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After a merger, which agreement controls when both companies have pre-existing contracts with a common third party? In May 2016, Stamford-based Charter Communications Inc. (“Charter”) completed its acquisition of Time Warner Cable (“TWC”), making it the second largest cable provider behind Comcast Corporation. At the time of the acquisition, TWC was the larger of the two companies.  As such, TWC was able to negotiate more favorable rates and terms on carriage agreements with programmers than the then-smaller Charter.  One programmer, common to both TWC and Charter, was Univision Communications Inc. ("Univision"), the nation’s largest Spanish language broadcaster. Univision’s contract with TWC does not expire until June 2022, and provides for licensing fees at a much cheaper rate than the Charter agreement.  Univision’s contract with Charter was set to expire on June 30, 2016. Beginning in March 2016, Univision tried to renegotiate its agreement with Charter. Those efforts were rebuffed by Charter, which claimed that the TWC agreement governed the payment of licensing fees through June 2022. Univision contends that Charter is acting in bad faith by "resorting to transparently constructed, pretextual arguments ... to unilaterally impose license fees that are dramatically below current market license fees."  In support, Univision relies on a provision in its contract with Charter which provides that in the event Charter acquires a company with a pre-existing Univision carriage agreement, the licensing fee rates of the acquired company may only remain in effect until the expiration of the calendar year when the acquisition occurred -- which in this case would be December 2016.  Univision claims the provision was expressly designed to address and avoid the kind of licensing fee dispute that has now come to pass. Univision also maintains that Charter's position is contradictory to public statements that Charter executives made to secure approval of the acquisition -- namely that it would be Charter, not TWC, management who would control the operations of the combined company after the acquisition. According to Univision, these statements formed the basis upon which "the Federal Communications Commission, the U.S. Department of Justice, the New York State Public Service Commission, and the California Public Utilities Commission each approved the Acquisition." Univision filed suit against Charter in New York Supreme Court (Index No. 653568/2016) this month for breach of contract related to the licensing fees dispute. Freiberger Haber LLP  is a New York City based law firm experienced in business law and complex business litigation.  The firm handles all aspects of business transactions, including contract negotiations and preparation, asset purchase agreements, mergers, and acquisitions, and litigation that arises from such transactions.  Contact the firm today at (212) 209-1005 or online here .

This blog will address many aspects of arbitration, including the pros and cons of this alternative dispute resolution mechanism.  This installment will look at the difficulties the losing party has challenging the arbitral award. Arbitration is a voluntary form of dispute resolution.  It is less formal than a court and conducted by an impartial person or persons selected by the parties. Unless the parties agree to the contrary, the arbitrator is not bound to follow the law. Instead, he/she may base the decision on business custom and practice, technical knowledge, or broad notions of equity and justice. Because arbitration is a contractually agreed upon method of dispute resolution, the parties can agree whether the award will be final and binding. Parties can agree to arbitration in a number of ways.  Often, they include an arbitration clause in their agreements or transaction documents.  These clauses mandate the resolution of disputes in an arbitral forum, such as the American Arbitration Association or FINRA.  Other times, parties agree to arbitrate after a dispute has arisen. Once an award is issued, the losing party can appeal it ( i.e. , move to vacate the award) in court. However, because arbitration is less formal than court and contractually based, the grounds upon which a court will vacate an award are limited. Generally, a court will vacate an arbitral award for the following reasons: the arbitrator violated the arbitration agreement; the arbitrator was not independent; the award was obtained by corruption, fraud or undue means; and the arbitrator exceeded his/her powers – that is, the arbitrator ruled on matters that the parties did not consent to be heard in the arbitration agreement.  Making a mistake in fact or law is not sufficient to vacate an award.  An arbitrator’s decision will be upheld, unless it is completely irrational or constitutes a manifest disregard of the law.  As the U.S. Supreme Court noted, “‘as long as an honest arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,’ the fact that ‘a court is convinced committed serious error does not suffice to overturn decision.’” E. Associated Coal Corp. v. United Mine Workers of Am., Dist. 17 , 531 U.S. 57, 62 (2000) (citations omitted). In New York, CPLR § 7511(b) sets forth the grounds upon which a court can vacate an arbitral award. Under federal law, Section 10 of the Federal Arbitration Act governs the grounds upon which a court can vacate an award. Under CPLR 7511, an arbitral award may be vacated: if the rights of a party were prejudiced by “(1) corruption, fraud, or misconduct in procuring the award, (2) partiality of a supposedly neutral arbitrator, (3) the arbitrator exceeding his powers < i.e. , violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on his/her power> i.e., violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on his/her power> so that no final and definite award was made, or (4) failure to follow procedures provided by CPLR article 75.” Matra Bldg. Corp. v Kucker , 2 A.D. 3d 732 (2d Dep’t 2003).  Case law makes it clear that New York courts apply these four grounds narrowly, declining more times than not to vacate arbitral awards.  E.g. , Matter of Mercury Cas. Co. v Healthmakers Med. Group, P.C. , 67 A.D. 3d 1017, 1017 (2d Dep’t 2009). On June 29, 2016, the Appellate Division, Second Department added another decision to the long list of cases showing the difficulties faced when trying to vacate an arbitral award.  See Structure Tek Construction, Inc. v. Waterville Holdings, LLC , 2016 NY Slip Op. 05140. Structure Tek was an action, inter alia , to foreclose a mechanic’s lien in which the plaintiff sought to confirm an arbitral award in its favor.  The plaintiff was hired by the defendant Waterville Holdings, LLC, d/b/a Smuggler Jacks Restaurant, as a contractor in connection with the construction of a restaurant located on property owned by another defendant, Noel Cannon.  Sometime thereafter, the plaintiff and the defendants became involved in a dispute about the construction of the restaurant. The plaintiff filed a mechanic’s lien against the property.  After the plaintiff commenced the action, the plaintiff and the defendants agreed to resolve the dispute through arbitration. After a hearing, the arbitrator issued an award in favor of the plaintiff for $254,735.29. The plaintiff sought to confirm the award pursuant to CPLR 7510, and the defendants moved to vacate the award pursuant to CPLR 7511. The Supreme Court, Nassau County granted the petition and denied the motion to vacate the award. The defendants appealed.  The Second Department affirmed. In affirming the ruling, the Second Department underscored the difficulty parties to arbitration have in vacating an arbitral award: Judicial review of arbitration awards is extremely limited. A party seeking to overturn an arbitration award on one or more grounds set forth in CPLR 7511(b)(1) bears a heavy burden to demonstrate that vacatur is appropriate by clear and convincing evidence. An arbitrator may do justice as he or she sees it, applying his or her own sense of law and equity to the facts as he or she finds them to be and making an award reflecting the spirit rather than the letter of the agreement. An arbitrator’s award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice. (Internal quotations and citations omitted.) Against the foregoing, the Second Department found that the “record not reflect” any evidence “that the arbitrator made an award that was irrational, or that the award violated a strong public policy or clearly exceeded a specifically enumerated limitation on the arbitrator’s power.”  (Internal quotations and citations omitted.) Takeaway : Arbitration can be a very effective forum for the resolution of disputes. It is a less formal and less costly alternative to resolve disputes.  However, as Structure Tek shows, it is very difficult to vacate an arbitral award.  For this reason, parties that agree to arbitrate their disputes should do so with their eyes wide open.  They should understand that there are disadvantages to arbitration, including the difficulties overturning an award. In short, the parties should expect to live with the outcome of the arbitration, even if it is unjust or erroneous, or both.

What are the ramifications of the new fiduciary rule? Earlier this year, the Department of Labor unveiled a new fiduciary standard regulation that will require financial advisors who provide investment recommendations for retirement accounts to meet a fiduciary standard by putting clients’ interests before their own (discussed here ).  The Obama administration claims the new standard will protect retirement investors and save them $17 billion in advisory fees. Now, a consortium of Wall Street and business lobbyists are fighting back saying that the new standard is "deliberately unworkable." A lawsuit was filed in Dallas federal court in late June by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Insured Retirement Institute alleging that the Labor Department does not have jurisdiction to create a new fiduciary rule. According to the lawsuit, only the Securities and Exchange Commission has the jurisdiction to do so. The lawsuit comes as no surprise since financial firms have been battling with the Labor Department since it first started crafting this rule 6 years ago. The parties to the suit said in a statement that their action was an effort "to prevent the Labor Department from exceeding the authority that was assigned to it by Congress." While the goal of the new fiduciary rule is to eliminate incentives for brokers to steer clients into retirement products with higher fees and commissions, some observers argue that the new standard will hurt smaller investors when their accounts are dropped by firms seeking to avoid additional compliance costs. "The rule will shackle Main Street financial advisers with extensive new requirements and constant liability, forcing them to limit the options and guidance they provide to retirement savers," the group said. In addition to this legal action, the National Association for Fixed Annuities has filed a separate suit seeking to block the new measures. They contend the Labor Department changed course by including fixed annuities in its definition of applicable retirement investments and the new rule will force firms to stop offering these products. Meanwhile, Congressional lawmakers have floated legislation to block the rule from becoming effective, but it is sure to be vetoed by the president if it makes it to his desk. Whether or not these lawsuits will prevail remains to be seen, however, given the tenor of the times in the wake of the financial crisis and the public's lack of trust in Wall Street, the era of enhanced regulatory oversight by federal authorities is likely to continue. While establishing and implementing compliance programs can be costly, the costs of litigation and a regulatory enforcement action may turn out to be far steeper. By engaging the services of an experienced attorney , securities firms can be proactive in adhering to the pending fiduciary rule that is slated to become effective in 2017, and retirees can be assured that their financial advisors are acting in their best interests when recommending retirement products.

What are the consequences of submitting inaccurate trade data to the SEC and FINRA? Investment banks and securities firms are well aware of their responsibilities to adhere to the rules promulgated by the Securities Exchange Commission ("SEC") and the Financial Industry Regulatory Authority ("FINRA") regarding trade data, also referred to as "blue sheets." The federal securities laws and FINRA rules require firms to provide blue sheet information to FINRA and other regulators electronically upon request. This data provides regulators with detailed information about securities transactions, including the security, trade date, price, share quantity, customer name, and whether it was a buy, sale or short sale.  Regulators use blue sheet information to ferret out fraudulent activity, market manipulation and insider trading. Last month, FINRA fined Deutsche Bank Securities Inc., an indirect wholly-owned subsidiary of Deutsche Bank AG ("Deutsche Bank"), $6 million for failing to provide complete and accurate trade data in a timely manner when requested by FINRA and the SEC.  In addition to the fine, Deutsche Bank must retain an independent consultant to review all of the firm's policies, systems, procedures and training related to its blue sheets, and to implement any changes that may be necessary to improve its trade data submissions. Deutsche Bank allegedly submitted thousands of inaccurate and late blue sheets to the SEC and FINRA over a seven-year period. While Deutsche Bank neither admitted nor denied any wrongdoing - as is often the case in these settlements, the fine is the largest imposed by FINRA in connection with trade sheet lapses. "Incomplete and inaccurate blue sheet data compromises our ability to identify individuals engaging in insider trading schemes and other fraudulent activity," Cameron Funkhouser, the executive vice president and head of FINRA’s Office of Fraud Detection and Market Intelligence, said in a statement. FINRA alleged that Deutsche Bank submitted thousands of inaccurate blue sheets between 2008 and 2015 and misreported over a million transactions. The inaccuracies ranged from incorrect broker codes and missing trading party identifications to duplicated, omitted or incorrectly reported transactions. Moreover, 40 percent of the blue sheets that Deutsche Bank submitted between January and August 2014 were late. The inaccuracies were said to be caused by systems failures, programming errors, and Deutsche Bank's  failure to implement required enhancements. The firm also allegedly failed to adequately supervise its blue sheets system, and did not implement an audit system to ensure the trade date was accurate. "Firms must invest the resources necessary to ensure that they are providing complete and accurate blue sheet data whenever requested — without exception," said Funkhouser. The takeaway is that blue sheet submissions appear to be the subject of enhanced regulatory scrutiny as this fine comes in the wake of a $2.95 fine FINRA imposed on Macquarie Capital (USA) late last year. The best way to avoid a regulatory enforcement action is by implementing sound compliance policies and procedures with the help of a an experienced attorney .

In today’s digital world, it is not uncommon for individuals and businesses to memorialize the terms of their oral agreements through email. But are such agreements enforceable?  The answer depends on a couple of factors, including whether there is a writing that memorializes the material terms of the agreement. Oral agreements that cannot be performed within one year of the agreement must be in writing.  This broad rule, contained in the statute of frauds, is intended to “prevent a party from being held responsible, by oral, and perhaps false, testimony, for a contract that the party claims never to have made.”  73 Am. Jur. 2d Statute of Frauds § 403 (cited by William J. Jenack Estate Appraisers and Auctioneers, Inc. v. Rabizadeh , 22 N.Y.3d 470, 476 (2013)).  In New York, the statute of frauds is codified in New York in General Obligations Law § 5-701(a)(1). Since oral contracts that cannot be performed within one year must be in writing, litigants have asked the courts to decide whether an email or other electronic media can satisfy the writing requirement of the statute of frauds. In 2004, the Supreme Court, Kings County held that a party’s “act of typing his name” at the bottom of an email demonstrated his/her “intention to authenticate” for purposes GOL § 5-701(a).   Rosenfeld v. Zerneck , 4 Misc. 3d 193, 776 N.Y.S. 458 (Sup. Ct., Kings County 2004). In 2010, the Appellate Division, First Department ratified Rosenfeld , holding that “any uncertainty that existed in 1994 as to whether the record of an electronic communication satisfied the statute of frauds under New York state law has long since been resolved.” Naldi v. Grunberg , 80 A.D. 3d 1, 13 (1st Dep’t 2010). See also GOL § 5-703 (providing that “written text produced by … electronic signals…shall constitute a writing and any symbol executed or adopted by a party… to authenticate a writing shall constitute a signing.”). Given the recognition of email as a writing for purposes of the statute of frauds, the question for the courts is whether the email communications contain the content required to form a contract? See Naldi , 80 A.D.3d at 13 (quoting Nimmer, Law of Computer Technology § 13:12).  Recently, the First Department addressed this question in Josephberg v. Crede Capital Group, LLC , 2016 NY Slip Op. 05086 (1st Dep’t June 28, 2016). Josephberg involved a $4.8 million breach of contract action arising from the alleged wrongful termination of the plaintiff, a former salesman at the defendant Crede Capital Group LLC (“Crede”), and the failure to pay commissions to the plaintiff for securing deals while employed at the defendant’s predecessor, Socius Capital Group, LLC, (“Socius”). The plaintiff claimed that the defendants failed to pay him a 15 percent commission on profits earned on deals generated by him with Cell Therapeutics Inc., Xcite Energy Ltd. and others, in violation of his oral agreement with Socius. Josephberg was never provided with, and did not sign, a written employment agreement. The defendants moved to dismiss the complaint on several grounds, including that Josephberg’s contract claims were barred by the statute of frauds. The lower court dismissed the plaintiff's breach of contract causes of action.  The First Department reversed, holding that the emails relied upon by Josephberg to evidence the terms of his employment agreement satisfied the statute of frauds: Plaintiff alleges that defendant Socius orally agreed to provide him with 15% of the profits generated by financing transactions originated by him. The emails to which he points, authored by defendants Wachs and Peizer, equal partners in Socius, confirm the material elements of this alleged agreement and therefore satisfy the requirements of the statute of frauds ( see Morris Cohon & Co. v Russell , 23 NY2d 569, 574­575 <1969> ; see also General Obligations Law § 5­701 <10> ). Takeaways : The admonition that parties to an agreement should “put it writing” remains sound. Preferably, the agreement should be memorialized in a formal contract negotiated and drafted by counsel. However, as Josephberg teaches, electronic communications that confirm the existence of a contract by containing the material terms of the agreement can also suffice. There is one other admonition worth noting. Agreement by email can be risky. The reason: during negotiations, a party can inadvertently enter into an agreement.  For this reason, parties often include language in their emails that expressly disclaims an enforceable contract until a formal, written agreement is prepared and executed. Of course, retaining counsel to negotiate and draft a written contract from the outset is the clearest way to avoid an inadvertent agreement.

On June 22, 2016, the Department of Justice (“DOJ”) filed a Notice of Supplemental Authority in U.S. ex rel. Westrick v. Second Chance Body Armor, et al. , No. 04-0280 (D.D.C.), a case brought under the False Claims Act (“FCA”) against contractors who manufactured and sold bullet proof vests.  The purpose of the filing was to notify the court of the U.S. Supreme Court’s unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar , 579 U.S. ___, slip op. No. 15-7 (June 16, 2016) ( discussed here ), and to explain its impact on the court’s dismissal of the government’s fraud-in-the-inducement claim. In Westrick , the government alleged that the bullet proof vests that the defendants manufactured and sold to the government degraded without warning and did not maintain the same level of bullet-resisting efficacy during the five-year warranty period. See United States ex rel. Westrick v. Second Chance Body Armor, Inc. , 685 F. Supp. 2d 129, 132 (D.D.C. 2010); United States v. Toyobo Co., Ltd. , 811 F. Supp. 2d 37, 41-42 (D.D.C. 2011). The government claimed that the defendants, Second Chance Body Armor, Inc., Toyobo Co., Ltd. and Toyobo America, Inc., and certain individuals, knew that the vests were unable to maintain their bullet-resisting efficacy during the five-year warranty period, did not inform the government or other buyers about this degradation, and intentionally placed false information into the market suggesting that there was no degradation. See Second Chance , 685 F. Supp. 2d at 132; Toyobo , 811 F. Supp. 2d at 41-43. On motions for summary judgment, the district court dismissed some of the government’s fraud-in-the-inducement claims on the ground that the government did not present evidence that the withholding of data caused the government to purchase the vests ( i.e. , the data was a condition of payment). U.S. ex rel. Westrick v. Second Chance Body Armor, Inc. , 128 F. Supp. 3d 1, 19 (2015). Prior to Escobar (and its adoption of the implied certification theory of liability in which half-truths are actionable), courts “employed a fraud-in-the-inducement theory to establish liability under the for each claim submitted to the Government under a contract which was procured by fraud, even in the absence of evidence that the claims were fraudulent in themselves.” Id . (citation omitted). To prevail under this theory, the government had to “show that the false statements upon which relied … caused to award the contract at the rate that it did.”   E.g. , United States ex rel. Thomas v. Siemens AG , 991 F. Supp. 2d 540, 569 (E.D. Pa. 2014) (citing United States ex rel. Marcus v. Hess , 317 U.S. 537, 543-44 (1943)). The government moved for reconsideration of the dismissal, and filed the supplemental authority to underscore the point that after Escobar the defendants “had a legal duty to disclose” their knowledge that the degradation of the bullet-proof vests sold to the government “contradicted misrepresentations about the superiority” of those vests, and that the condition of payment analysis the court employed was no longer valid.  In Escobar , the Supreme Court rejected arguments that the FCA only prohibits fraud that is “expressly designated” as a “condition of payment.” The DOJ’s Notice of Supplemental Authority in Westrick is the first public statement by the DOJ concerning the application of Escobar to the facts in a pending case under the FCA.

Summary On June 16, 2016, the U.S. Supreme Court decided Universal Health Services, Inc. v. United States ex rel. Escobar , a Medicaid case involving the “implied certification” theory of liability under the False Claims Act (“FCA”). The “implied false certification” theory provides that a defendant may violate the FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement.  In Escobar , the Court unanimously confirmed that the theory “can be a basis for liability.” In so holding, the Court identified two preconditions for the application of the theory. First, when a defendant submits a claim for government payment, the defendant must not “merely request payment”; instead, the defendant must also “make[] specific representations about the goods or services provided.” Second, the omission – that is, the defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” – must rise to the level of “misleading half-truths.” Importantly, the noncompliance must be “material to the Government’s payment decision.” In this way, “every undisclosed violation of an express condition of payment automatically trigger[] liability.” Background Escobar involved a Medicaid patient (Yarushka Rivera) who was undergoing treatment for bipolar disorder at a Massachusetts mental health clinic. During treatment, Ms. Rivera experienced an adverse reaction to prescribed medication and died.  Her parents later learned that only one of the five counselors who treated Ms. Rivera at the clinic was licensed under Massachusetts law. In 2011, Ms. Rivera’s parents filed a qui tam complaint in federal court, alleging that the treating counselors were not licensed or supervised, in violation of Massachusetts health regulations. They claimed that, by seeking reimbursement from Medicaid for services performed in violation of those regulations, the clinic and its parent, Universal Health Services, Inc. (“UHS”), submitted false claims to the government. Because the clinic did not expressly certify that the services were performed in compliance with state regulations, the qui tam complaint relied on the implied certification theory of liability – that is, the clinic had impliedly (and falsely) certified that it was in compliance with applicable Medicaid licensing and supervision requirements at the time it submitted the claims for reimbursement. In 2014, the district court dismissed the complaint on the ground that none of the regulations the clinic allegedly violated was an express condition of government payment. The court concluded that the complaint did not state a claim for relief because it relied on noncompliance with regulations that were conditions of participation in the Medicaid program, rather than conditions of payment by the program.   The Court of Appeals for the First Circuit reversed, holding that conditions of payment, “which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated.’” Instead, the court explained that whether a legal requirement is a condition of payment is “a fact-intensive and context-specific inquiry, involving a close reading of the foundational documents, or statutes and regulations, at issue” and evidence showing that the government would be entitled to refuse payment were it aware of the violation.  The court concluded that the regulations at issue imposed conditions of payment, and therefore were “dispositive evidence of materiality.” The First Circuit’s decision contributed to a split among the courts of appeals over the validity and scope of the “implied false certification” theory of liability.  Other courts of appeals have rejected the theory in total ( e.g. , the Seventh Circuit), while others have ruled that an implied certification must involve compliance with an express condition of payment ( e.g. , the Second Circuit). The Supreme Court granted certiorari to resolve the split and answer the questions whether the implied certification theory is a viable one, and if so, whether it would only apply where a defendant violated a legal requirement that the government had expressly designated as a condition of payment. The Supreme Court’s Decision As an initial matter, the Court held that the implied certification theory of liability is a viable one under the FCA, albeit “in some circumstances.…” The Court based its holding on the use of the word “fraudulent” in the FCA, noting that it is “a paradigmatic example of a statutory term that incorporates the common-law meaning of fraud.” “Because common-law fraud has long encompassed certain misrepresentations by omission,” the Court found that “misrepresentations by omission can give rise to liability.” Having found the theory to be viable, the Court identified two conditions under which a defendant may be liable: (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. As to the first condition, the Court emphasized that, in the case before it, the defendant had made representations “about the specific services provided by specific types of professionals,” but “failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” Therefore, the Court found, the representations were “clearly misleading in context,” because the defendant used specific billing codes and identifiers concerning the “types of treatment” and “specific job titles,” implying that the clinic’s counselors had the requisite training and qualifications for their jobs. Such misrepresentations, held the Court, fell “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.” As to the second condition, the Court held that a misrepresentation about legal compliance does not become “material” simply because the government expressly labeled the legal requirement as a “condition of payment,” or because the government could choose to withhold payment if it knew about the noncompliance. “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” The Court explained that “ statement that misleadingly omits critical facts is a misrepresentation irrespective of whether the other party has expressly signaled the importance of the qualifying information.” Therefore, the fact that a legal requirement is labeled as a condition of payment is relevant to materiality, but “not automatically dispositive.” The Court explained that the materiality inquiry focuses on the “effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” Although “minor or insubstantial” noncompliance “cannot” be material, other relevant considerations include whether the government “consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement,” or, conversely, whether the government “pays a particular claim in full despite its actual knowledge that certain requirements were violated.” To underscore the importance of the materiality inquiry, the Court stressed that the analysis is “rigorous” and “demanding,” and that the FCA is not “an all-purpose antifraud statute” or “vehicle for punishing garden-variety breaches of contract or regulatory violations.” The Court also reiterated that whistleblowers must plead their claims “with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).” Against this analysis, the Court found that the clinic’s submissions for reimbursement “without disclosing many violations of basic staff and licensing requirements,” could qualify as misleading misrepresentations giving rise to liability under the FCA. The Court vacated the First Circuit’s judgment and remanded the case to determine whether the alleged misrepresentations were material under the standard set forth by the Court. Implications The Court’s decision contains two core conclusions: the implied certification theory is viable; and liability in such cases turns on materiality – i.e. , whether the misrepresentation about compliance with a statutory, regulatory, or contractual requirement is material to the government’s payment decision. Specific Representations and Failure to Disclose Noncompliance In adopting the theory of liability, the Supreme Court blurred the lines, if not did away with the distinction, between an express false certification and an implied false certification. Escobar makes clear that whether a requirement is expressly labeled a condition of payment is not solely dispositive of the outcome – it is only one factor.  As the Court explained: Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment.  Conversely, even when a requirement is expressly designated a condition of payment, not every violation of such a requirement gives rise to liability.  What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision. While the Court seemed to be endorsing a broad approach, the decision indicates, however, that application of the theory is more narrow than relators would prefer. Relators must show a link between the claim for payment and the undisclosed legal violation. In this regard, the Court held that the relator must plead that the defendant “ma specific representations about the goods or services provided.” A request for reimbursement, without specificity as to the goods or services provided, will not suffice under Escobar . Additionally, the underlying violation must be directly relevant to a specific representation made by the defendant.  A defendant’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” must render “those representations misleading half-truths.” Thus, technical violations that cannot be linked to any affirmative representation by the defendant should not result in an FCA violation. Determining whether the link between the claim for payment and the undisclosed legal violation, as well as the nexus between the underlying violation and a specific representation, are context-dependent inquiries.  It remains to be seen whether the district courts will establish a uniform standard for making these determinations. Materiality The Court’s focus on the materiality of the representation indicates that pleading and proving a false certification will be a fact-specific, hotly-contested part of any qui tam action.  Notwithstanding, it is important for potential relators and defendants to understand that this focus does not mean that every qui tam complaint will survive a motion to dismiss. The Court emphasized that the materiality analysis, though “rigorous” and “demanding”, should not be “too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.”  Relators have to plead “facts to support allegations of materiality” and satisfy the requirements of “plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b).” Nevertheless, the emphasis on materiality raises a number of questions.  For example, since a relator must plead and prove the materiality of the legal requirement and the defendant’s knowledge that the legal requirement was material, does this mean that both have to be satisfied? What if the materiality of the legal requirement is not disputed, but the defendant’s knowledge is disputed? Can the defendant obtain a dismissal on a motion to dismiss? The Court’s opinion does not directly answer these questions, though it suggests that the defendant would likely succeed in securing a dismissal. The lower courts will have to grapple with these and other questions.  It remains to be seen whether disputes surrounding the meaning of “materiality” will lead to inconsistent lower court opinions. Conclusion Escobar has a little something for everyone. On the one hand, it permits relators to bring qui tam actions alleging an implied false certification.  On the other hand, it provides the conditions under which such a claim may be viable and assures defendants that complaints based on an implied false certification theory of liability remain subject to dismissal, despite the context-dependent nature of the claim, if relators do not plausibly allege, with particularity, that the government considers the particular undisclosed legal violation at issue to be material to its payment decision.

Like most states in the country, New York is considered to be an “employment at will” state.  This means that if there is no written agreement between the employer and employee (such as, a collective bargaining agreement) governing when the employer can fire the employee, the employer has the right to fire the employee at any time for any reason.  When this happens, the employee has no legal recourse even when the termination is arbitrary, unfair or unreasonable. There are a few exceptions to an “employment-at-will” relationship.  For example, employers cannot discharge an employee in violation of any law that prohibits discrimination.  Additionally, an employer cannot discharge an employee: in violation of the company’s employee handbook; in retaliation for whistleblowing a violation of law to a supervisor or to a public agency; for participation, on his/her own time, in lawful political or recreational activities; in retaliation for filing a Workers’ Compensation or Disability Benefits claim or testifying before the Workers’ Compensation Board; and because of the employee’s absence from work to fulfill a jury duty obligation.  Under any of the foregoing circumstances, an at-will employee may sue his/her employer for damages and/or reinstatement for wrongful termination. What happens, however, when an employee, who had an employment agreement that expired but continues to work for the company as an at-will employee until fired, seeks post-termination compensation? Can an employee under these circumstances sue his/her employer for such compensation? On June 2, 2016, the Appellate Division, First Department said no. In Holahan v. 488 Performance Group, Inc. , 2016 NY Slip Op. 04311, the First Department held that an at-will employee was not entitled to post-termination commissions, even though those commissions would have been paid under the expired contract. Colleen Holahan (“Holahan”) worked for the defendant pursuant to an employment agreement until 2007, when the agreement expired.  Although the agreement was not extended in writing, Holahan continued to work for the defendant as an at-will employee until her employment was terminated in 2013. Holahan claimed that she earned commissions that the defendant refused to pay. She brought suit, alleging, among other things, breach of contract and unjust enrichment related to the failure to pay the commissions. The defendant moved to dismiss the complaint, which the Supreme Court, New York County, granted on April 22, 2015.  Holahan appealed. The First Department unanimously affirmed the dismissal. The Court held that, “as a matter of law,” Holahan’s breach of contract claim was properly dismissed because her employment agreement with the defendant had expired in 2007 without, as alleged in her complaint, extension: Plaintiff’s breach of contract claim, which alleged that the corporate defendant breached the parties’ employment agreement by failing to pay her certain compensation and benefits upon the termination of her employment in 2013, was correctly dismissed. The employment agreement expired in December 2007, and it unambiguously provided that any extension of the agreement needed to be in writing. Because there was no writing extending the agreement, her breach of contract claim fails as a matter of law. ( Goldman v White Plains Ctr. for Nursing Care, LLC , 11 NY3d 173, 178 <2008> ). The Court also held, “as a matter of law,” that since Holahan had been an at-will employee following the expiration of her employment agreement, she was not entitled to any post-termination commissions: Plaintiff’s unjust enrichment claim, which seeks post-termination commissions, also fails as a matter of law. Upon the expiration of her employment agreement, plaintiff became an “at-will” employee, and such employees are not entitled to post-termination commissions. ( Mackie v La Salle Indus. , 92 AD2d 821, 822 <1st dept 1983> .) Defining the Relationship Is Important Holahan stands as a reminder to employers and employees that they should define the terms of their employment relationship in writing ( i.e. , in documents such as employment applications, employee handbooks, and office policy and procedure manuals).  This is especially important since the law generally presumes that an employee is employed at will unless he/she can prove otherwise, usually through written documents relating to the employment or through oral statements made by the employer. Freiberger Haber LLP counsels both individuals and employers regarding their legal rights related to employment termination. In this regard, the firm evaluates the circumstances surrounding an employee’s termination to determine if the discharge was lawful.  The firm also helps employers minimize the possibility of being involved in a wrongful termination lawsuit, by among other things, reviewing and revising employee handbooks and company policies and procedures, as well as reviewing documents concerning the reasons for employee discharge.

What are the requirements to obtain a monetary award under the SEC Whistleblower Program? In June, the Securities and Exchange Commission ("SEC") announced its second largest whistleblower award of more than $17 million to a former financial services employee (the largest award of $30 million was awarded in 2014). This bounty comes after the SEC issued two awards in May. The securities watchdog continues to see a significant uptick in whistleblower claims. "The information and assistance provided by this whistleblower enabled our enforcement staff to conserve time and resources and gather strong evidence supporting our case," said Andrew Ceresney, Director of the Division of Enforcement. What is the SEC Whistleblower Program? The Securities Exchange Commission's Whistleblower Program was created in 2010 under the Dodd-Frank Act to encourage individuals to report violations of the federal securities laws. To be eligible, a person must voluntarily provide the SEC with original information about a possible violation that has occurred, is ongoing or is about to occur. The tip must lead to a successful enforcement action by the SEC that results in monetary sanctions exceeding $1 million, of which the whistleblower will be awarded between 10 and 30 percent. $17 Million Award In order to protect the whistleblower, the SEC did not identify the relator and the agency did not identify the subject of this action. However, the case reportedly involved wrongdoing at a large financial services organization. The $17 million award indicates that the enforcement action was in the range of $56 to $170 million. The order concerning the award stated that the whistleblower provided the SEC with original, detailed and new information. The SEC believes the whistleblower program has been effective since it was launched in 2011. In fact, more than $84 million has been awarded to 32 whistleblowers during this time, of which $26 million was awarded to five whistleblowers in the last month alone. The SEC attributes this recent uptick  in awards to growing public awareness of the program. "We hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC," said Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower. In the end, this case illustrates how crucial it is for financial firms to establish and implement compliance programs to prevent, detect and respond to potential securities violations. If you have vital information that you believe makes you eligible for a whistleblower award, or need assistance with an SEC investigation, you should engage the services of an attorney with experience in securities law.

Is it a breach of contract to bypass an agreed-upon, independent alternative dispute resolution (“ADR”) process and commence an arbitration proceeding elsewhere? When two companies enter into a contract, it’s common to include language wherein both parties consent to having any disputes related to the contract decided by an agreed-upon, neutral third party, rather than by a judge in a lengthy, formal court proceeding. The process of ADR-- which may be by arbitration or mediation-- is generally a faster, less formal, and less expensive way to resolve a contractual dispute than commencing a lawsuit for breach of contract. In mediation, an independent facilitator merely assists the parties in an attempt to resolve their dispute without the need for a formal arbitration or court proceeding. A mediator does not render a decision and the parties are free to resolve their dispute as they choose. Conversely, an arbitrator hears both sides of the dispute, reviews evidence, and renders a decision--much like a judge. The parties may or may not be bound by the arbitrator’s decision, depending on the terms of the ADR language in the agreement. But what happens when one of the parties bypasses the agreed-upon independent firm chosen for dispute resolution and commences an arbitration proceeding elsewhere? This issue is at the heart of a dispute between American industrial giant General Electric Co. (“GE”) and Alstom, a French rail transport company, regarding a contract under which Alstom purchased GE’s rail-switching system. The rail-switching system transaction occurred simultaneously with GE’s acquisition of Alstom’s energy business. Rather than submitting the $800 million purchase price adjustment dispute to the agreed-upon independent Deloitte accounting firm, GE instead filed an arbitration proceeding with the International Chamber of Commerce business group. In response and claiming unspecified damages, Alstom filed suit in U.S. District Court in Manhattan in May, 2016 to have the proceeding dismissed and the matter remanded to Deloitte for review and a decision. The case is titled  Alstom et al. v. General Electric Co. , U.S. District Court, Southern District of New York, No. 16-03568. There are many factors to consider in determining whether alternative dispute resolution is beneficial in a business contract, and if so, whether mediation or arbitration is the better option for your business’ needs and goals. Consulting a business law and litigation attorney with ADR experience is advisable for all your business transactions. Freiberger Haber LLP in New York City is experienced in business law and litigation and handles all aspects of business transactions, including contract negotiations and preparation, asset purchase agreements, mergers, and acquisitions. In addition, the practice handles dispute resolution through ADR as well as complex business litigation. Contact the firm today at (212) 209-1005 or online here .

How do anti-money laundering programs detect suspicious activity? The Financial Industry Regulatory Authority ("FINRA") announced in May that it fined two Raymond James entities for systemic flaws in their anti-money laundering programs. The units, Raymond James & Associates (RJA) and Raymond James Financial Service ("RJFS") were fined $8 million and $9 million, respectively. FINRA cited these units for not establishing and implementing adequate procedures over the course of several years. An investigation by the self-regulatory agency revealed that the firms did not conduct required due diligence and periodic risk reviews for foreign financial institutions and that RJFS also failed to establish and maintain an adequate Customer Identification Program. In addition a former AML compliance officer was fined $25,000 and suspended for three months which highlights the growing trend of regulators holding compliance officers personally accountable for compliance breaches. Enhanced Regulatory Scrutiny At the same time, Raymond James success may have made the firm a target of enhanced regulatory scrutiny. In its press release, FINRA noted that the firms achieved significant growth over a ten-year period from 2006 to 2014, but that they failed to establish comprehensive AML programs during this time. Because of this, Raymond James was unable to detect, prevent and report suspicious activity, according to FINRA. FINRA also found that the compliance officer did not establish AML programs that were suited for each business unit and that "red flags" for suspicious activity were missed. This is not the first time Raymond James was cited for its failure to adhere to AML requirements. RJFS was previously sanctioned in 2012 and agreed to beef up its policies and procedures. Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Raymond James had significant systemic AML failures over an extended period of time, made even more egregious by the fact the firm was previously sanctioned in this area." For their part, RJA and RJFS neither admitted nor denied the charges, but consented to the terms of the settlement. In short, this settlement highlights the importance for financial firms to establish and implement sufficient AML measures as part of a comprehensive compliance program. Given the growing attention that is being paid to money laundering, the consequences of failing to weed out suspicious activity can be drastic. In the end, if your firm needs assistance on any compliance or FINRA related matters, you should engage the services of an experienced attorney .

Catastrophic events often bring out the best in people. Sometimes, however, such events bring out the worst in people. The events that followed Hurricaine Katrina stand as reminders of the latter, at least according to Cori and Kerri Rigsby, two sisters who filed a False Claims Act (“FCA”) complaint against State Farm Fire and Casualty Co. (“State Farm”), among others. The Rigsby sisters, two experienced claims adjusters, alleged that State Farm and other insurance companies were falsely billing the federal government for flood insurance claims when, in fact, the claims were based on wind damage. According to the sisters, the insurance companies fraudulently changed the classification of a claim without sending an inspector to the affected site in order to collect reimbursement from the federal government. A few weeks after Hurricane Katrina, the Rigsby sisters inspected the home of Thomas and Pamela McIntosh in Biloxi, Mississippi. The McIntoshes held two insurance policies with State Farm: (1) a Standard Flood Insurance Policy (“SFIP”), which excluded payment for wind damage; and (2) a homeowners’ policy, which excluded payment for flood damage. In September 2005, a State Farm supervisor approved the payment of $350,000 ($250,000 for the home and $100,000 for personal property) under the SFIP. Three days later, State Farm sent checks to the McIntoshes. In April 2006, the Rigsby sisters filed a qui tam complaint against the insurance companies, alleging that the insurers wrongfully sought to maximize their policyholders’ flood claims (which were paid with government funds) in order to minimize wind claims (which are paid by the insurer). Following motion practice, a trial was held on a single, bellwether false claim – the McIntosh claim. The jury concluded, among other things, that the McIntosh property sustained no compensable flood damage and that the government therefore suffered damages of $250,000 as a result of State Farm’s submission of false flood claims for payment on the McIntosh home. The district court denied State Farm’s motions for a new trial and judgment notwithstanding the verdict, and ordered State Farm to pay more than $3 million in damages and attorneys’ fees. After the ruling, State Farm moved to dismiss the action due to alleged violations of the FCA’s seal requirement. State Farm argued that the Rigsby sisters and their attorneys had disclosed the existence of the qui tam action to a variety of news outlets while the case was under seal. State Farm charged that the Rigsby sisters and their then-lawyer, Dickie Scruggs, violated the statutory seal by engaging in a media campaign in which they discussed the allegations in the qui tam complaint in order to “demonize and put pressure on State Farm to settle” the action. The district court declined to dismiss the complaint on the basis of the seal violations, and the U.S. Court of Appeals for the Fifth Circuit affirmed that decision, holding that the seal violations did not warrant dismissal. Thereafter, State Farm filed a writ of certiorari to the Supreme Court. In filing the writ of certiorari, State Farm asked the Supreme Court to review the Fifth Circuit’s affirmance of the district court’s decision, especially since there were three separate circuit court (Ninth, Second and Fourth, and Sixth) standards governing the dismissal of a qui tam complaint following a violation of the FCA’s seal requirement. The Fifth Circuit adopted the Ninth Circuit’s approach, which requires dismissal only if the seal violation caused actual harm to the government – in essence, a “no harm, no foul” approach. The Second and Fourth Circuits, by contrast, require dismissal only when a seal violation “incurably frustrate ” the congressional goals underlying the seal requirement, including the ability of the government to fully evaluate the propriety of an enforcement suit and determine whether the suit involves matters already under investigation. Finally, the Sixth Circuit requires dismissal when there is a violation of the seal requirement no matter the circumstance, thereby rejecting any form of balancing test. On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby . IMPLICATIONS: Resolution of the circuit split will materially impact the rights of whistleblowers and defendants to whistleblower claims. If the Sixth Circuit’s approach prevails, then defendants would have a greater ability to seek dismissal of FCA claims when relators violate the seal requirement. By contrast, a ruling in favor of the approach advanced by the Ninth Circuit or the Second and Fourth Circuits would be relator friendly because even when there is a violation of the seal requirement, as long as there is no harm to the government or the government’s ability to investigate is not frustrated in any way, then there would be no dismissal. Of course, there is no way to know how the Supreme Court will rule. However, it is important to note that seal violations occur under many circumstances, including, but not limited to, failing to file the complaint under seal and inadvertently disclosing the allegations. Balancing the violation, the reason for the violation and the impact of the violation on the government’s investigative interests seems to be the most reasonable way to ensure that meritorious cases are not dismissed over a technicality. The Supreme Court is expected to address the case in the next term.