved labeling. This draft guidance is aimed to specifically address solicitations for information received by product manufacturers regarding off-label indications or conditions of use.

The draft guidance clarifies the difference between unsolicited and solicited requests, and also differentiates between requests that are public and non-public. Solicited requests are requests for information that are “prompted in any way by a manufacturer or its representatives.” According to the draft guidance, the FDA may consider a solicited request as evidence of a firm’s intent to support or market a drug or medical device for a condition or use that has not been approved by the FDA.

Unsolicited requests, on the other hand, are “initiated by persons or entities that are completely independent of the relevant firm.” A public unsolicited request is made in a public forum. A question about off-label use of a specific product during a live presentation is one example of a public unsolicited request. A non-public unsolicited request is directed privately to a firm using a one-on-one communication approach. An example of a non-public unsolicited request is a call or e-mail for off-label use to medical information staff at a firm.

The FDA remains committed to its long-standing position that “firms can respond to unsolicited requests for information about FDA-regulated medical products by providing truthful, balanced, non-misleading, and non-promotional scientific or medical information that is responsive to the specific request, even if responding to the request requires a firm to provide information on unapproved or uncleared indications or conditions of use.” For any response made to a non-public unsolicited request for off-label information, the FDA recommends that a firm provide information only to the individual making the request. In addition, the information contained in the response should conform to the following:

- Information should be tailored to answer only the specific question(s) asked;

- Information should be truthful, non-misleading, accurate, and balanced;

- Information should be scientific in nature; and

- Information should be generated by medical or scientific personnel, independent from sales or marketing departments. 

In addition, the distributed information should be accompanied with a copy of the FDA-required labeling, a statement disclosing the indications for which the FDA approved or cleared the product, and a statement notifying the recipient that the FDA has not approved or cleared the product as safe and effective for use. If a firm’s response conforms to the FDA’s new draft guidance, the FDA would not use the response as evidence of the firm’s intent to unlawfully support or market the product for an unapproved or uncleared use.

The FDA also addressed responses to public unsolicited requests for off-label information made through electronic media. Although the FDA recognizes that addressing off-label use to the general public can result in potential benefits to the public health, the agency continues to have significant concerns about broad, public responses. First, the FDA is concerned that product information posted on websites or other public forums may provide information about off-label use to individuals who have not requested such information, and would thus promote a product for a use or condition not approved or cleared by the FDA. Secondly, the FDA is concerned that the information posted on websites or other public forums would be available for an indefinite amount of time, and could pose a serious risk to public safety if new scientific advances render the posted information outdated or obsolete. Based on these concerns, the FDA recommends that firms only respond to requests pertaining specifically to its own named product. Further, firms should omit any information pertaining to off-label usage, should provide the individual requesting information with the firm’s contact information, and should recommend that the individual contact a medical/scientific representative with the specific unsolicited request to obtain more information. Any public response should disclose a representative’s relationship to the firm and should not be promotional in nature. 

In addition to this draft guidance, the FDA also issued a notice in the Federal Register on December 28, 2011, announcing the comment-period for scientific exchange. (For the full text of this notice, please click here.) At present, FDA regulations do not restrict the promotion of the “exchange of scientific information” regarding an investigational drug or device. The FDA, however, has yet to define the scope of scientific exchange. This notice, a direct response to a Citizen Petition jointly filed by several major pharmaceutical manufacturers, seeks comments on all aspects of scientific exchange communications and activities related to off-label uses of marketed drugs, biologics, and devices and use of products that are not yet legally marketed.

Specifically, the FDA seeks comments on how “scientific exchange” should be defined, what types of activities fall under scientific exchange, how to determine the players involved in scientific exchange, how it should be distinguished from promotion, and how the FDA should treat scientific exchange for products that have not been approved or cleared by the FDA. These comments will help the FDA to evaluate its policies on off-label uses and possible pre-approval communications. The FDA will accept comments through March 27, 2012.

Fuerst Ittleman will continue to monitor any developments in the FDA’s regulation of off-label uses for medical drugs and devices. For more information, please contact us at contact@fuerstlaw.com.

On January 9, 2012, the IRS  reopened the Offshore Voluntary Disclosure Program (OVDP) following continued interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

The 2012 program will be open for an indefinite period.  Unlike the 2009 and 2011 programs, the 2012 program contains is no set deadline for people to apply.  However, the terms of the program are subject to  change by the IRS at any time with no advanced warning.

For the 2012 program, the penalty for failing to disclose their foreign bank accounts by failing to file a Form TD 90.22-1 is 27.5 percent of the highest aggregate balance during the eight full tax years prior to the disclosure. That is a small (2.5%) increase from 25 percent in the 2011 program. However, certain taxpayers will be eligible for 5% or 12.5% penalties that were available under the 2009 and 2011 programs. 

Like the 2009 program, participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties (usually 20% of the additional tax owed, which is separate and apart from the Bank Secrecy Act penalty of 27.5%). 

The announcement on the IRS website is available here.

The attorneys at Fuerst Ittleman have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRS’s voluntary disclosure program.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

On December 31, 2011, President Barack Obama signed into law the National Defense Authorization Act. Among the various provisions included within the $662 billion defense spending bill are new sanctions that focus on foreign financial institutions which engage in financial transactions with the Central Bank of Iran and those which engage in financial transactions for the purposes of purchasing oil and petroleum products. However, because the new sanction provisions provide for several exceptions and waivers it is uncertain what effect, if any, they will have on foreign financial institutions engaging in business in the United States.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC. General information regarding economic sanctions against Iran can be found at OFAC’s website here.

The new sanctions go further than those previously in place by prohibiting the opening of any correspondent account or payable-through account in the US by foreign financial institutions which “knowingly conducted or facilitated any significant financial transactions with the Central Bank of Iran.” Additionally, the new sanctions “shall apply with respect to a foreign financial institution owned or controlled by government of a foreign country, including a central bank of a foreign country, only insofar as it engages in a financial transaction for the sale or purchase of petroleum or petroleum products to or from Iran.” The practical effect of these sanctions would be to prohibit many countries, including allies of the US, from purchasing petroleum from Iran.

The broad language of the Act originally raised fears that the sanctions would drive oil prices up and alienate US allies that currently depend upon Iran for its oil supplies. However, Congress and the White House hoped to quash those fears by giving the President flexibility in his implementation of the sanctions program.

First, the statute provides that the sanctions scheme will not take effect until the President determines “that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.” The President must make an initial determination within 90 days of the enactment of the Act and every 180 days thereafter. As a result, the President has the flexibility of delaying the ultimate implementation of the Act.

Second, once the sanctions take effect, the Act gives the President the authority to grant exemptions to foreign financial institutions that are located in countries which “significantly reduced its volume of crude oil purchases from Iran” in the prior 180 days. Finally, the Act provides that the President may waive the imposition of sanctions on a foreign financial institution “if the President determines that such a waiver is in the national security interest of the United States.”

Given the broad discretionary powers of the President in implementing the new Iranian sanction scheme, it is possible that foreign financial institutions may see little to no changes in their business dealings with Iran in the near future. Fuerst Ittleman, PL will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fuerstlaw.com