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On June 23, 2017, President Trump signed legislation that is intended to protect whistleblowers who report problems at the Department of Veterans Affairs ("VA"), and improve employee accountability for misbehavior and abusive conduct. In April of this year, the president signed an executive order that created the Office of Accountability and Whistleblower Protection ("OAWP") within the VA to investigate allegations of misconduct – including retaliation against whistleblowing employees who reported abuses — and identify systemic barriers that have prevented senior VA officials from addressing such problems, including with disciplinary action.  At the time of the executive order, VA Secretary David Shulkin told reporters that “ ccountability is an important issue to us at VA and something that we’re focusing on to make sure that we have employees who work and are committed to the mission of serving our veterans, and when we find employees that have deviated from these values, we want to make sure that we can move them outside of VA and not have them working at VA.” The bipartisan legislation, the VA Accountability and Whistleblower Protection Act of 2017, makes the OAWP permanent. The Act gives the VA Secretary more authority to fire misbehaving or underperforming employees, shorten the appeals process for that firing, prohibits employees from being paid while they pursue the appeals process, and revokes bonuses from underperforming staffers and, in certain cases, reduces the pensions of executive-level employees who are disciplined. It also includes new protections against retaliation for employees  who file complaints with the VA general counsel's office ( i.e. , whistleblow) and shortens the process of hiring new employees to fill a workforce shortage at the VA.    The Act marks the second time Congress has focused on changing the disciplinary process at the VA. In 2014, Congress tried to prevent senior executives from appealing disciplinary measures at the VA to the Merit Systems Protection Board in the Veterans Access, Choice and Accountability Act. However, the Court of Appeals for the Federal Circuit ruled that the act was unconstitutional because it violated the Constitution’s appointments clause. Some observers believe that the president is fulfilling a campaign promise to veterans. On the campaign trail, the president called the VA, the government’s second-largest department, the “most corrupt” and “most incompetently run agency in the United States.” At the signing ceremony for the new law, the president spoke about the VA wait time scandal in 2014 that saw veterans, who had been put on secret wait lists by some VA workers, die while waiting for appointments for medical exams. "What happened was a national disgrace, and yet some of the employees involved in these scandals remained on the payrolls," Trump said. "Today, we are finally changing those laws." Proponents of the measure believe the legislation will help to usher in a new era of accountability and integrity at the VA and place greater emphasis on patient outcomes. Although public employee unions opposed the measure, the law had overwhelming bipartisan support in Congress.   Since the 2014 scandal, the VA has been under a microscope from veterans organizations, Congress, and the public. This increased focus has revealed the existence of a significant number of misbehaving VA employees, as well as insufficient laws and policies in place to reprimand or remove them for violating ethical or legal standards. "There's nothing more demoralizing to our workforce and to our veterans than when the VA is forced to take employees back who have deviated from those values," Secretary Shulkin said. The new law follows a trend of whistleblower programs that have been implemented by the federal government to address fraud and other wrongdoing. In particular, the SEC, CFTC and the IRS all have whistleblower programs, and whistleblowers who report wrongdoing under the False Claims Act, are entitled to a percentage of any money recovered by the government (as are whistleblowers who report wrongdoing to the foregoing agencies). The question remains, however, whether whistleblowers under the new law will receive financial rewards for reporting wrongdoing at the VA.

Since the early 1900s, tortious interference with contractual relations has been a viable cause of action in New York. E.g. , S.C. Posner Co. v. Jackson , 223 N.Y. 325, 332 (1918); Lamb v. Cheney & Son , 227 N.Y. 418, 421 (1920).  It occurs when a business or individual who is not a party to a contract intentionally disrupts a business relationship formed by a contract. Lama Holding v. Smith Barney , 88 N.Y.2d 413, 424 (1996). Under New York law, an action for interference with a contractual relationship requires the existence of a valid, enforceable contract between the plaintiff and a third party, the defendant’s knowledge of that contract, the defendant’s intentional procurement of the third-party’s breach of the contract without justification, an actual breach of the contract, and damages resulting therefrom. NBT Bancorp v. Fleet/Norstar , 87 N.Y.2d 614, 621 (1996); RLR Realty Corp. v. Duane Reade Inc. , 145 A.D.3d 444, 445 (1st Dept. 2016). When the claim involves a corporate officer alleged to have personally interfered with a contract between the corporation and a third party, the plaintiff must satisfy a heightened pleading standard. Joan Hansen & Co. v. Everlast World’s Boxing Headquarters Corp. , 296 A.D.2d 103, 108-109 (1st Dept. 2002).  Thus, to plead liability for tortious interference with contract against a corporate officer, the complaint must allege that the officer’s acts were either outside the scope of his/her employment, or, if within the scope of employment, that the officer personally profited from the acts in contravention of the corporation’s interests. Id. ; Hoag v. Chancellor , 246 A.D.2d 224, 228 (1st Dept. 1998). Moreover, “ pleading must allege that the acts complained of, whether or not beyond the scope of the defendant’s corporate authority, were performed with malice and were calculated to impair the plaintiff’s business for the personal profit of the defendant.” Joan Hansen & Co. , 296 A.D.2d at 110 (internal citations omitted). TC Tradeco, LLC v. Karmaloop Europe, AG Dismissal for failure to satisfy the heightened pleading standard was at issue in TC Tradeco, LLC v. Karmaloop Europe, AG , 2017 NY Slip Op. 31217(U) , in which Justice Oing of the Supreme Court, New York County, Commercial Division dismissed a case based on, inter alia , a claim of tortious interference with contractual relations by a corporate insider. Background The case arose from a dispute relating to an Inventory Supply Agreement (“ISA”) between Karmaloop, Inc. and certain of its subsidiaries (“Karmaloop”) and the plaintiff TC Tradeco, LLC (“Tradeco”), as well as a dispute relating to a Payment Protection Agreement (“PPA”) between Karmaloop and Capstone Partners, LLC (“Capstone Partners”) and Greg Selkoe. The parties entered into the PPA to provide Tradeco with security after Karmaloop had defaulted on their payment obligations pursuant to the ISA. Defendant Brian Davies (“Davies”) signed the PPA on behalf of Capstone Partners. Defendant Selkoe signed a personal guarantee agreeing to be liable for any breach by Karmaloop of the PPA. The decision at issue involved a motion to serve a second amended complaint in which, among other claims, Tradeco sought damages against Davies for tortious interference with contract. The Court’s Ruling On the tortious interference with contract claim, the Court found that Tradeco failed to satisfy the heightened pleading standard required by the courts: Here, plaintiff has failed to plead sufficient facts to show that Davies acted for personal profit, independent of any benefit bestowed on CRS Capstone as a corporate entity. In its second proposed amended complaint, plaintiff merely alleges that both defendant Capstone Partners and/or Defendant CRS agreed in that it shall not pre-approve or authorize Karmaloop to make any payment to any person or entity if Karmaloop is not then current on any and all sums then owed. Such an allegation, standing alone, is insufficient to subject defendant Davies to a tortious interference claim. Plaintiff’s allegation that Davies personally profited from his procurement of the breach of the does not eliminate the above-noted pleading deficiency. Without more, the proposed pleading is palpably insufficient. Internal quotations and citations omitted. Takeaway As discussed, when seeking to hold corporate officials personally responsible for the company’s breach of contract under a theory of tortious interference with contractual relations, the plaintiff must satisfy “an enhanced pleading standard.” Joan Hansen , 296 A.D.2d at 109. This means that the plaintiff must come to court with facts, not conclusions. Tradeco failed to plead such facts ( i.e. , facts demonstrating that Davies acted for his personal profit, independent of any benefit bestowed on the company), and learned that its failure to plead the facts necessary to establish the elements of a wrongful and intentional interference with a contractual relationship sufficed to dismiss its claim. Id . at 110. TC Tradeco , therefore, stands as a reminder that “conclusory allegations — claims consisting of bare legal conclusions with no factual specificity — are insufficient to survive a motion to dismiss.” Godfrey v Spano , 13 N.Y.3d 358, 373 (2009).

Jimmy Smith is widely considered to have been one of the most influential and accomplished jazz musicians of his time, if not in jazz history. Smith, who died in 2005, revolutionized the use of the Hammond B3 organ in modern jazz, laying the groundwork for generations of jazz musicians to come. Estate of James Oscar Smith v. Cash Money Records, Inc. In 2013, rapper/singer/songwriter Drake released Pound Cake/Paris Morton Music 2 (“Pound Cake”) on his album, Nothing Was the Same . The track included a 35 second sample of the “Jimmy Smith Rap” (the “Rap” or “JSR”), a spoken word narrative that appeared on Smith’s 1982 album Off The Top .  Drake edited the excerpt of the Rap by moving and deleting words; however, he did not add any words to the sample. Approximately one week before Drake released Nothing Was the Same , a music publisher that represents songwriters in negotiating the licensing of copyrights reviewed an advance copy of the album’s credits. The publisher noticed that Drake had secured a license for the recording, but not the composition, of the Rap. Thereafter, the publisher informed Jimmy Smith’s estate (the “Estate”) that Drake was using a portion of the Rap in the Pound Cake track. Two months after Drake released Nothing Was the Same , the Estate sent a cease and desist letter to the defendants, informing them that it had a copyright interest in the Pound Cake track. After the Estate sued the defendants, both parties moved for summary judgment. On May 30, 2017, William H. Pauley III, United States District Court Judge for the Southern District of New York, ruled that, although the case was not ripe for summary judgment on the question of whether the defendants infringed upon the Smith copyright, it was ripe for summary judgment on the issue of fair use. The Court found that Drake’s 35 second use of the Rap was permissible under the fair use doctrine, even though Drake and his record label failed to obtain the publishing rights to the song. The Ruling Copyright Infringement As an initial matter, the Court addressed whether the defendants had infringed upon the Estate’s claimed copyright of the Rap. The Court concluded that neither party was entitled to summary judgment because genuine issues of material fact existed as to whether Smith was the author of the Rap and whether the sample used by Drake was entitled to copyright protection based on a subjective assessment of the similarity between Pound Cake and the Rap. Fair Use Having declined to grant summary judgment on the infringement claim, the Court turned to the defendants’ fair use affirmative defense. In doing so, the Court considered the four nonexclusive factors set forth in Section 107 of the Copyright Act of 1976: 1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. Purpose and Character of the Use Courts have referred to this factor as “ he heart of the fair use inquiry” because it focuses on the nature and purposes of the allegedly infringing use. Davis v. The Gap, Inc. , 246 F.3d 152, 174 (2d Cir. 2001). Central to the inquiry is “whether and to what extent the new work is ‘transformative.’” Campbell v. Acuff-Rose Music, Inc. , 510 U.S. 569, 579 (1994). The reason: “ he more the appropriator is using the copied material for new, transformative purposes, the more it serves copyright’s goal of enriching public knowledge and the less likely it is that the appropriation will serve as a substitute for the original or its plausible derivatives.” Authors Guild v. Google, Inc. , 804 F.3d 202, 214 (2d Cir. 2015). Accordingly, the relevant inquiry “is whether the new work merely supersedes the objects of the original creation, or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” Campbell , 510 U.S. at 579 (internal quotation drakesamplefairuse s omitted). Applying these principals, the Court found that Pound Cake fundamentally altered the message of the Rap.  By changing the words from “Jazz is the only real music that’s gonna last” to “Only real music is gonna last,” Drake had “transformed Jimmy Smith’s dismissive comment about non-jazz music into a statement on the relevance and staying power of ‘real music,’ regardless of genre.” Defendants’ use of JSR is transformative regardless of whether the average listener would identify the source of the sample and immediately comprehend Drake’s purposes. The critical question is “how the work in question appears to the reasonable observer,” not the quality or accessibility of the commentary. The average listener of Pound Cake would understand the sampled portions of JSR as a statement that, regardless of how a song was made or how one might classify it, “only real music is gonna last.” Because this purpose is “sharply different” from Jimmy Smith’s purpose in creating the original track, Defendants’ use is transformative and this factor weighs in favor of a finding of fair use. The Court rejected the plaintiffs’ argument that Drake’s use of the JSR could not be transformative because the copied portion was not readily identifiable and did not identify Smith. Noting that the plaintiffs were seeking to apply “the standard for fair use in parody to this non-parodic use,” the Court found that Drake had used the Rap in furtherance of a “distinct creative or communicative objective[ ]” and, therefore, his use “was a transformative one.” Citation and internal quotation marks omitted. Nature of the Copyrighted Work Noting that this factor is rarely determinative, the Court considered two factors: (1) whether the work is expressive or creative, such as a work of fiction, or more factual, with greater leeway being allowed to a claim of fair use where the work is factual or informational, and (2) whether the work is published or unpublished, with the scope for fair use involving unpublished works being considerably narrower. The Court found that because the JSR is a work of creative expression, “this factor weighs against a finding of fair use.” The Court noted, however, that “ his factor is of particularly limited usefulness in this case” because it had already determined that Drake used the Rap “for a transformative purpose.” Citations and internal quotation marks omitted. Amount and Substantiality of the Portion Used The test under this factor is “whether the quantity and value of the materials used[] are reasonable in relation to the purpose of the copying.” Blanch v. Koons , 467 F.3d 244, 257 (2d Cir. 2006). As the Court observed, “a finding of fair use is more likely when small amounts, or less important passages, are copied than when the copying is more extensive, or encompasses the most important parts of the original.” Authors Guild , 804 F.3d at 221. Applying the foregoing test, the Court held that the amount taken by the defendants was reasonable and in proportion to the needs of the intended transformative use. The Court found that the excerpt was not extraneous to Drake’s statement on the importance of “real” music, and that the use of the lines in the Rap drove the point home: “The full extent of the commentary is … that many musicians make records in similar ways …, but that only “real” music—regardless of creative process or genre—will stand the test of time.” The Court rejected the plaintiffs’ argument that the defendants “appropriated an unreasonable portion of JSR when they used thirty-five seconds of the one-minute track, and that any statement on the staying power of ‘real’ music would necessitate the use of only that single line.” Effect on the Market for the Copyrighted Work Under this factor, courts analyze “the effect of the use upon the potential market for or value of the copyrighted work,” 17 U.S.C. § 107(4), by considering “whether the copy brings to the marketplace a competing substitute for the original, or its derivative, so as to deprive the rights holder of significant revenues because of the likelihood that potential purchasers may opt to acquire the copy in preference to the original.” Authors Guild , 804 F.3d at 223. “The more transformative the secondary use, the less likelihood that the secondary use substitutes for the original.” Castle Rock Entm’t, Inc. v. Carol Pub. Grp., Inc. , 150 F.3d 132, 145 (2d Cir. 1998). The Court found that there was no evidence “to suggest that Pound Cake usurps any potential market for JSR or its derivatives” because Smith targeted a “sharply” different market than Drake: “JSR, a spoken-word criticism of non-jazz music at the end of an improvisational jazz album, targets a sharply different primary market than Pound Cake, a hip-hop track.” Moreover, the plaintiffs “never attempted to establish a market for licensed derivative uses of the JSR composition copyright until Defendants used the recording on the Album,” a fatal defect, observed the Court, that undermined the strength of the plaintiffs’ usurpation argument. A copy of Estate of James Oscar Smith v. Cash Money Records, Inc., et al., Case No. 14-cv-2703 (S.D.N.Y.) can be found here .

The New York Statute of Frauds provides that “ contract for the . . . the sale, of any real property, or an interest therein, is void unless the contract or some note or memorandum thereof, expressing the consideration, is in writing, subscribed by the party to be charged, or by his lawful agent thereunto authorized by writing.” New York General Obligations Law § 5-703(2). “To satisfy the statue of frauds, a memorandum evidencing a contract and subscribed by the party to be charged must designate the parties, identify and describe the subject matter, and state all of the essential terms of a complete agreement.” Nesbitt v. Penalver , 40 A.D.3d 596, 598 (2d Dept. 2007) (citation and quotation omitted). The memorandum may be informal – it can be a series of emails – and therefore in compliance with the statute of frauds “where it identifies the parties, describes the subject property, recites all essential terms of a complete agreement.” O’Brien v. West , 199 A.D.2d 369, 370 (2d Dept. 1993). “If the contract does not contain all the necessary terms, the law presumes that the parties have not reached an agreement as to such terms and, therefore the agreement is fatally flawed and unenforceable.” 3-32 Warren’s Weed New York Property § 32.10. In that instance, or if “it is necessary to resort to parol evidence to ascertain what was agreed to, the remedy of specific performance is not available.” Nesbitt , 40 A.D.3d at 598 (citation and internal quotation marks omitted). Notably, an agreement as to price only is insufficient to create an enforceable real estate contract. See , e.g. , DeMartin v. Farina , 205 A.D.2d 659, 660 (2d Dept. 1994) (quotation omitted). Instead, the agreement must also include “those terms customarily encountered in transactions of this nature, such as … the time and terms of payment, the required financing, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, adjustments for taxes and utilities, etc.” Nesbitt , 40 A.D.3d at 598 (citation and internal quotation marks omitted). On June 7, 2017, in Saul v. Vidokle , 2017 NY Slip Op. 04485 , the Second Department addressed the foregoing issues and held that the alleged sale violated the statute of frauds. Background In Saul , the plaintiff, Lewis Saul, sought specific performance of a purported oral agreement to purchase a condominium apartment owned by his neighbor, Anton Vidokle. The agreement was alleged to have been memorialized in email exchanges between the parties. Vidokle emailed his attorney with information regarding the sale, including the parties’ names, the purchase price ($1.3 million in cash), an agreement that no brokers would be involved in the sale and that the defendant would lease the property back from the plaintiff for $3,000 per month during the period of time it took to complete work on his new home. Within days, however, Vidokle learned from a real estate broker that the apartment could be sold for a significantly higher amount. Acting on this information, Vidokle asked Saul to “wait” on moving forward with the execution of a formal contract. Saul refused, insisting that the parties were already bound by their emails. Thereafter, Saul filed a complaint against Vidokle seeking specific performance of the alleged agreement. Vidokle moved to dismiss the complaint pursuant to CPLR 3211(a)(1), (5), and (7), in part, on the ground that the emails failed to satisfy the statute of frauds. The motion court denied the motion and Vidokle appealed. In a brief opinion, the Second Department modified the motion court’s ruling. The Second Department Ruling The Court found that the emails failed to satisfy the statute of frauds because they omitted the “essential” terms of the transaction: The emails relied upon by the plaintiff to establish the alleged agreement among the parties for the purchase of the defendant’s apartment were insufficient to satisfy the statute of frauds, as they left for future negotiations essential terms of the contemplated contract, such as a down payment, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, and adjustments for taxes and utilities, and were subject to the execution of a more formal contract of sale.  Contrary to the plaintiff’s contention, in the emails exchanged by and between the parties and the defendant’s attorney, the parties expressly anticipated the execution of a formal contract. Accordingly, the Supreme Court should have granted the defendant's motion to dismiss the complaint. Citations omitted. Takeaway As this Blog has noted in other postings, email correspondence can suffice to form an enforceable contract. (Here , here and here .) However, when the emails omit the essential terms of the proposed transaction, and indicate that the substance of the transaction is subject to continued negotiation and a formal written contract, there is no binding agreement and dismissal of the complaint is warranted as a matter of law.  In the real estate context, this means that the emails should include, among other things, a deposit or down payment, closing date, quality of title, escrow, risk of loss, right to inspect, terms for default, and adjustments for taxes and utilities.  As Saul learned, the absence of these terms was fatal to his claim and rendered the alleged agreement unenforceable under the statute of frauds as a matter of law.

The Department of Justice recently announced a settlement with eClinicalWorks ("ECW" or the "Company") related to alleged False Claims Act violations. The Massachusetts-based company, one of the largest electronic health records ("EHR") vendors in the U.S., had been accused of misrepresenting its software capabilities and paying kickbacks to customers in exchange for promoting its product. What is the False Claims Act? The False Claims Act is designed to protect the government from being overcharged for goods or services. These cases involve various types of fraud, such as Medicaid and Medicare fraud, defense contractor fraud, overcharging the government, billing for services that were never provided, paying kickbacks, and so on. Under this law, a whistleblower that reports someone for defrauding the government can receive a portion of any funds that are recovered. The $155 million settlement arose from a lawsuit brought by a whistleblower who will receive an award of about $30 million out of the settlement. During the Obama Administration, the Department of Health and Human Services ("HHS") created the Electronic Health Records Incentive Program to reward healthcare providers that adopted and demonstrated the "meaningful use" of EHR certified technology. In order to obtain certification for their products, EHR vendors had to attest that their products satisfied specific HHS criteria that passed testing by an accredited independent certifying entity approved by HHS.  The Government's Allegations And The Settlement In its complaint-in-intervention , the government alleged that ECW falsely obtained that certification when it concealed from its certifying entity that its software did not comply with the requirements for certification. For example, in order to pass certification testing without meeting the certification criteria for standardized drug codes, the Company modified its software by “hardcoding” only the drug codes required for testing.  In other words, rather than programming the capability to retrieve any drug code from a complete database, ECW simply typed the 16 codes necessary for certification testing directly into its software.  ECW’s software also did not accurately record user actions in an audit log and in certain situations did not reliably record diagnostic imaging orders or perform drug interaction checks.  In addition, ECW’s software failed to satisfy data portability requirements intended to permit healthcare providers to transfer patient data from ECW’s software to the software of other vendors.  As a result of these and other deficiencies in its software, ECW caused the submission of false claims for federal incentive payments based on the use of ECW’s software. Additionally, the Company allegedly paid customers up to $500 to recommend its EHR software to clients in violation of the federal Anti-Kickback Statute.  “Every day, millions of Americans rely on the accuracy of their electronic health records to record and transmit their vital health information,” said Acting Assistant Attorney General Chad A. Readler of the Justice Department’s Civil Division. “This resolution is a testament to our deep commitment to public health and our determination to hold accountable those whose conduct results in improper payments by the federal government.” The settlement calls for eClinicalWorks and three of its founders to pay the federal government $155 million. Of that, $154.92 million will be paid by the Company while the remaining $80,000 will be paid by the three principals. eClinicalWorks also entered into a Corporate Integrity Agreement that imposes quality control and other obligations on the Company for 5 years. The Takeaway Ultimately, this case highlights how far-reaching efforts to defraud the federal government can go. If you have knowledge of a False Claims Act violation , an experienced attorney can advise you of your legal options for compensation.

Yesterday, the House of Representatives voted along party lines to repeal many of the regulations enacted after the 2008 financial crisis under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). It was the first step for Republicans who have long-promised to eliminate regulations they maintain are hurting banks, restricting consumer credit, inhibiting small businesses, and slowing economic growth. The legislation faces significant hurdles in the Senate because of Democratic opposition. Still, passage of the Act in the House furthers President Trump’s effort to dismantle key parts of the Dodd-Frank Act. (Discussed here .) The Dodd-Frank Act includes many financial reforms, such as the prohibition on federally insured banks from engaging in risky trading, the creation of a liquidation authority to wind down faltering financial institutions to avoid future taxpayer bailouts, and the creation of the Consumer Financial Protection Bureau (“CFPB”) to oversee credit cards, mortgages and other financial products. The Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, or the CHOICE Act 2.0 (in recognition of the second iteration of the Act), eliminates or scales back much of the Dodd-Frank Act. Its major provisions include repealing the trading restrictions, known as the Volcker Rule, and eliminating the liquidation authority, which some critics argue reinforces the notion that some banks are too big to fail, in favor of enhanced bankruptcy provisions designed to remove any chance taxpayers would be on the hook if a major financial institution collapsed. “We will replace bailout with bankruptcy. We will replace economic stagnation with a growing healthy economy,” said Rep. Jeb Hensarling (R-Tex.), the Act’s author. “We’ll replace Washington micromanagement with market discipline.” The CHOICE Act 2.0 also repeals the Department of Labor’s fiduciary rule (discussed here ), which requires financial advisors who provide retirement advice to act in the best interests of their clients – that is, they are required to put their clients’ interests ahead of their own. (Discussed here .) In previous posts, this Blog has written about other parts of the CHOICE Act 2.0, such as the provision that: (a) weakens the SEC Whistleblower program by barring “co-conspirators” from recovering awards under the program ( here ); and (b) imposes a heightened pleading standard on plaintiffs claiming a breach of fiduciary duty under the Investment Company Act by their investment advisor.  ( Here .) Significantly, the Act weakens the CFPB, curbs its oversight powers, and makes the agency’s director an at-will employee of the president. (Discussed here .) For example, the Act strips the agency of its ability to monitor firms for compliance with consumer protection laws and specifically prohibits the agency from writing any regulations on payday and car-title loans.  It also eliminates the bureau’s independent funding stream, making it subject to congressional appropriations where the majority party (now the Republicans) can restrict its budget. Since 2011, when the CFPB opened its doors, the bureau has obtained approximately $12 billion in refunds, mortgage principal reductions and other relief for consumers. Recently, the CFPB recovered $100 million in fines from Wells Fargo & Co. in connection with the bank’s creation of about 2.1 million unauthorized deposit and credit card accounts. Democrats and other opponents of the Act have labeled the legislation, the “Wrong Choice Act,” with Rep. Maxine Waters (D-Calif.), calling it “one of the worst bills I have seen in my time in Congress.” “This bill would pave the way back to economic damage of the same scale (as the financial crisis), or worse,” Waters said in a statement. Waters, who serves as the ranking Democrat on the Senate Financial Services Committee, has previously said that CHOICE Act 2.0 is “dead on arrival” in the Senate because of Democratic support for the Dodd-Frank Act and opposition to the CHOICE Act 2.0. Perhaps recognizing the strength of that opposition, Senate Republicans, led by Mike Crapo (R-Idaho), along with Senate Democrats, led by Sherrod Brown (D-Ohio), are working on their own bill, which many hope can garner the Democratic support needed for passage. These efforts largely preserve many parts of the Dodd-Frank Act, such as the CFPB, the Volker Rule, and the regulations that dictate the amount of capital lenders must hold in cases of losses. This Blog will continue to monitor developments related to the CHOICE Act 2.0 as the legislation moves through the Senate.

On June 5, 2017, the U.S. Supreme Court held that claims for disgorgement imposed as a sanction for violation of the federal securities laws must be commenced within five years of the date the claim accrues.  In doing so, the Court rejected the SEC’s argument that the five-year statute of limitations was not applicable to claims for disgorgement. The decision, written by Justice Sonia Sotomayor for a unanimous court, resolves a split among the circuits and provides clarity concerning the scope of potential liability for parties facing SEC liability. The Court’s opinion in Kokesh v. Securities and Exchange Commission can be found here . Background In 2009, the SEC brought an enforcement action in federal court against Charles Kokesh (“Kokesh”), a New Mexico-based investment adviser, alleging that between 1995 and 2006, Kokesh misappropriated $34.9 million from four development companies.  The SEC sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from violating the securities laws in the future. After a 5-day trial, a jury found in favor of the Commission. Thereafter, the SEC sought civil penalties for conduct that fell within and without the statute of limitations and disgorgement for conduct that fell outside the limitations period. In doing so, the SEC argued that disgorgement is an equitable remedy, not a “penalty” within the meaning of 28 U.S.C. § 2462, which provides that the “enforcement of any civil fine, penalty, or forfeiture” should be “commenced within five years from the date when the claim first occurred” and, therefore, no limitations period applied to the disgorgement remedy. Kokesh argued that disgorgement was barred under the five-year statute of limitations. The district court agreed with the SEC and ordered Kokesh to pay civil penalties of $2.4 million (representing “the amount of funds that himself received during the limitations period”), plus $34.9 million in disgorgement of the ill-gotten gains (from conduct occurring “outside the limitations period”). (Internal quotation marks omitted.) Kokesh appealed the decision. The Tenth Circuit affirmed.  In doing so, the court determined that disgorgement is not subject to the five-year statute of limitations in Section 2462, agreeing with the district court that disgorgement is not a penalty, and adding that disgorgement is not a forfeiture. Thereafter, Kokesh filed a petition for a writ of certiorari with the U.S. Supreme Court. On January 13, 2017, the Supreme Court granted the cert. petition in order to resolve a split in the circuits on the issue. Although the 10th Circuit’s opinion comported with that of other courts of appeals (including the First Circuit and the District of Columbia Circuit), it conflicted with the 11th Circuit, which broke from its sister circuits in Securities and Exchange Commission v. Graham . In Graham , the court held that there is “no meaningful difference in the definitions of disgorgement and forfeiture,” adding that disgorgement can be “considered a subset of forfeiture.” On April 18, the U.S. Supreme Court heard oral argument in the case. (Discussed here .) The Court’s June 5, 2017 Opinion In writing for the Court, Justice Sotomayor concluded that disgorgement “in the securities enforcement context is a ‘penalty’ within the meaning of Section 2462,” and, therefore, “disgorgement actions must be commenced within five years of the date the claim accrues.” In concluding that disgorgement is a penalty, Justice Sotomayor looked at two factors. First, whether the payment had been imposed to redress a wrong to the public, or a wrong to an individual.  A penalty is imposed to redress the former, not the latter.  “This is because penal laws, strictly and properly, are those imposing punishment for an offense committed against the State.”  (Internal quotations omitted.)  Moreover, disgorgement is more like a penalty because, as applied by the courts, it does not necessarily compensate the victims; disgorged profits are paid to the district court, and it is “within the court’s discretion to determine how and to whom the money will be distributed.” (Citation and internal quotation marks omitted.) Second, whether the payment was imposed to deter future wrongdoing by depriving violators of their ill-gotten gains. In deciding that disgorgement is a penalty, the Court rejected the SEC’s argument that disgorgement was remedial in nature, intended to restore the status quo. Justice Sotomayor noted that sometimes disgorgement exceeds the ill-gotten gains, while at other times (as was the case in Kokesh ) disgorgement is ordered “without consideration of a defendant’s expenses” which “reduce[ ] the amount of illegal profit.” In such cases, said Justice Sotomayor, disgorgement leaves defendants in a worse position than they were before the securities violation: “it is not clear that disgorgement, as courts have applied it in the SEC enforcement context, simply returns the defendant to the place he would have occupied had he not broken the law.” Therefore, “ ecause disgorgement orders go beyond compensation, are intended to punish, and label defendants wrongdoers as a consequence of violating public laws, they represent a penalty and thus fall within the 5-year statute of limitations of §2462.” (Internal quotation marks and citation omitted.) Takeaway As news outlets noted the Court’s decision represents “a major victory for Wall Street firms,” because it curbs the power of the SEC to seek disgorgement in the “enforcement process.” ( Here and here .) Indeed, defendants in SEC proceedings (and arguably other agency proceedings, such as those before the CFTC) will no longer have to litigate issues relating to conduct that exceeds the five-year statute of limitations. In some cases, that would mean disgorgement is a non-issue altogether. Moreover, aside from the “certainty and predictability” ( here ) that defendants will have in enforcement proceedings, the Court laid the groundwork in a footnote for a larger question to be resolved on another day: whether the courts should be ordering disgorgement in enforcement actions at all. In that regard Justice Sotomayor cautioned: “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Finally, since disgorgement is a penalty, it raises the question whether the SEC will seek disgorgement on top of other penalties generally available to the Commission. The logic of the decision suggests that the SEC will not do so.

The Fiduciary Rule (the “Rule”) is designed to protect investors receiving investment advice about qualified retirement plans and individual retirement accounts (“IRAs”) by requiring all registered brokers, financial advisers, and other investment professionals (collectively, “Financial Advisors”) to act in the best interest of their clients and to disclose any potential conflicts of interest when providing retirement advice. The Rule also requires Financial Advisors who earn a commission for making recommendations ( i.e ., compensation not paid directly by the client) to disclose information about the compensation s/he receives for the recommendation. The DOL proposed the Rule to close loopholes within the Employee Retirement Income Security Act of 1974 (“ERISA”) concerning investments recommended by pension fund managers. Under ERISA, pension managers are required to act in the best interest of pensioned employees. However, since 1974, self-directed retirement accounts like 401(k)s, IRAs and health savings accounts have largely replaced managed pension funds. By the Rule, the DOL sought to expand ERISA’s fiduciary protection to these types of accounts. The DOL first proposed the Rule in April 2016, with different parts to be phased into effect beginning on April 10, 2017. Full enforcement of the Rule is scheduled for January 1, 2018. On February 3, 2017, President Trump signed a memorandum directing the DOL to determine whether the Rule should be revised or rescinded. (Discussed here .) The memorandum directed the DOL to delay the implementation date of the Rule by 180 days. Pursuant to that direction, on March 10, 2017, the DOL filed a notice proposing to delay the start of the Rule from April 10, 2017 to June 9, 2017. ( Here .) After a 15-day public comment period, the DOL sent its delay notice to the Office of Management and Budget for review. Following the OMB’s review, the DOL publicly released an official 60-day delay to the effective date of the Rule. ( Here .) On May 22, 2017, Alexander Acosta, the new Secretary of Labor, confirmed that the first phase of the Rule will go into effect on June 9, 2017, as scheduled. Secretary Acosta announced his determination in an Op Ed commentary published in the Wall Street Journal : The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule. We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed. Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule. Notably, despite its decision to begin implementation of the Rule on June 9, the DOL will not enforce the Rule until full implementation on January 1, 2018; instead it will provide “assistance” to those “who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” And, notwithstanding the decision to begin implementation, the DOL remains intent on issuing a Request for Information for additional public input concerning “possible new exemptions or regulatory changes”, including whether to delay full implementation in January 2018. (The DOL temporary enforcement policy can be found here .) Takeaway While implementation of the Rule will begin on June 9, its fate remains uncertain. In addition to the numerous lawsuits challenging the Rule (discussed here and here ), passage of the CHOICE Act 2.0 could also undo implementation – the act requires the DOL to issue a fiduciary rule that is “substantially similar” to a fiduciary rule issued by SEC, which as of today has not been proposed. ( Here .) Notwithstanding the uncertainty, a fiduciary standard of care remains a best practice for the industry. As many Financial Advisors and advocates have stated clarity and transparency around compensation builds faith and credibility with investors and retirees. ( Here .) Implementation of the Rule will ensure that these best practices are achieved. This Blog will continue to monitor any developments surrounding the Rule.

Arbitration is an alternative to a court proceeding. It is an adversarial proceeding in which the parties can call witnesses and present evidence to a neutral arbitrator or panel of arbitrators. The rules of discovery and evidence are relaxed to make it a shorter and more cost-efficient process.  An attorney or retired judge, who works for a private firm, conducts the proceeding.  Often, the parties select the arbitrator or panel of arbitrators. Arbitration can be binding, in which the arbitrator renders (or the panel of arbitrators render) a decision that can be enforced by the courts, or non-binding, in which the arbitrator renders (or the panel of arbitrators render) an advisory opinion that the parties can accept or reject. In short, an arbitration is similar to a trial without the formalities. Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. See Primex Int’l Corp. v. Wal-Mart Stores, Inc. , 89 N.Y.2d 594, 598 (1997) (affirming trial court ruling that “whether there is a clear, unequivocal and extant agreement to arbitrate the claims, is for the court and not the arbitrator to determine.”); Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39, 45-46 (1997) (noting “well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance.”) (citing cases). In New York, courts will enforce an agreement to arbitrate, and will not take the issue of arbitrability away from the arbitrator when the parties specifically provide as such: hen the parties’ agreement specifically incorporates by reference the AAA rules, which provide that ‘ he tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement,’ and employs language referring ‘all disputes’ to arbitration, courts will ‘leave the question of arbitrability to the arbitrators.’ Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 495 (1st Dep’t 2009) (quoting Smith Barney, 91 N.Y. at 47). This approach reflects the “overarching principle of law ‘that arbitration is a matter of contract’” and that “courts must rigorously enforce arbitration agreements according to their terms.” Monarch Consulting, Inc. v. National Union Fire Ins. , 26 N.Y.3d 659, 675 (2016) (quoting American Express Co. v Italian Colors Restaurant , 133 S.Ct. 2304, 2309 (2013)).  New York “favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties . . . . Therefore, New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to jurisdiction.” Life Receivables , 66 A.D.3d at 495. In short, courts will enforce the parties’ agreement to have the arbitrator decide issues of arbitrability, and they will not stay an action that a party claims is not arbitrable. Id . On May 23, 2017, Justice Ostrager of the Supreme Court, New York County, Commercial Division, issued a decision in  Port Authority of N.Y. & NJ v. 2 World Trade Center LLC , 2017 NY Slip Op. 31121(U), in which he refused to stay an arbitration on the grounds that the parties’ agreement to arbitrate permitted the arbitrator to determine the arbitrability of the matter instead of the court. Background Just before the terrorist attacks of September 11, 2001, 2 World Trade Center LLC, 3 World Trade Center LLC, and 4 World Trade Center LLC (collectively, “SPI”), entities owned or controlled by Silverstein Properties, entered into leases (the “Net Leases”) for several of the buildings at the World Trade Center, including the Twin Towers and Four and Five World Trade Center (the “Properties”). The Net Leases required that SPI maintain insurance on the Properties and that, in the event the Properties were damaged or destroyed, SPI would rebuild them. In February 2003, SPI adopted a plan for the reconstruction of the World Trade Center site, which contemplated the construction of five buildings, including One World Trade Center, as well as Towers 2, 3, 4, and 5. By December 2005, SPI had not begun construction on any of the contemplated buildings and the Port Authority (the owner of the land compromising the World Trade Center) entered discussions with SPI to improve the likelihood of success of the redevelopment project. In November 2006, the Port Authority and SPI entered into several agreements, including a master development agreement (“MDA”) and a Second Amended and Restated Reciprocal Easement and Operating Agreement (the “REOA”) that altered the parties’ responsibilities in connection with reconstruction of the site. Among other things, the Port Authority took over the leases and development obligations for One World Trade Center and Tower 5, as well as took on an enhanced responsibility for other construction and infrastructure for the site. SPI retained the Net Leases and obligation to develop and construct Towers 2, 3, and 4. The MDA generally governed the overall development and construction of Towers 2, 3, and 4. The REOA called for SPI and the Port Authority, together with the City of New York, to create commercial design guidelines (“CDG”) to govern many of the design elements of the World Trade Center site, including the retail space. Both the MDA and the REOA contained arbitration provisions. The MDA provided, in pertinent part, that “ ll disputes, Claims or controversies arising” under the agreement were to be resolved by a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association (“AAA”). Arbitration under the REOA was to be conducted in accordance with the commercial arbitration rules of the AAA, with certain modifications. A dispute arose over whether the Port Authority had improperly permitted one of the successor lessees, non-party Westfield Corporation (“Westfield”), to “rebrand” the visual identity of the World Trade Center in contravention of certain design standards under the agreements. In particular, the dispute concerned signage that Westfield erected at certain retail areas of the site and the potential placement of two kiosks in the space: SPI has repeatedly notified the Port Authority that SPI does not accept the Port Authority’s temporary signage, which degrades the unified aesthetic that is central to the CDGs. In a letter from our attorneys, Skadden, Arps to the Port Authority, dated May 7, 2015, SPI has made clear that it does not accept the Port Authority’s plan to use signage to “rebrand” the visual identity of the World Trade Center campus, and it has repeatedly requested that the Port Authority adhere to the uniformity standard that is fundamental to the CDGs. The Court’s Decision The Port Authority commenced a special proceeding pursuant to CPLR §7503(b), seeking a permanent stay of an arbitration that was commenced on April 3, 2017 by the SPI. The Port Authority also moved for a temporary restraining order in connection with a hearing scheduled by the arbitrator for May 19, 2017. The Port Authority argued, among other things, that the arbitration was improper because it failed to include Westfield, an essential party, and because the dispute was not governed by the MDA but rather by the REOA. SPI argued that both the MDA and REOA governed the signage dispute and that it was for the arbitrator to decide whether the dispute was arbitrable because the MDA incorporates the AAA rules. The Court sided with SPI, holding: It is a well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance. Nevertheless, an important legal and practical exception has evolved which recognizes, respects and enforces a commitment by the parties to arbitrate even that issue when they clearly and unmistakably so provide. Thus, the Court must examine whether the parties evinced a clear and unmistakable agreement to arbitrate arbitrability as part of their alternative dispute resolution choice in the MDA Agreement. When the parties’ agreement specifically incorporates by reference the AAA rules, which provide that the tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement, and employs language referring all disputes to arbitration, courts will leave the question of arbitrability to the arbitrators. While the Port Authority attempts to distinguish the language of the arbitration clause in this case from the Life Receivables Trust case, the Court finds the Port Authority’s argument unpersuasive. Citations and internal quotations omitted. Takeaway Like many jurisdictions, New York “favors and encourages arbitration” because it “conserv the time and resources of the courts and the contracting parties.”  Life Receivables , 66 A.D.3d at 495.  And, because “arbitration is a matter of contract,” the “courts rigorously enforce arbitration agreements according to their terms.” Monarch Consulting, Inc. v. National Union Fire Ins. , 26 N.Y.3d 659, 675 (2016). Consequently, the courts will rarely interfere with the parties’ agreement to submit their dispute to arbitration ( i.e. , stay an arbitration), and will enforce their decision to abide by the rules of the governing forum, including having the arbitrator decide issues of arbitrability. Id . Port Authority of N.Y. & NJ stands as a reminder that the foregoing principles are clear and unambiguous and that the courts will “leave the question of arbitrability to the arbitrators” when the parties agree that the arbitrator or panel of arbitrators will “have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement.” Life Receivables Trust , 66 A.D.3d 495 (citations and internal quotation marks omitted).

In previous posts, this Blog has written about certain parts of the recently proposed Financial CHOICE Act 2.0; namely, the provision that: (a) bars “co-conspirators” from recovering whistleblower awards under the SEC's Whistleblower Program, (b) prevents the DOL's Fiduciary Duty Rule from becoming effective, and (c) imposes a heightened pleading standard on plaintiffs claiming a breach of fiduciary duty under the Investment Company Act by their investment advisor.  ( Here and here .) In today's post, this Blog will discuss other provisions of the CHOICE Act 2.0 that are intended to repeal and roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. ("Dodd-Frank" or the "Dodd-Frank Act"). The CHOICE Act 2.0 (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) eliminates a number of financial regulations that many argue have stifled economic growth. In particular Republican lawmakers, including the bill's sponsor Committee Chairman Jeb Hensarling (R-TX), believe that the Dodd-Frank Act has dramatically restricted lending to small businesses and limited consumer choices to financial products. "There is no excuse in the United States of America for 2 percent growth," said Hensarling. "Those are American dreams that will never be realized." The CHOICE Act 2.0 at a Glance The CHOICE Act 2.0 takes aim at the Consumer Financial Protection Bureau ("CFPB") established under the Dodd-Frank Act. Renamed the Consumer Law Enforcement Agency ("CLEA"), the CHOICE Act 2.0 scales back the agency's budget and restricts its power to enforce consumer protection laws. Most notably, the CHOICE Act 2.0 places the CLEA under the supervision of the political apparatus. For example, the CLEA director can be removed by the President, and the agency's funding will be controlled by Congress through the appropriations process (unlike the CFPB, which is funded through the Federal Reserve (the "Fed")). In addition, The CHOICE Act 2.0 allows banks to opt out of Dodd-Frank, provided they have sufficient capital reserves. The federal stress tests for big banks would also be limited to every two years. Moreover, the Fed's authority to label a bank "too big to fail" would be eliminated. One controversial provision that Democrats strongly opposed eliminates the Fed's Orderly Liquidation Authority ("OLA") and replaces it with a special bankruptcy process that would guard the markets against the fallout of a failure by a big bank. Democrats introduced several amendments to preserve the OLA that were rejected by Republicans. Finally, the CHOICE Act 2.0 repeals a rule that caps fees charged by debit companies to retailers for card processing. The Takeaway While opponents of the CHOICE Act 2.0 believe it will lead to the next financial meltdown, proponents believe it will create jobs, stimulate growth and restore discipline to the financial markets. Many analysts and political observers believe that passage of the Act is unlikely, noting that Senate Democrats will likely filibuster the legislation. Even some Republicans reportedly have misgivings about certain parts of the bill. Given the uncertainty, it remains to be seen whether the Act will get through Congress and in what form. This Blog will continue to monitor developments surrounding this legislation.

In  Universal Health Services, Inc. v. United States ex rel. Escobar , the U.S. Supreme Court unanimously confirmed that the false certification theory “can be a basis for liability” under “some circumstances.” ( See  Blog post here .)  Those circumstances are: (1) the defendant does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading. Since the Supreme Court decided Escobar , courts have devoted much of their time on cases involving the second prong of the Escobar test – that is, whether the plaintiff satisfied the heightened pleading standard for materiality. Recently, the Fourth Circuit addressed the first prong of the test, falsity. See United States ex rel. Badr v. Triple Canopy, Inc. , No. 13-2190 (4th Cir. May 16, 2017). In Triple Canopy , the Fourth Circuit broadly defined falsity such that it permitted the government to avoid identifying any specific misrepresentation. United States ex rel. Badr v. Triple Canopy, Inc. Background In Triple Canopy , the government had awarded the company a one-year contract to provide security services at an airbase in Iraq. As part of that contract, Triple Canopy was required to meet certain “responsibilities,” including “ensur that all employees have . . . qualified on a U.S. Army qualification course.” According to the relator, Triple Canopy brought in guards from Uganda who were unable to meet this marksmanship requirement. Rather than inform the government of this deficiency, Triple Canopy falsified the scorecards of these contractors. Triple Canopy submitted monthly invoices for its guards without certifying compliance with the marksmanship requirement in the contract, though such certification was not required. Triple Canopy moved to dismiss the complaint, which the district court granted. United States ex rel. Badr v. Triple Canopy, Inc. , 950 F. Supp.2d 888 (E.D. Va. 2013).  In doing so, the court “decline recognition of an implied certification theory of liability.” Id . at 899. On appeal, the Fourth Circuit adopted the implied theory of liability and decided that the government adequately pled a false claim against Triple Canopy by alleging that the company hired guards that could not meet the government’s contractual requirements for marksmanship. United States v. Triple Canopy, Inc. , 775 F.3d 628, 635-637 (4th Cir. 2015) ( here ). Thereafter, Triple Canopy filed a writ of certiorari with the Supreme Court. Following Escobar , the Supreme Court granted certiorari, vacated the Fourth Circuit’s opinion, and remanded the case for reconsideration in light of its Escobar ruling.  On remand, the Fourth Circuit affirmed its prior decision, finding that the government had adequately alleged both falsity and materiality. The Fourth Circuit’s Decision The Fourth Circuit first addressed the falsity question, concluding that claims for payment implicitly state a legal entitlement to payment. Accordingly, because Triple Canopy’s alleged noncompliance with the requirements of the contract would have rendered it legally ineligible for payment, its claims to the government were false. We conclude that the Government has sufficiently alleged falsity. Simply, the Universal Health rule is not as crabbed as Triple Canopy posits. In announcing the rule, the Court made clear that it was targeting omissions that “fall squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.” That “half-truth” is exactly what we have here: although Triple Canopy knew its “guards” had failed to meet a responsibility in the contract, it nonetheless requested payment each month from the Government for those “guards.” Just as in Universal Health , anyone reviewing Triple Canopy’s invoices “would probably—but wrongly—conclude that had complied with core requirements.” Next, the Court addressed the materiality prong of the Escobar test, concluding that “common sense and Triple Canopy’s own actions in covering up the noncompliance” confirmed the materiality of the company’s violation the contract: “Guns that do not shoot are as material to the Government’s decision to pay as guards that cannot shoot straight.” The Fourth Circuit also looked at the government’s conduct after becoming aware of the allegations in the action.  In that regard, the Court noted that the government did not renew its contract with Triple Canopy and “immediately intervened” in the qui tam action – actions that spoke volumes about the materiality of the false certification: In addition, in discussing the types of evidence the Government could introduce to show materiality, the Court referenced whether the Government typically paid claims that violated the particular requirement. Here, the Government did not renew its contract for base security with Triple Canopy and immediately intervened in the litigation. Both of these actions are evidence that Triple Canopy’s falsehood affected the Government’s decision to pay. As we explained, the “Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.” Triple Canopy , 775 F.3d at 638. A copy of the panel’s decision can be found  here . Takeaway It remains to be seen whether the panel’s decision will be relied upon by courts outside of the Circuit. The Court’s view of falsity post- Escobar is broad. Indeed, to the panel, the mere fact the word “guard” appeared on the invoice sufficed to constitute a representation that the guards met the requirements of the contract. Other courts may find this broad analysis to be a bridge too far, even if the representation is the type of “half-truth” that the Escobar Court found sufficient to satisfy the first prong of the analysis. While the falsity portion of the decision is broad in scope, its materiality analysis is limited and could be confined to its facts. Indeed, as noted above, the panel was focused on the company’s alleged concealment of unqualified guards and the government’s “immediate[ ]” intervention into the litigation. No doubt the defense bar will find the decision more helpful than will the relators bar given the fact that the government declines to intervene in approximately 75% of the qui tam actions initiated by a relator. ( See U.S. Chamber Inst. for Legal Reform , The New Lawsuit Ecosystem 63 (Oct. 2013).) Nevertheless, the relators bar may find, on a broad level, governmental action after becoming aware of the non-compliance to be helpful in showing materiality.

This Blog has previously written about the benefits of forming a limited liability corporation (“LLC”) and the perils of ignoring the corporate formalities that are attendant thereto. ( Here .) In today’s post, this Blog will examine the use of the corporate entity to commit a fraud on another and a court’s willingness to pierce the corporate veil to hold the owners or members personally liable for that wrongful conduct. When to Pierce the Corporate Veil: In general, the courts will pierce the corporate veil and impose liability on the company’s owners or members when: (1) they exercise complete domination over the corporation or LLC; and (2) their domination of the corporation or LLC is used to commit a fraud or wrong that injured another. There is No Daylight Between the Company and its Owner The plaintiff must prove that the owner or member is operating the LLC as a “sham” for his/her personal benefit and the LLC is acting as the “agent,” “alter ego” or “mere instrumentality” of the owner or member. Indicia of domination includes: (1) the failure to adhere to corporate formalities (such as, making important corporate decisions without recording them in minutes of a meeting); (2) inadequate capitalization (that is, the company never had sufficient funds to operate; it was not a separate entity that could stand on its own); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the company; and (5) use of corporate funds for personal benefit ( e.g. , the owner or member pays his/her personal bills from the business bank account). The Company’s Actions Were Wrongful or Fraudulent Those seeking to pierce the corporate veil must show that the corporation or LLC was dominated in connection with the transaction at issue and that the domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences. In New York, it is not necessary to plead or prove fraud in order to pierce the corporate veil. Nandlal v. Al-Pros Construction, Inc. On April 7, 2017, Justice Dufficy of the New York Supreme Court, Queens County, Commercial Division, had the opportunity to consider these principles in a bench trial of an action in which the Court pierced the corporate veil because the corporate form was used to perpetrate a fraud. Nandlal v. Al-Pros Construction, Inc. , 2017 NY Slip Op. 50620(U) . Background On June 13, 2011, the plaintiffs, Vishnu Nandlal and Dularie Nandlal, entered into a contract with the defendant Al-Pros Construction, Inc. (“Al-Pros”) for the renovation of their home.  Pursuant to the contract, Al-Pros agreed to substantially renovate the home over a compressed period of time – the contract specified that time was of the essence. Work was to commence on June 23, 2011, and to be completed within six months of the commencement of construction, on or about December 23, 2011. Notwithstanding the agreed-upon time requirements, Al-Pros did not commence work on the project until July 7, 2011. Once work began, the quality of Al-Pros’ work proved to be substandard. For example: (a) it removed the roof of the premises, but failed to place a protective tarp over the open structure of the premises, causing the home to sustain extensive damage from rain and the elements; (b) it failed to remove construction debris from the premises; and (c) it failed to properly align the rafters and install the flitch beams. Pursuant to the contract, the plaintiffs sent letters to the defendants complaining of the poor work quality and substandard workmanship, and requesting that these conditions be corrected immediately. The defendants refused to correct any of the issues cited, and instead ceased work on the project. When Al-Pros failed to complete the project by the deadline set forth in the contract, the plaintiffs exercised their option to terminate the contract. At trial, the plaintiffs’ expert, a structural engineer, testified that there were serious deficiencies in the defendants’ work. In the expert’s opinion, these conditions would affect the structural integrity of the premises, and would not pass inspection by the New York City Department of Buildings. The expert also observed mold on the wood beams, as well as subflooring that was decayed and warped. He testified that the wood beams and the subflooring would have to be replaced to avoid compromising the structural integrity of the premises. Al-Pros did not offer a rebuttal expert. Instead, it provided the testimony of the defendant Yusuf Ali (“Ali”), the president of Al-Pros. Ali admitted that he is not an engineer, and had no knowledge of how to install flitch beams or other items that were required by the contract. He also admitted that Al-Pros did not complete the contract. He failed to produce any written change orders signed by the plaintiffs to substantiate his contention that extra work was performed. In addition, Ali admitted that Al-Pros had been barred from performing work within the State of New York. As a result, he formed a new corporation with a different spelling of the corporate name, to wit, he changed the spelling of the word “Delaware” to “Deleware.” Similarly, Al-Pros’ home-improvement license expired on June 30, 2011, prior to the commencement of any work on the project. As a result, Al-Pros was barred from obtaining any permits from governmental agencies to perform renovation work. The plaintiffs sued for breach of contract and unjust enrichment. After trial, the Court ruled in favor of the plaintiffs. The Court’s Ruling The Court found that the defendants performed their work in an unworkmanlike manner, failed to remediate the dangerous conditions they caused when asked, and abandoned the job. As a result, the plaintiffs had to expend significant amounts of money to rectify the conditions, and to obtain a residence to live until the work was completed. Despite being unlicensed, and barred from performing this type of work, the defendants manipulated the corporate form to allow them to engage in substandard work while insulating themselves from the consequences. This prevented Ali from using the corporate form as a shield from liability and found him to be jointly and severally liable with the company. As to the latter finding, the Court held: Having been barred from performing home-improvement work in the State of New York, the individual defendant, Yussuf Ali a/k/a Yussuf Au, formed a new corporation with a slightly different spelling to its name. His intention was clearly to circumvent the proscription on performing home-improvement work. The corporate form will be disregarded when it has been used to achieve fraud or where the corporation has been so dominated by an individual or another corporation (usually a parent corporation), and its separate identity so disregarded, that it primarily transacted the dominator's business, rather than its own, and can, therefore, be considered the other's alter ego. The Court finds that the corporate entity was misused by Ali, for his own personal ends, to commit a fraud or wrongdoing or avoid his obligations. Since the new corporation was formed with a fraudulent purpose, Ali cannot avail himself of the protection of the corporate forum. Hence, the individual defendant shall be jointly and severally liable for the amount awarded in this trial. Takeaway The concept of piercing the corporate veil is a limitation on the accepted principles that a corporation exists independently of its owners, as a separate legal entity, that the owners are not liable for the debts of the corporation, and that it is acceptable to incorporate for the purpose of limiting the liability of the corporate owners. While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a device to further their personal interests rather than the company’s business, such domination, standing alone, is not enough; some showing of a deceitful, fraudulent or unjust act toward another party is required. The party seeking to pierce the corporate veil, therefore, must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene. The plaintiffs in Nandlal were able to successfully do so.