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 September 13, 2011, the United States District Court for the Middle District of Pennsylvania issued its decision finding that the individual mandate provision of the Patient Protection and Affordable Care Act (PPACA) exceeded Congress’s authority under the Commerce Clause and therefore is unconstitutional. As discussed in a recent Forbes article, this decision is merely one in a long line of District and Circuit opinions on the constitutionality of the PPACA. Ultimately, the individual mandate provision the PPACA’s constitutionality will turn on the interpretation of two bedrocks of Commerce Clause precedent, Wickard v. Filburn, 317 U.S. 111 (1942) and Gonzales v. Raich, 545 U.S. 1 (2005). A copy of the Forbes article can be read here.

Generally speaking, Congress’s power under the Commerce Clause extends to three broad categories. First, Congress may regulate the channels of interstate commerce. Second, Congress may regulate and protect the instrumentalities of interstate commerce. Finally, Congress may regulate activities that have a substantial effect on interstate commerce. See United States v. Lopez, 514 U.S. 549, 558 (1995). It is within this third category that Congress’s Commerce Clause authority is pressed to its “outer limits” and is often the subject of judicial challenge. See Id. at 557. Such is the case with the PPACA.

In Wickard, the Supreme Court held that Congress could regulate the production of home grown wheat meant solely for personal use under its Commerce Clause power. In so holding, the Court found that although Filburn’s activities were entirely local, such activities, when taken in the aggregate, had a substantial effect on the national market for wheat. In the annals of Commerce Clause jurisprudence, Wickard v. Filburn represents the high-water mark for Congressional power.

More than 60 years later,    in Gonzales v. Raich, the Supreme Court upheld Congress’s authority under the Commerce Clause to prohibit the possession of home-grown marijuana intended solely for personal use, even when such possession was allowed by state law. Similar to the Court’s rationale in Wickard, the Raich Court found that the production of marijuana substantially affects supply and demand in the national market; therefore the regulation was “squarely within Congress’ commerce power.” The Court went on to hold that “Congress can regulate purely intrastate activity that is not itself ‘commercial’ . . . if it concludes that failure to regulate that class of activity would undercut the regulation of the interstate market in that commodity.” Raich, at 18. Both Raich and Wickard stand for an expansive and broad reading of Congress’s power under the Commerce Clause.

In finding that the PPACA’s individual mandate was unconstitutional, Judge Conner distinguished the mandate from the economic regulations at issue in Wickard and Raich. The Court found that unlike the laws at issue in Wickard  and Raich, which allowed people to not engage in regulated conduct and thereby stay beyond the reach of the statute, PPACA’s mandate requires people to become active participants in the health insurance market regardless of whether heath services will be used. As explained by Judge Conner:

Congress can reach the personal production of wheat – a clear activity affecting the interstate market – in an effort to stabilize the wheat market. Congress cannot, however, in order to stabilize that market, force the purchase of wheat by individuals who decide to forego wheat or wheat products, even if Congress legitimately determines that an individual’s decision not to purchase wheat or wheat products inhibits the government’s ability to regulate or stabilize the wheat market. Similarly, Congress may lawfully regulate the interstate market for health insurance and health services, but Congress cannot require individuals who choose not to purchase health insurance or individuals who are not currently seeking or receiving services in the health care market to purchase health insurance in order to stabilize the health insurance market. Congress cannot mandate or regulate in anticipation of conduct that may or may not occur.

Bachman v. U.S. Department of Health and Human Service, et. al., at 36.

The Court went on to find that an uninsured individual’s conduct has no effect on conduct Congress sought to regulate under the Commerce Clause until such time that: 1) the individual obtains health care services; and 2) the individual does not pay for the services received. The Court stated that “the mere status of being without health insurance, in and of itself, has absolutely no impact on interstate commerce . . . at least not any more so than the status of being without any particular good or service.” Id. at 38. As a result, “current Commerce Clause precedent does not permit Congress to reach a pre-transaction stage in anticipation of participation in a market. . . .”Id. at 40.

Ultimately, it is likely that the final decision as to the constitutionality of the individual mandate of the PPACA will be made by the Supreme Court. Such a decision has the potential to reshape Congress’s power to regulate individuals and businesses under the Commerce Clause regardless of its outcome. Fuerst Ittleman will continue to monitor the litigation challenging the PPACA and its effects on Commerce Clause jurisprudence. For more information, please contact us at contact@fuerstlaw.com.

On August 9, 2011, the U.S. Department of Agriculture’s (USDA) Animal and Plant Health Inspection Service (APHIS) issued a proposed rule to establish a mandatory livestock tracking system in order to improve the traceability of U.S. livestock. The proposed rule would require farmers and ranchers to affix unique identification numbers to animals transported interstate. The rule seeks to establish an effective, transparent animal disease traceability system without additional burden on farmers and ranchers. The tracking system would allow federal officials to quickly isolate diseased animals in the event of an outbreak.

In 2004, the USDA began developing a framework for animal disease traceability through the implementation of the National Animal Identification System (NAIS). NAIS is a voluntary registration system established to trace the source of an animal disease within 48 hours. However, in 2009, the USDA estimated that only 36 percent of farmers and ranchers participated in the NAIS. In order to improve traceability, APHIS launched a series of efforts to assess the acceptance of an animal disease traceability system which lead to the development of the proposed rule.   

The proposed rule requires that livestock moved interstate be officially identified and accompanied by an interstate certificate of veterinary inspection or other documentation, such as owner-shipper statements or brand certificates, unless exempt. Official forms of identification include tattoos, metal eartags, or brands with certain exceptions. The proposed rule also allows for States and tribes to develop alternative forms of identification. Livestock subject to the identification requirements include cattle, bison, sheep, goats, swine, horses, captive cervids, and poultry.

The USDA is confident that the new system will be able to trace the source of an animal disease within a few days of an outbreak. Advocates say the implementation of the new mandatory system would be a significant improvement compared to USDA bovine tuberculosis investigations averaging 150-days to trace the source of an outbreak.  

The USDA is currently seeking public comment on the proposed rule for a mandatory livestock tracking system. The deadline for submission is November 9, 2011. Fuerst Ittleman will continue to monitor the development of the USDA APHIS’s new proposed rule. For more information, please contact us at contact@fuerstlaw.com.

In 2004, the U.S. Department of Justice (DOJ) Office of the Inspector General (OIG) began investigating Janssen Pharmaceutica Inc. (Janssen), a subsidiary of Johnson & Johnson (J&J), concerning the marketing practices for Risperdal, an antipsychotic prescription drug. Janssen allegedly promoted Risperdal for unapproved off-label uses, a misdemeanor criminal offense. Pursuant to the Federal Food, Drug, and Cosmetic Act (FD&C Act) manufacturers are prohibited from directly marketing a drug for a use other than the U.S. Food and Drug Administration (FDA) approved indication. 21 U.S.C. §§301-97. The FDA approved Risperdal for the treatment of schizophrenia in adults and adolescents. Allegations suggest that Janssen also promoted Risperdal for the treatment of dementia and anxiety disorders. See our previous report here for more information regarding misdemeanor criminal charges resulting from off-label promotion.

On August, 9, 2011, in a quarterly report filed with the Securities and Exchange Commission (SEC), J&J announced efforts to resolve the criminal penalties related to Risperdal marketing. J&J stated that an agreement had been reached with the DOJ regarding the key issues; however, the settlement has yet to be finalized. J&J adjusted its financial statements for the second quarter of 2011 to reflect the financial component of the proposed criminal settlement. 

In addition, J&J announced the settlement of a tolling agreement with approximately 40 states. The tolling agreement allows for the delay of the statute of limitations in order to provide J&J an opportunity negotiate civil claims with states before a state is forced to file a complaint to preserve their rights. J&J states litigation is likely if negotiated resolutions cannot be reached in regards to the civil litigation relating to the allegations of off-label promotion of Risperdal. Pursuant to the False Claims Act, companies who knowingly represent a false approval are subject to civil penalties. 31 U.S.C. § 3729. 

J&J claims that the resolution of the criminal and civil matters is not expected to have a material adverse effect on the Company’s financial position, although the resolution in any reporting period could have a material impact on the Company’s results of operations and cash flows for that period.

For more information regarding the drug approval process or for any questions regarding how your company can maintain regulatory compliance, please contact us at contact@fuerstlaw.com.

On July 26, 2011, the U.S. Food and Drug Administration (FDA) issued draft guidance that clarifies when changes or modifications to a previously cleared 510(k) device necessitate a new premarket submission. In order to introduce a medical device into the interstate market, the FDA must either approve a premarket application (PMA) or clear a 510(k) premarket notification. Lower-risk devices are often submitted through the 510(k) premarket notification process, whereby the FDA “clears” the device for sale if it is found to be substantially equivalent to a previously cleared predicate device. The FDA announced that an additional 510(k) notification is required in instances where a change or modification to a cleared device would “significantly affect the product’s safety or effectiveness” or “constitute a major change to the intended use of the device.”

The new draft guidance outlines when an additional 510(k) notification is required for compliance with FDA regulations. The guidance suggests that manufacturers should compare the modified device to the most recently cleared version of the device to determine whether the modification could significantly affect its safety or effectiveness. In addition, manufacturers should assess individual changes to a device to determine whether, if at all, any of those changes constitutes a major change to the product’s safety, effectiveness, or intended use. A manufacturer should clearly document whether it believes the change does or does not require submission of an additional 510(k) notification, as well as the reason for that decision.

Furthermore, the FDA provides specific guidance to help manufacturers determine whether to submit an additional 510(k) notification for changes or modifications to the manufacturing process, product labeling, technology or engineering, or material type. This guidance also instructs manufacturers to weigh whether bench testing or simulations are sufficient to assess the safety or effectiveness of a modified device. Absent clear evidence of safety or effectiveness from these types of testing, the FDA suggests that manufacturers conduct clinical data using human subjects to validate the safety of these products.

This guidance document is part of the FDA’s Plan of Action for Implementation of 510(k) and Science Recommendations, a series of action items launched earlier this year intended to “enhance predictability, consistency, and transparency of the FDA’s premarket review programs.” For more information about the FDA’s Plan of Action, see our previous post here.

Fuerst Ittleman is well-equipped to assist members of FDA-regulated industry navigate the laws and regulations applicable to medical devices. For more information about the current regulatory framework surrounding medical devices, please contact us at contact@fuerstlaw.com.

Earlier this week, a pair of whistleblowers filed an amended complaint in United States District Court in Atlanta alleging that DaVita, a kidney dialysis clinic, intentionally wasted medicine to collect Medicare drug overpayments. The plaintiffs claim that DaVita changed how it dispensed dialysis medication in order to inflate their Medicare reimbursement return. The original complaint, which was filed in October of 2007, was unsealed this past week. After two years of investigating the claim, the federal government decided in April that it did not intend to join the lawsuit.

DaVita, the second largest independent provider of dialysis services for patients with chronic kidney failure, is responsible for treating nearly one-third of the nation’s dialysis patients. The complaint against DaVita alleges that the company designed multiple sets of conflicting internal protocols and “dosing grids” that dictated how each drug should be administered to patients, based on the cost of the drug and Medicare reimbursement. Prior to January 2011, Medicare paid dialysis centers separately for dialysis procedures and medication. Dialysis centers often made a profit from these Medicare reimbursements because Medicare reimbursed more than the centers paid for the medicine. Earlier this year, however, Medicare changed its payment plan in an attempt to curb overuse of dialysis drugs. In January, Medicare transitioned to a bundled-payment system, where payments are fixed per treatment and include the cost of drugs. Under this system, Medicare reimburses dialysis centers for the total amount of medicine contained in the vial, not the amount of medicine administered to the patient

In response to this new reimbursement system, DaVita adjusted the way it ordered and administered medication. Under the old system, for example, DaVita’s dialysis treatment consisted of a six-microgram dose, which was administered in three vials of two-micrograms each. After Medicare shifted to the bundled-payment system, DaVita used the same six-microgram therapy program but administered the therapy from a single 10-microgram vial instead. According to the whistleblowers, the excess four-micrograms were not used in therapy and were simply wasted. The dialysis treatment remained the same, except DaVita charged Medicare for four extra micrograms of medication it did not actually administer to patients. A similar sequence of events was reported for DaVita’s administration of Venofer, where approximately 75 milligrams of medication was wasted each therapy session. These examples are contrasted with DaVita’s use of Epogen, an anemia drug that is paid for based on the amount actually used, not the amount per vial. The lawsuit alleges that DaVita did not waste any Epogen medication. The allegations against DaVita have been supported by other physicians and nurses working in dialysis clinics around the nation.

DaVita denies that it overused pharmaceuticals in return for financial incentives. A representative of DaVita claims that the changes in its administration of dialysis therapy have been dictated by physicians, not DaVita’s own drug protocol.

Fuerst Ittleman will continue to monitor the progress of this whistleblower lawsuit For additional information, please contact us at contact@fuerstlaw.com.

On June 30, 2011, Fuerst Ittleman lawyer Robert Becerra gave a presentation on “Criminal Prosecution in the International Trade Arena: Conducting Business While Staying Out of Jail” to the National Association of Purchasing Management, South Florida Chapter and the Association of Operations Management. The presentation was featured at the National Association of Purchasing Management’s installation dinner for its officers for the 2011-2012 year. Robert Becerra concentrates his practice on white collar criminal defense, grand jury investigations, regulatory proceedings, civil forfeitures, corporate compliance and internal investigations, among other areas. He is “AV” rated by the Martindale Hubbell Law Directory, rated a “Top Lawyer” by the South Florida Legal Guide, and as “Superb” by the lawyer rating website www.Avvo.com.

On April 26, 2011, the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury announced that it had reached a settlement with HCC Insurance Holdings, Inc. (“HCC”) over alleged violations of the Iranian Transactions Regulations (“ITR”). The 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 settlement agreement and alleged violations of the IRT highlight the breadth and complexity of the sanctions on trade with Iran. OFAC alleged that HCC, a wholly-owned insurance subsidiary of Houston Casualty Company, violated 31 C.F.R. §§ 560.206 and 560.208 of the IRT by participating in the hull portion of a hull and liability aviation insurance policy that covered commercial flights operating in Iran from April 2005 to April 2006. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person.

More specifically, OFAC alleged the violations occurred when: 1) a foreign insurance broker insured a foreign-owned commercial airline with a hull and liability policy of which HCC was a part; 2) the foreign-owned commercial airliner then leased aircraft covered by this policy to an air charter company that operated in Iran. As a result of this arraignment, HCC received $113,921 in premiums. HCC voluntarily disclosed the violation and OFAC announced that HCC paid $38,448 in penalties for its violations. According to OFAC enforcement guidelines, the base penalty associated with such a violation is $56,960. However, this penalty was lowered because HCC cooperated with OFAC in its investigation and it had not been subject to prior OFAC penalties or administrative actions. A copy of OFAC’s announcement can be read here.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fuerstlaw.com.

On February 28, 2011, in Michigan v. Byrant, Justice Sotomayor writing for the United States Supreme Court held that a victim’s identification and description of the defendant and the location of the alleged crime were not testimonial statements because they had a “primary purpose . . . to enable police assistance to meet an on-going emergency.” Citing Davis v. Washington, 547 U. S., at 822. Therefore, the use of the identification at the Defendant’s trial did not violate the Confrontation Clause.

To make the “primary purpose” determination, the a criminal court must objectively evaluate the circumstances in which the out-of-court statement was given to the police and the parties’ statements and actions. The primary purpose inquiry is an objective analysis. The existence of an “ongoing emergency” at the time of the encounter is among the most important circumstances informing the interrogation’s “primary purpose.”

However Justice Scalia wrote a blistering dissent rejecting the majority’s opinion. The highlights of the dissent include the following passages:

Today’s tale—a story of five officers conducting successive examinations of a dying man with the primary purpose, not of obtaining and preserving his testimony regarding his killer, but of protecting him, them, and others from a murderer somewhere on the loose—is so transparently false that professing to believe it demeans this institution. But reaching a patently incorrect conclusion on the facts is a relatively benign judicial mischief; it affects, after all, only the case at hand. In its vain attempt to make the incredible plausible, however—or perhaps as an intended second goal—today’s opinion distorts our Confrontation Clause jurisprudence and leaves it in a shambles. Instead of clarifying the law, the Court makes itself the obfuscator of last resort.

The only virtue of the Court’s approach (if it can be misnamed a virtue) is that it leaves judges free to reach the “fairest” result under the totality of the circumstances. If the dastardly police trick a declarant into giving an incriminating statement against a sympathetic defendant, a court can focus on the police’s intent and declare the statement testimonial. If the defendant “deserves” to go to jail, then a court can focus on whatever perspective is necessary to declare damning hearsay nontestimonial. And when all else fails, a court can mix-and-match perspectives to reach its desired outcome. Unfortunately, under this malleable approach “the guarantee of confrontation is no guarantee at all.”

The full opinion can be found here: http://www.supremecourt.gov/opinions/10pdf/09-150.pdf

The attorneys at Fuerst Ittleman have extensive experience handling white collar criminal cases at both the trial and the appellate level. You can reach an attorney by emailing us at contact@fuerstlaw.com.

At its board meeting on February 23, 2011, the Financial Accounting Standards Board (FASB) stated that it plans to issue its final guidance on Troubled Debt Restructurings (TDRs) by March 31, 2011.

At the present time there are no clear guidelines to assist creditors in determining whether a loan or other debt modification meets the criteria to be considered a TDR, both for debt recording and TDR disclosure purposes.  In announcing the guidance initiative last year, FASB Acting Chairman Leslie Seidman stated that the guidance should “result in more consistent application of GAAP for debt restructurings.”

On the basis of public comments and Board deliberations to the guidance initiative, FASB recommended earlier this year that the final guidance will feature:

• a specification that the absence of a market rate for a loan with risks similar to the restructured loan is an indicator of a troubled debt restructuring, but not a determinative factor
• >assessment of whether a restructuring reaches the level of a TDR should consider all of the modified terms of the restructuring, including any additional collateral or guarantees
• >insignificant delays in cash flows are a factor to consider when determining whether a concession has been granted
• >for purposes of determining whether a borrower is experiencing financial difficulty, creditors should consider whether default is “probable in the foreseeable future.”

At the February 23rd Board meeting, the FASB discussed many facets of TDRs including a lengthy analysis of the concept of “insignificant delays in cash flows,” in the context of restructurings.  The Board also discussed the transition provisions and effective date for the new guidance.

With respect to the latter issue, the FASB affirmed that the final guidance on TDRs will be prepared by March 31 of this year.  The Board also stated that the interim guidance proposed in the October 13, 2010 Exposure Draft would be effective on a prospective basis for interim and annual periods ending after June 15, 2011, with retrospective application permitted.