handshakeAlthough the Department of Justice’s Antitrust Division has recently been in the news for the civil complaints that it has filed against several large technology companies, during 2020 it has quietly continued to ramp up civil and criminal antitrust enforcement in the labor market by targeting companies that agree on employees’ wages or not to hire each other’s employees.

The Department of Justice and Federal Trade Commission issued Antitrust Guidance for Human Resource Professionals in October 2016, which explicitly stated that naked no-poach agreements are a per se illegal violation of the antitrust laws and warned that wage-fixing and no-poach agreements between competitors made or continued after that date could face criminal prosecution. Although both DOJ and FTC subsequently brought civil actions, including recent actions by the FTC related to no-poach clauses in acquisition agreements, it was not until January 2021 that DOJ brought its first criminal no-poach indictment.  That case was itself filed on the heels of DOJ’s first wage-fixing criminal case, which was indicted in December 2020.  Although several years have passed since DOJ issued its antirust HR guidance, it now appears that the Antitrust Division has anticompetitive labor practices squarely in its sights.

What are no-poach or no-hire agreements?

A no-poach agreement (sometimes called a no-hire or non-solicit agreement) is a written or oral agreement with another company not to compete for each other’s employees, such as by agreeing not to solicit or hire another company’s employees. A wage-fixing agreement, in contrast, is an agreement with another company regarding the level of compensation paid to employees or contractors, either at a specific level or within a certain range.  So-called “naked” no-poach agreements are agreements that are not reasonably ancillary to a separate, legitimate business agreement amongst the companies.

Where are no-poach agreements found?

No-poach and non-solicitation agreements can arise under a variety of circumstances but often arise in the context of corporate transactions. They may be found in a clause in an underlying acquisition agreement or a standalone agreement that is ancillary to the main transaction agreement. No-poach agreements can also occur pursuant to agreements between a manufacturer and distributor, franchisor and franchisee, licensor and licensee, or among parties to a joint venture.

What does the legal landscape look like now for no-poach agreements?

DOJ pursuit of no-poach agreements

In 2018, in a first-of-its-kind settlement, the Department of Justice filed a civil suit and simultaneous settlement against Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp., alleging that these companies, along with a third company, engaged in a six-year conspiracy in which they agreed not to hire each other’s employees. Along with the settlement, the Antitrust Division has taken the unusual step of filing a competitive impact statement that detailed the government’s position that naked no-poach agreements are per se unlawful. The terms of the settlement included a seven-year injunction, a requirement to appoint an antitrust compliance officer, placement of advertisements in industry publications about the settlement, and a requirement that each company notify all its U.S. employees of the settlement and the companies’ obligations thereunder.

Since then, DOJ has filed civil enforcement actions along with statements of interest in numerous private no-hire cases to express its view that such agreements are per se illegal horizontal allocations of the labor market under the antitrust laws. See, e.g., Statement of Interest of the United States, In re Railway Industry Employee No-Poach Antitrust Litig., 2:18mc00798 (W.D. Pa. Feb. 8, 2019) (rail industry employees); Corrected Statement of Interest of the United States, Harris v. CJ Star, LLC, 2:18-cv-00247 (E.D. Wash. Mar. 8, 2019) (fast food franchise employees); Statement of Interest of the United States, Seaman, et al. v. Duke University, et al., 15-cv-00462 (M.D.N.C. March 7, 2019) (medical school faculty members).

Although these cases all sought only civil penalties, DOJ has continued to emphasize that it views naked no-hire agreements as criminal conduct. In an interview with The Wall Street Journal. in January 2020, Assistant Attorney General Makan Delrahim, the chief of the Justice Department’s antitrust section, said that the Antitrust Division expected to bring its first criminal case accusing employers of colluding not to hire each other’s workers in the first half of 2020. Perhaps delayed by the COVID-19 pandemic, the Justice Department indicted its first criminal wage-fixing case in December 2020 and its first criminal no-poach case in January 2021.

In the wage-fixing indictment, United States v. Jindal, No. 4:20-CR-00358 (E.D. Tex. Dec. 9, 2020), the defendant was the owner of a physical therapy staffing company that employed physical therapists (PTs) and physical therapist assistants (PTAs) to provide in-home care to patients. The physical therapy staffing companies in the region competed with each other to hire or contract with PTs and PTAs, who decided which companies to work for based on pay, among other factors. The government claims that the defendant entered into a conspiracy with other owners of physical therapy staffing companies to exchange non-public information about rates paid to PTs and PTAs and to implement rate decreases for wages paid to PTs and PTAs in their employ.

The indictment points out that the cost of home health care, including physical therapy, is often covered by Medicare, the federal health care program providing benefits to persons who are over 65 or disabled. The government’s discussion of Medicare reimbursement in the context of the wage-fixing indictment is noteworthy because it was not directly relevant to the facts of that case. Tellingly, however, the day after the indictment was filed, the Eastern District of Texas, where the wage-fixing case was indicted, announced that it was joining the Procurement Collusion Strike Force, which is a partnership between the Department of Justice, multiple U.S. Attorneys’ offices around the country, and nearly 30 member agencies. The strike force is tasked with anti-competitive activity in connection with public procurement, so it possible that many early wage-fixing or no-poach criminal cases will involve Medicare, Medicaid, defense, or other government spending.

Thereafter, on January 5, 2021, a federal grand jury in the Northern District of Texas returned an indictment alleging a criminal antitrust violation relating to an agreement between three companies to not solicit senior-level employees of the other companies. Although the indictment alleged that agreement prohibited only proactive solicitation of employees, as opposed to an unqualified agreement not to hire, the indictment nonetheless alleges that this type of agreement is per se unlawful under the antitrust laws.

FTC pursues no-poach and noncompete claims after merger review

DOJ is not the only agency concerned with the anticompetitive effects of no-poach agreements. The FTC issued an administrative complaint in January 2020 challenging a consummated May 2018 acquisition not reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) by Axon Enterprise, Inc. of its competitor VieVu, LLC. Before the acquisition, the two companies competed to provide body-worn camera systems to large, metropolitan police departments across the United States. The complaint challenges the acquisition, alleging that the acquisition reduced competition in an already concentrated market and VieVu’s parent company, Safariland LLC, entered into ancillary anticompetitive non-compete and non-solicitation agreements with Axon when Axon acquired the VieVu body-worn camera division, which substantially lessened competition. Among other things, Axon and Safariland agreed “not to hire or solicit any of [the other’s] employees, or encourage any employees to leave [the other], or hire certain former employees of [the other], except pursuant to a general solicitation” for a period of 10 years. The FTC claims these non-solicitation provisions “eliminate a form of competition to attract skilled labor and deny employees and former employees … access to better job opportunities” as well as restrict worker mobility and deprive workers of competitive information that they could use to negotiate better employment terms. Although Safariland and Axon agreed to rescind the provisions the FTC alleged were anticompetitive within weeks of the complaint being filed, the FTC pursued the action. Safariland entered into a consent agreement in June 2020 requiring it to submit any agreements with Axon that restrict competition between the two companies to the FTC for review and prior approval and to comply with certain antitrust compliance and reporting requirements. Axon is challenging the proceedings on the merits and constitutional grounds and recently sought and obtained a stay of the October 2020 administrative trial.

This enforcement action follows a blog post in which the FTC provided guidance on the use of such restrictions in mergers and acquisitions. The FTC challenge, along with changes in reporting instructions under the HSR Act that require filers to submit all noncompete agreements between the parties of a reportable transaction, shows that acquisition agreements are ripe for scrutiny by antitrust authorities. The Axon enforcement action underscores the need for companies evaluating mergers and acquisitions to carefully consider the need, scope and duration of ancillary no-poach or non-solicitation provisions in transaction agreements, whether the transaction is reportable under the HSR Act or not.

State attorneys general step in

Even more than DOJ and FTC, several state attorneys general have become crusaders against no-poach agreements, particularly the attorney general of Washington state. While the Justice Department takes a reasonably nuanced view of which no-poach agreements should be subject to per se treatment, the Washington attorney general’s office feels itself unencumbered by such fine distinctions:  instead, it takes the view that all no-poach agreements are unlawful in Washington, characterizing DOJ’s case-by-case approach as “somewhat misguided.” Although Washington has focused on franchise systems thus far, there is no indication that its analysis is limited to the franchise context. Notably, the state will not resolve any investigation unless no-poach clauses are removed from contracts nationwide, not just in Washington.

The attorney general’s views have not been tested in court, but since Washington began investigation of no-poach clauses in 2017, it has entered into settlement agreements with over 200 companies (representing nearly 200,000 locations) to end no-poach clauses nationwide. Although the Washington attorney general may be the most fervent enforcer, he is not alone amongst the state attorneys general: in 2018, a coalition of 10 states (including New York and California) and the District of Columbia sent a letter to eight leading fast-food franchisors that requested documents and information relating to the companies’ practices involving no-poach agreements. In 2019, a coalition of 13 attorneys general entered into a multi-state settlement with three companies that ended the use of no-poach clauses contained in franchise agreements.

Private no-poach litigation

In addition to DOJ and FTC pursuit of no-poach agreements, private litigants have brought Sherman Act claims alleging that agreements between competitors not to solicit or hire each other’s employees are per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Some courts have denied motions to dismiss, noting that discovery is needed to determine whether per se, quick look or rule of reason analysis should apply to a given case. See, e.g., In re Papa John’s Employee & Franchisee Employee Antitrust Litig., 2019 WL 5386484 (W.D. Ky. Oct. 21, 2019) (denying restaurant franchisor’s motion to dismiss and declining to require plaintiffs to allege a relevant product or geographic market as direct evidence of anticompetitive effects in terms of suppressed wages and decreased job mobility was sufficient to plead a claim that could be unlawful under a per se, quick look or rule of reason analysis); In re Ry. Indus. Emple. No-Poach Antitrust Litig., 395 F. Supp. 3d 464, 481 (W.D. Pa. 2019) (denying motion to dismiss antitrust claim where plaintiffs alleged a naked no-poach agreement between competitors because such agreements are per se unlawful); Hunter v. Booz Allen Hamilton, Inc., 418 F. Supp. 3d 214, 223 (S.D. Ohio 2019) (denying defendants’ motion to dismiss suit brought by employees of three defense contractors challenging no-poach agreements under all three modes of antitrust analysis without deciding which mode should apply). Given the possibility that such claims will survive a motion to dismiss and proceed to discovery, any no-poach or no-hire provisions should be analyzed to assess the risk of civil litigation or agency enforcement.

Practice Tips for No-Poach Clauses

No-poach agreements can serve to protect legitimate business interests, but they also can serve as a restraint on the ability of employees to compete in the labor market for jobs and wages. A company considering using a no-poach clause in an agreement should consult with antitrust counsel to ensure it is in accordance with federal and state antitrust laws.

To survive antitrust scrutiny, a no-poach agreement must be reasonably ancillary or necessary to achieve an otherwise legitimate business interest such as a merger, asset purchase, joint venture or other type of combination or collaboration, and narrowly tailored to achieve that interest. The restriction must be closely related to the purpose of the underlying agreement and limited in scope and duration. Parties to the restrictive clause should consider what they are trying to protect, why the protection is needed, the scope of protection actually needed and be able to articulate how the restriction accomplishes the benefits of the transaction. The specific facts and circumstances surrounding the transaction and the restrictive clause will be key determinants of enforceability and whether such a clause survives antitrust scrutiny.

National DefenseThe recently passed defense authorization act, known as the NDAA, included amendments to the Securities Exchange Act of 1934 (the “Exchange Act”)—having nothing to do with national defense. Section 6501 of the NDAA enhances the SEC’s ability to obtain disgorgement in the wake of two recent Supreme Court cases, Kokesh v. SEC, 137 S. Ct 1635 (2017) and Liu v. SEC, 140 S. Ct. 1936 (2020), that curtailed the SEC’s ability to obtain that remedy.

Briefly, Section 6501 made the following amendments to the Exchange Act:

  • Gave the SEC statutory authority to pursue disgorgement in federal court.
  • Extended the statute of limitations for scienter-based securities law violations from five to ten years.
  • Provided for a tolling of the statute of limitations period for any disgorgement claim brought against a person outside of the United States.

Kokesh and Liu 

Despite a lack of express statutory authority, federal courts regularly ordered defendants in SEC enforcement actions to disgorge their ill-gotten gains, relying on their power to order equitable relief ancillary to an injunction.

Such orders finally gained Supreme Court scrutiny in 2017 in Kokesh. In that case, the Court held that disgorgement was a “penalty” and, as such, was subject to a five-year statute of limitations.  The Court expressly left open the question of whether the SEC and the courts had the authority to seek and impose disgorgement.  In 2019, the Supreme Court teed up that question by granting certiorari in Liu. The Liu Court agreed with the SEC that courts could impose disgorgement pursuant to their power to order “equitable relief” under Section 21(d) of the Exchange Act, but imposed limits on how the amount of disgorgement could be calculated.  The Justices held that disgorgement orders must be tethered “to a wrongdoer’s net unlawful profits,” meaning that legitimate expenses should be deducted in the calculation of a disgorgement amount. The Court also imposed limits on joint and several liability in the disgorgement context and required that disgorged amounts be returned to victims rather than to the U.S. Treasury.

The Exchange Act Amendments under Section 6501 of the NDAA

Following Kokesh, the SEC lobbied Congress to overturn that decision with legislation. While not fully overturning Kokesh, Section 6501 of the NDAA goes a long way toward meeting the SEC’s goal. It enhances the SEC’s enforcement powers in several ways:

  • It provides express statutory authority for the SEC to seek, and for federal courts to order, disgorgement.  No longer does the SEC have to rely on a court’s general authority to order equitable relief.
  • It doubles the length of the statute of limitations for the SEC to bring enforcement actions under statutes where scienter is an element of the violation. Thus, the SEC now has ten years in which to charge violations of the fraud provisions of section 10(b) of the Exchange Act and section 17(a)(1) of the Securities Act of 1933. Section 6501 of the NDAA also permits the SEC to bring a claim of disgorgement “not later than 10 years after the latest violation that gives rise to the action.”
  • Alleged violators who are not in the U.S. may have to wait even longer to clear the limitations period. Section 6501 provides for tolling of the limitations period for any disgorgement claim where “the person against which the action or claim, as applicable, is brought is outside the United States.”

Implications

The Section 6501 amendments augment the SEC’s authority to obtain disgorgement, most notably for the most serious, scienter-based securities law violations. They also expand the SEC’s ability to seek and obtain disgorgement of ill-gotten gains obtained farther back in time. As a practical matter, the amendments will enable the Commission to leverage higher settlements from enforcement defendants. The amendments did not, however, address the limitations on disgorgement calculations that the Supreme Court prescribed in Liu, since in drafting the amendments Congress appears to have sought to distinguish between “disgorgement” and “civil money penalties.” Also left untouched by Section 6501 were Liu’s limitations on joint and several liability and its requirement that disgorged funds be used to compensate victims. Thus, defendants and those negotiating resolutions with the SEC still can argue, based on Liu, that disgorgement is limited to gross ill-gotten gains offset by legitimate expenses.

 

Facebook LikeIf it seems like 2020 was the year when everyone was talking about antitrust on their socially distant Zoom calls, that is because government antitrust lawyers have been busy. Just before the year began, the Department of Justice announced the formation of the Procurement Collusion Strike Force and, in January 2020, the Antitrust Division rolled out its new vertical merger guidelines. In the criminal realm, courts issued three antitrust fines at or above the $100 million statutory maximum, and the past year also saw the first-ever criminal antitrust indictment for wage fixing, which was brought in the Eastern District of Texas against the owner of a physical therapy staffing company.

Against this backdrop, the Department of Justice and the Federal Trade Commission have filed lawsuits asserting that pretty much the entire Internet is an antitrust violation, and they are seeking to break up the company that is probably the home page on your Internet browser. In addition, a bi-partisan group of state attorneys general filed their own antitrust lawsuit against tech companies, and then another subset of states filed yet another Internet antitrust lawsuit.

Not to be outdone, Congress also got in on the antitrust action. On December 8, 2020, Congress passed the Criminal Antitrust Anti-Retaliation Act of 2019, which was later signed into law. The statute, which took more than a year to be enacted, prohibits any employer from retaliating against an employee, agent, or contractor who reports a potential criminal antitrust violation to the federal government or an internal company supervisor. The statute also explicitly excludes from protection any person who planned and initiated an antitrust violation, attempted to obstruct an antitrust investigation by the Department of Justice, or engaged in another violation of the law in connection with an antitrust violation. The Anti-Retaliation Act provides that an aggrieved individual is entitled to “all relief necessary to make [him] whole,” which includes reinstatement, back pay with interest, and special damages, which includes litigation costs, expert witness fees, and attorneys’ fees.

Unlike some of the other antitrust developments in 2020, the passage of the Criminal Antitrust Anti-Retaliation Act requires some immediate action. First, a company’s whistleblower and compliance policies should be updated to ensure that no adverse action is taken against an employee who reports an antitrust violation. Because the protections of the law apply only to those whistleblowers who report criminal conduct, this effectively limits a whistleblower’s protection to complaints relating to price or wage fixing, bid rigging, output agreements, market or customer allocations, or naked no-poach agreements. Second, those individuals in a company’s compliance department or who are responsible for whistleblower reports must be educated on the antitrust laws in order to ensure the proper controls and procedures are followed once a report is received. Because a protected whistleblower claim will necessarily involve a report of a criminal antitrust violation, procedures should be implemented to ensure that the legal department is involved from the beginning of the process in order to ensure that a proper investigation is performed and the attorney-client privilege is protected.

We’re all waiting to see what 2021 will bring to the world of antitrust. More tech lawsuits? A chorus of criminal no-poaching cases? Increased antitrust prosecutions in government procurement? If 2020 is any indication, in-house counsel and compliance departments should keep their seatbelts fastened and prepare for another bumpy ride.

PillsOn December 22, 2020, the Department of Justice’s (“DOJ”) Civil Division, Consumer Protection Branch, and five U.S. Attorneys’ Offices announced a groundbreaking civil enforcement action against Walmart Inc. (“Walmart”).  The 160-page complaint alleges that the world’s largest company (by revenue) and the operator of over 5,000 in-store pharmacies contributed to the national opioid crisis by violating the Controlled Substances Act (“CSA”) in a myriad of ways.

A Closer Look at the Allegations Against Walmart

In U.S. v. Walmart, et al., filed in the U.S. District Court for Delaware, where Walmart is incorporated, DOJ alleges that Walmart regularly filled opioid prescriptions from known “pill mills”; failed to scrutinize controlled-substance prescriptions to ensure they were valid; had a compliance team that withheld information about “problem prescribers” from its own in-house pharmacists; and placed “enormous pressure” on its pharmacists to fill prescriptions as fast as possible without following proper protocols.

Of the several “red flags” ignored, DOJ alleges that Walmart pharmacists: filled prescriptions for “trinities”[1] and other well-known and highly dangerous drug “cocktails” that Walmart pharmacists knew were predominately sought by individuals engaging in drug abuse; filled multiple prescriptions at the same time for immediate release opioids which, as opposed to extended-release opioids, release the drugs more quickly into the bloodstream; and filled prescriptions for very high dosages of opioids.

DOJ alleges that several of Walmart’s pharmacists filed “refuse-to-fill reports” after noticing these red flags, but Walmart ignored hundreds of the reports filed by its own pharmacists.  Additionally, between 2013 and 2017, Walmart shipped approximately 37.5 million Schedule II, III, and V orders to its pharmacies while at the same time only reporting 204 suspicious orders to the Drug Enforcement Agency (“DEA”).

Prior Criminal Investigation and 2,000 Lawsuits 

According to media reports, DOJ had initially opened the Walmart investigation as a criminal investigation in Texas, but this federal civil enforcement action was brought instead.  The DOJ action also follows more than 2,000 suits filed by states, cities, and counties, which make similar allegations that Walmart ignored red flags in filling prescriptions for opioids.

Walmart’s Suit Against DOJ and the DEA

DOJ’s December 2020 enforcement action against Walmart follows on the heels of Walmart’s filing of a federal civil suit in October 2020 against DOJ and the DEA. In what Walmart acknowledged was a preemptive suit, it sought a declaratory judgment that its opioid prescription practices were compliant with the CSA.  In Walmart’s lawsuit, it also accused DOJ and the DEA of scapegoating Walmart for the government’s own failures in dealing with the opioid crisis.

There are several important takeaways from the Walmart case:

  1. Look for DOJ to Pursue Pharmacies for Their Alleged Roles in the Opioid Crisis. The Walmart case is in line with DOJ’s current trend — and announced intention — of pursuing civil and criminal actions against pharmacies. This comes as DOJ widens its enforcement scope beyond opioid manufacturers and distributors to all actors in the prescription drug supply chain – including pharmacies. While perhaps previously back-burnered while DOJ focused on giant opioid manufacturers, DOJ is now viewing pharmacies as worthy targets and the last line of defense against opioid diversion. This shift “downstream” by DOJ mirrors the wave of local government suits against pharmacies.

On December 15, 2020, Deputy Assistant Attorney General Daniel Feith, who oversees DOJ’s Consumer Protection Branch, gave a keynote speech at the Food and Drug Law Institute’s annual enforcement conference signaling the coming trend in enforcement actions against pharmacies.  DAAG Feith stated that “the Consumer Protection Branch [of DOJ] is also going after unlawful actions by others in the opioid supply chain, including pharmacies.”  DAAG Feith highlighted that pharmacies for “too long [have] abdicated [their] responsibility” as “the last line of defense against prescription opioid diversion.”  Among the many failings by pharmacies, DAAG Feith discussed the various “red flags” pharmacies have ignored, including filling opioid prescriptions written by doctors hundreds of miles away for dosages two to three times higher than CDC guidelines.  As stated by DAAG Feith, individuals and pharmacies “can expect to see additional developments in the opioid arena in the coming year.”

  1. Pharmacies Large and Small Will Be on DOJ’s Radar. While DOJ’s case against Walmart will be one of the most significant opioid enforcement actions in U.S. history, DOJ will cover the waterfront and also look for smaller pharmacies with similar “red flag” practices. As with the Walmart case, look for DOJ civil enforcers to use the CSA as a statute of choice because it allows for injunctive relief (i.e., shutting down the pharmacy) as well as civil money penalties.

In 2019, DOJ’s Consumer Protection Branch and the U.S. Attorney’s Office in the Middle District of Tennessee brought an earlier version of the Walmart suit against two local Tennessee pharmacies.  DOJ stated at the time that it was the Department’s first CSA action against a pharmacy.  Under the leadership of Main Justice’s Prescription Interdiction and Litigation Task Force (PIL), this civil enforcement action (U.S. v. Oakley Pharmacy Inc. et al.,) alleged that two pharmacies, their owner, and three pharmacists assisted in filling several prescriptions outside the course of professional practice and in violation of the pharmacists’ responsibility to ensure that prescriptions were written for a legitimate medical purpose.

DOJ alleged that the pharmacists ignored numerous “red flags” such as: unusually high dosages of oxycodone and other opioids; patients paying high cash prices for prescriptions; patients traveling considerable distances to obtain or fill a prescription; and patients presenting prescriptions for combinations of drugs which are known to be used together by drug abusers as a “cocktail” for their synergistic effect.  Shortly after the case was filed, in February of 2019, the U.S. District Court for the Middle District of Tennessee entered a temporary restraining order against all the defendants shutting down the pharmacies from operating.[2]

  1. Do You Really Want to Sue DOJ? Unlike Walmart, not every company has the resources or frankly, the swagger, to take preemptive legal action against DOJ. It is considered risky, and in the case of Walmart’s preemptive suit, commentators have observed that it appears to be aimed more at creating a public narrative than anything else. When a private party sues DOJ, it is going up against the biggest law firm in the world — and one that actively partners with every law enforcement agency in the U.S.  It is not for the faint of heart.

Conclusion

As we approach the handover to the new Administration, look for DOJ health care fraud enforcement to continue apace, and for DOJ’s Walmart civil enforcement action to signal an increased focus on pharmacies in the opioid space.

[1]             A combination of opioid/non-opioid prescriptions that on their face present an obvious red flag as to the prescription’s validity.

[2]             As of June 2019, DOJ and the defendants moved jointly to enter a preliminary injunction against the two pharmacies and their owner extending the terms of the TRO.

White HouseOn December 22, 2020, President Donald Trump granted fifteen full pardons and commuted the sentences of five incarcerated individuals. The next day he did it again, granting twenty-six more pardons and three additional sentence commutations. While there is no doubt that a President has the constitutional authority to grant pardons and commute criminal sentences, the extent to which President Trump’s actions bypassed established guidelines and political norms is striking.

Of those granted clemency, several were politically connected to the President.   For instance, George Papadopoulos and Alex van der Zwaan received full pardons. Both men were members of the 2016 Trump campaign who pleaded guilty to making false statements to FBI officials in connection with the Mueller investigation into Russian interference in the 2016 election. The President’s former campaign chairman, Paul Manafort, was also pardoned of his financial crimes related to his work in Ukraine.

Former GOP Congressmen Duncan Hunter and Chris Collins were each pardoned of their convictions for misuse of campaign funds and insider trading, respectively. And President Trump commuted the sentence of former Rep. Steve Stockman, who was convicted of misuse of charitable funds.

The President pardoned Charles Kushner, real estate tycoon and the father of the President’s son-in-law, who had been convicted of filing false tax returns, witness intimidation, and making false statements to the Federal Election Commission. Four Blackwater security guards, who were involved in the 2007 Nisour Square Massacre in Baghdad, Iraq, also received pardons.

Several media outlets and lawmakers from both sides of the aisle have criticized the pardons and commutations. Rep. Adam Schiff (D-CA) said that the President did not grant the pardons “on the basis of repentance, restitution or the interests of justice, but to reward his friends and political allies.” Ben Sasse (R-NE) called the grants of clemency “rotten to the core.”

The New York Times reported that many of the pardons and commutations “bypassed the traditional Justice Department review process — more than half of the cases did not meet the department’s standards for consideration.”

While presidents have unfettered power to grant pardons and to commute sentences, there are procedures that those seeking such relief usually follow. Petitions for and grants of clemency are guided by 28 C.F.R. Part 1. Individuals typically apply for clemency through the Department of Justice’s Office of the Pardon Attorney. Individuals are typically not eligible to seek a full pardon until at least five years after their release from any form of confinement imposed as part of the sentence for their most recent criminal conviction. Under certain circumstances, DOJ may grant a waiver of the five-year wait requirement. Those seeking sentence commutations may submit petitions at any time, provided they have exhausted all other judicial and administrative avenues for relief.

For ordinary individuals, without direct ties to the President like some of those mentioned above, the clemency process begins by submitting a petition to the Pardon Attorney. The Pardon Attorney, under the supervision of the Deputy Attorney General, investigates and evaluates all clemency petitions. In general, the Pardon Attorney looks for demonstrated good conduct by a petitioner for a substantial period after conviction and service of a sentence.

The DOJ Justice Manual requires the Pardon Attorney to evaluate and consider the following five factors: 1) the petitioner’s post-conviction conduct, character, and reputation; 2) seriousness and relative recentness of the offense; 3) acceptance of responsibility, and atonement by the petitioner; 4) need for relief; and 5) official recommendations and reports from knowledgeable officials, such as the prosecuting attorneys and sentencing judges. The Pardon Attorney also considers factors such as disparity or undue severity of a sentence, the petitioner’s health and age, overall criminal record, and any service to the country.

After the Pardon Attorney has considered all relevant information, the office prepares a recommendation to the Deputy Attorney General. The Deputy Attorney General makes DOJ’s final determination on a petition and submits it to the White House for review by the President.

While the motive behind the President’s recent pardons and commutations may be subject to question, his executive clemency power is not.   The Constitution vests the President with the plenary “Power to grant Reprieves and Pardons for Offences against the United States.” The regulations that guide the typical application process “are advisory only and for the internal guidance of Department of Justice personnel.” “They create no enforceable rights in persons applying for executive clemency, nor do they restrict the authority granted to the President under Article II, Section 2 of the Constitution.”

As of the publication of this blogpost, President Trump has granted some form of clemency to 92 individuals. And if recent history is any indication, that number is only going to grow as President Trump continues to exercise that unconstrained authority.

 

 

 

Locked SafeTrade secrets are often a company’s most valuable asset, whether those secrets involve cutting-edge medical research or the formula for Coca-Cola. Businesses must take significant steps to protect these valuable “crown jewels” at all costs, whether by securing them on a network or a locked room, encrypting them, or restricting employee access on a need-to-know basis. But these precautions don’t always protect the data as intended and valuable information can slip into the wrong hands, causing substantial harm to the business including, if the wrongdoer can be identified, costs pursuing damages in civil litigation.

Last week the U.S. Attorneys’ Office for the Southern District of Ohio announced that Yu Zhou, a Chinese national, pleaded guilty to conspiring to steal trade secrets from his employer for the benefit of the Chinese government. Zhou, along with his wife, Li Chen, admitted to conspiring to steal medical research aimed at treating several different liver diseases and a rare condition affecting premature infants. Chen pled guilty in July 2020. Zhou and Chen worked in different research labs at an Ohio hospital for nearly a decade. Their employment gave them access to the valuable scientific research which, they agreed, could be sold for personal profit in China. To facilitate their scheme, they established a company in China through which they would sell the research to others connected with the Chinese government, including the National Natural Science Foundation of China. They also co-founded their own company, GenExosome Technologies in the United States, which would sell products and services related to the technology.

The hospital had established protocols to protect its information, including (1) restricting physical access to research labs; (2) requiring employees to wear identification badges and sign security and confidentiality agreements; (3) establishing policies to protect patents and prohibit conflicts of interest; (4) requiring third parties to sign non-disclosure agreements; (5) restricting computer access; and (6) conducting regular training on handling confidential information. Despite these protections, Chen and Zhou were able to access and remove data and establish companies in China and the United States to profit from their theft.

Zhou and Chen have yet to be sentenced but face years of imprisonment plus heavy monetary sanctions and forfeiture orders. Their convictions, however, highlight a key concern of the United States, recently described by Director of National Intelligence John Ratcliffe as the Chinese government’s strategy to “rob, replicate, and replace” American intellectual property.[1] The Department of Justice (DOJ) has, in turn, increasingly focused on protecting American innovation and technology from misappropriation by the Chinese government.

DOJ’s focus on trade secret theft is a key component of the “China Initiative” rolled-out by DOJ two years ago. On November 16, 2020, the two-year anniversary of the initiative, Attorney General William Barr announced that “the Department has made incredible strides in countering the systemic efforts by the [People’s Republic of China] to enhance its economic and military strength at America’s expense … [and] is committed to holding to account those who would steal, or otherwise illicitly obtain, the U.S. intellectual capital that will propel the future.”[2] The initiative “prioritizes use of the Department’s core tool, criminal investigation and prosecution, to counter economic espionage and other forms of trade secret theft.”[3]

The DOJ’s increased interest in investigating these crimes has resulted in multiple indictments for economic espionage since the start of 2020. In total, DOJ has charged five cases involving theft of trade secrets for the benefit of China and an additional ten cases with “some alleged nexus to China.”[4]

DOJ’s early focus was on educating and protecting those in academia who might be viewed as easier targets for these thefts given the open idea-sharing that is central to academic research. But the criminal charges unveiled this year reveal that the initiative is expanding.

Zhou and Chen, for example, underscore the value of medical research that might be targeted – a topic that is particularly acute given the ongoing COVID-19 pandemic. In fact, DOJ reported that it had charged several individuals associated with the Chinese Ministry of State Security in connection with global hacking campaigns targeting biomedical researchers conducting COVID-19 research.[5]

In February 2020, DOJ announced the sentencing of a Houston man, convicted of trade secret theft and related crimes, for setting up a subsidiary for a Chinese company in the U.S. that was used to steal trade secrets in connection with the manufacture of an engineered-foam material used in oil and gas drilling.[6] Later that same month, DOJ announced that a Chinese national had been sentenced for stealing trade secrets from his employer, a petroleum company, involving the development of battery technology.[7] DOJ has also announced charges or convictions related to theft of trade secrets from semiconductor manufacturers and oil and gas producers.[8]

Inevitably, businesses in all sectors must be vigilant to protect their valuable trade secret information. Those that have relationships with China-based distributors, manufacturers, or the like should employ enhanced due diligence and ensure the adequacy of their firewall protocols to silo trade secret information. Obviously, not every connection to China puts a company at risk for theft, but China’s willingness to facilitate, and pay for, misappropriated American research and technology creates a tempting environment for employees and business partners to steal trade secrets. Enhanced due diligence and periodic background checks are now critical to maintaining the secure environment a business needs to protect its proprietary information.

[1] John Ratcliffe, “China is National Security Threat No. 1,” Wall Street Journal Op-ed (Dec. 3, 2020).

[2] U.S. Dep’t of Justice, “The China Initiative: Year-in-Review (2019-20),” No. 20-1238 (Nov. 16, 2020).

[3] Id.

[4] Id.

[5] See id.

[6] See U.S. Dep’t of Justice, “American Businessman Who Ran Houston-Based Subsidiary of Chinese Company Sentenced to Prison for Theft of Trade Secrets,” No. 20-174 (Feb. 11, 2020).

[7] See U.S. Dep’t of Justice, “Chinese National Sentenced for Stealing Trade Secrets Worth $1 Billion,” No. 20-242 (Feb. 27, 2020).

[8] See, e.g., U.S. Dep’t of Justice, “Chinese Citizen Convicted of Economic Espionage, Theft of Trade Secrets, and Conspiracy,” No. 20-598 (June 26, 2020); U.S. Dep’t of Justice, “Chinese Energy Company, U.S. Oil & Gas Affiliate and Chinese National Indicted for Theft of Trade Secrets,” No. 20-1182 (Oc. 29, 2020).

FraudDefendants in the “Varsity Blues” university admissions scandal recently succeeded in their latest effort to beat back some of the charges against them by arguing that university admissions slots are not “property” for purposes of federal mail and wire fraud.  The decision in U.S. v. Ernst (D. Mass. 19-cr-10081) conflicts with the conclusion reached by another judge in a related case earlier this year.  This disagreement highlights the lack of clarity as to what constitutes “property” for mail/wire fraud.

As is familiar to readers of legal news and celebrity tabloids, the Varsity Blues defendants allegedly conspired to cheat on college entrance exams and admissions applications in order to fraudulently obtain admission to the schools.  The defendants in U.S. v. Ernst are coaches and an athletic director from the University of Southern California, Wake Forest University, and Georgetown University.  In the alleged scheme, applicants’ parents made payments to a college prep business and related charity run by Rick Singer.  Singer arranged for the payments to be passed along as bribes to college athletic recruiters, who in return accepted applicants without relevant athletic ability into the schools’ athletic programs.  Funds also were used to pay ringers to take exams and complete coursework on behalf of students whose parents thought their college applications needed a boost.

The defendants were charged with federal mail/wire fraud, which occurs when a person makes use of the mail or an interstate telephone call or electronic communication “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.”  18 U.S.C. §§ 1341.  Courts have determined that “property” may be intangible, such as a victim’s confidential business information.  Carpenter v. U.S., 484 U.S. 19 (1987), is the classic example where the Supreme Court held that non-public information concerning stocks is “property.”

But can the definition of “property” stretch to include university admissions slots?  The Ernst court held that it cannot, opining that university admissions slots do not have traditional commercial value like the confidential business information in Carpenter and similar cases, nor were they treated by the universities as an intangible property asset.

The Ernst court relied on Cleveland v. United States, in which the Supreme Court held that video poker licenses awarded by the state of Louisiana did not constitute “property.”  531 U.S. 12 (2000).  The Cleveland defendants used false statements to obtain video poker licenses.  The Supreme Court held that, although this deprived the state of its sovereign right to choose who obtained the licenses, it did not deprive the state of “property” as that concept traditionally has been understood.  As the Court further noted, the licenses only became “property” when placed in the hands of the recipients.

The Ernst court also cited the recent Supreme Court decision in Kelly v. U.S., 140 S. Ct. 1565 (2020), the “Bridgegate” case.  There, deputies of New Jersey Governor Chris Christie reduced access to traffic lanes in Fort Lee leading to the George Washington Bridge as a means of political retribution against Fort Lee’s mayor, a Christie critic.  This summer, the Supreme Court rejected the government’s effort to expand the definition of “property” to include either the physical lanes of the roadway or the labor of the government employees who engineered the lane realignment.  The Supreme Court determined that the scheme was directed not at obtaining government property, but at altering a regulatory decision.  Any cost imposed on the local bridge authority was not property that the defendants “sought to obtain” but rather was an “incidental byproduct” of the defendants’ conduct.

In holding that the university admissions slots were not “property,” Ernst rejected the government’s reliance on U.S. v. Frost, a Sixth Circuit decision concerning fraudulently awarded university degrees.  11 125 F.3d 346 (6th Cir. 1997). The court determined that Frost was not on point:  the question the Sixth Circuit faced was not whether the university had been fraudulently deprived of property, but rather whether the university had been deprived of the honest services of its employees (i.e., honest services fraud).  The analysis undertaken by the Sixth Circuit “did not wrestle with whether the degrees amounted to ‘intangible property rights’ under the standard set forth in Carpenter.”  Furthermore, Frost predated the Supreme Court’s decisions in Cleveland and Kelly.

The Ernst decision might suggest that there is finally a clear boundary line around what is rightly considered “property” for the purposes of mail/wire property fraud, and that this boundary turns on whether the alleged property has commercial value and can be monetized.  But in fact, this boundary is not so well-defined.  Another judge in the same court came to the opposite conclusion in a related Varsity Blues case this summer, United States v. Sidoo (D. Mass. 1:19-cr-10080).  Sidoo relied on Frost to hold that “the definition of ‘property’ extends readily to encompass admission slots.”  Sidoo focused on the monetary and commercial aspects of university admissions, noting for example that the admission of unqualified students hurts a school’s reputation, which in turn diminishes its ability to attract qualified tuition-paying students and solicit donations.

Courts in other districts continue to grapple with the definition of property.  For example, the Second Circuit recently held in a 2-1 decision in United States v. Blaszczak (2d Cir. 18-2811, Dec. 30, 2019) that a governmental regulatory agency’s confidential information is “property” akin to the confidential business information in Carpenter, because the agency had a “property right in keeping confidential and making exclusive use” of that information before announcing its regulatory position.  The Second Circuit opined that it is not required that a property interest be “economic” in nature, but nonetheless the agency had an economic interest in the information in Blaszczak, because the leaking of the information could hamper its decision-making process and make it less efficient.  And in United States v. Middendorf, (S.D.N.Y. 1:18-cr-36 (JPO), July 17, 2018), a New York district court held that confidential information belonging to the Public Company Accounting Oversight Board which was leaked to one of the accounting firms subject to its supervision was “property” for purposes of the wire fraud statute.

The Blaszczak defendants filed a petition for certiorari, citing extensively to Kelly, which was decided by the Supreme Court after the Second Circuit’s Blaszczak decision.  The government has requested that the Supreme Court vacate the Second Circuit’s decision and remand the case for further consideration in light of Kelly.  The Supreme Court has not yet decided whether to grant the certiorari petition.  Meanwhile, the trial defendants in Middendorf have appealed their convictions to the Second Circuit, but oral argument has not yet been scheduled.  So it appears that the Second Circuit, and possibly the Supreme Court, will have additional opportunities to explain what does and does not qualify as “property” for the purposes of federal mail/wire fraud.  In the meantime, the Varsity Blues cases continue to provide an interesting angle for examination of this enduring question.

moneyThe Southern District of Ohio, where interstate highways stretching from the southern tip of Florida enter the southwestern point of Ohio, usually and understandably boasts a steady stream of interstate drug trafficking cases. Since 2019, however, the District has prosecuted a growing number of public corruption cases as well. In that short time, the United States Attorney for the Southern District of Ohio has become Ohio’s Chief Public Corruption Officer. These prosecutions show that a core group of Southern Ohio federal prosecutors and investigating agents have used time-tested covert investigative techniques to bring to light alleged schemes by state and local public officials to obtain bribes from property development, construction and energy companies in need of government contracts, approvals and assistance.

The Investigations and Prosecutions

First came Dayton. On April 25, 2019, Joey Williams, a member of the Dayton City Commission, was charged with bribery concerning programs receiving federal funds in violation of 18 U.S.C. § 666(a)(1)(B), and Roshawn Winburn was charged with wire fraud in violation of 18 U.S.C. § 1343. Multiple Dayton businesspeople were also charged in connection with the scheme. The indictments alleged that Commissioner Williams solicited home remodeling services from a company at a lower rate than usual. In exchange, Commissioner Williams promised to provide the remodeling and construction company with city contracts. The indictments alleged that Mr. Winburn, Dayton’s Director of the Minority Business Assistance Center, devised the scheme. Five months later, Commissioner Williams pleaded guilty to corruptly soliciting a bribe and, on January 30, 2020, and was sentenced to 12 months in prison. Mr. Winburn, in turn, pleaded guilty on February 11, 2020 for corruptly soliciting a bribe and was sentenced to six months in prison. According to the charges, a confidential informant recorded incriminating conversations with Commissioner Williams, which undoubtedly was a significant factor in his and Mr. Winburn’s decisions to plead guilty.

Next came Cincinnati. In 2020, three members of the Cincinnati City Council were indicted on public corruption charges. One of them has pleaded guilty. All three cases involved the use of confidential informants and victim property development companies. Two involved undercover agents.

On March 11, 2020, Tamaya Dennard, a member of the Cincinnati City Council, was charged with federal program fraud, wire and honest services fraud, and extortion in violation of 18 U.S.C. §§ 666, 1343, 1346, and 1951. Councilwoman Dennard solicited and received money from a confidential informant, who was a Cincinnati attorney. Councilwoman Dennard offered to take public action to assist one of the attorney’s clients in exchange for the bribe. On June 29, Councilwoman Dennard pleaded guilty to honest services wire fraud. On November 24, she was sentenced to 18 months in prison.

On November 4, 2020, Jeffrey Pastor, another member of the Cincinnati City Council, was charged with bribery concerning programs receiving federal funds, honest services wire fraud, conspiracy to commit honest services wire fraud, and extortion and attempted extortion in violation of 18 U.S.C. §§ 666(a)(1)(B), 1343, 1346, 1349, 1951, and 1956. This investigation used a confidential informant but also used at least one undercover agent. The indictment alleged that Councilman Pastor solicited and received bribes from a Cincinnati property developer who was acting as a confidential informant and an undercover agent posing as the informant’s business partner. The alleged scheme was that the developer and business partner would pay a bribe in exchange for official acts and votes approving a Cincinnati development project owned by the confidential informant. On November 10, Councilman Pastor pleaded not guilty and the case is ongoing.

On November 18, 2020, a third member of the Cincinnati City Council, Alexander “P.G.” Sittenfeld, was charged with bribery concerning programs receiving federal funds, attempted extortion, and honest services wire fraud in violation of 18 U.S.C. §§666(a)(1)(B), 1343, 1346, and 1951. The indictment alleged that Councilman Sittenfeld solicited and received funds in exchange for official acts and votes approving the same development project involved in Mr. Pastor’s indictment. The indictment further alleged that the same confidential informant and three undercover agents, who posed as the same informant’s business partners, collected incriminating information from Councilman Sittenfeld. On November 19, Councilman Sittenfeld pleaded not guilty and the case is ongoing.

Last is the Ohio House of Representatives. On July 30, 2020, Larry Householder, now the former Speaker of the House of Representatives, and five other defendants – including non-profit corporations and lobbyists – were charged with racketeering, bribery, extortion and related crimes. The charges arose out of an energy company’s payment of approximately $60 million over three years to a 501(c)(4) entity allegedly for the purposes of influencing Ohio legislators to pass a $1.5 billion-dollar nuclear plant bailout and then to defeat a ballot initiative to overturn the bailout.  According to the indictment, a confidential informant assisted the government in the investigation. Mr. Householder and his codefendants have pleaded not guilty and the case is ongoing.

The Take-Aways

There are several common elements and lessons to be drawn from these cases. First, by developing evidence sufficient to indict at least six state and local current and former public officials, the prosecutors in the Southern District of Ohio have exposed a serious alleged pay-to-play public corruption problem in Ohio. The United States Attorney for the Southern District Ohio has stated in press conferences that public corruption is a focus of the Department of Justice. That focus is clear from these indictments.

Second, taking a page from the Abscam investigation and prosecutions 40 years ago – which inspired the 2013 movie American Hustle – the investigators first cultivated confidential informants and apparently persuaded them to make tape recordings of their conversations with the defendant public officials. In the Pastor and Sittenfeld investigations, the government eventually introduced the public officials to government agents acting in an undercover capacity, who also recorded their interactions. When cases are made using the public officials’ own words, it is very difficult for them to avoid conviction unless they are able to establish the rarely successful defense of entrapment. To succeed on the defense, the public official must demonstrate that the government “induced” him to commit the charged offense and then the government must fail to “prove beyond [a] reasonable doubt that the defendant was disposed to commit the criminal act prior to first being approached by Government agents.” Jacobsen v. United States, 503 U.S. 540, 549 (1992).

Third, these prosecutions should serve as a reminder to all Ohio public officials of one of the most important things they were taught early in their careers: Don’t say anything you would be embarrassed to see on the front page of your local newspaper. Or quoted in an indictment or U.S. Attorney’s press release.

State of OhioCOVID-19 continues to rage on after months of impacting our lives, businesses, and the economy. Ohio, at one point a beacon of the country’s COVID-19 response, has recently set state records for new daily cases, hospitalizations, and, sadly, deaths. In response to the increased number of cases in Ohio, last week, Governor DeWine announced a new set of COVID regulations and created a new investigative task force designed to curtail the spread of COVID-19. These new regulations will impact businesses immediately.

The RestartOhio Regulations

In April, Governor DeWine, through the Ohio Department of Health (“ODH”), promulgated the “RestartOhio Regulations,” which aimed to limit the spread of COVID-19 as Ohio reopened. We wrote about the RestartOhio Regulations and their predicted impact on Ohio businesses here. As we believed, restaurants and bars suffered from citations, fines, and government intervention from the Ohio Investigative Unit (“OIU”), a unit tasked with enforcing the RestartOhio Regulations. To date, the lion’s share of enforcement appears to have been directed at restaurants and bars; however, the Governor’s recent order appears designed to expand enforcement to other retail establishments while further tightening restrictions on the restaurant industry.

Ohio’s Revised Orders

On November 11, 2020, Governor DeWine reupped regulatory oversight of businesses, retail establishments, and bars and restaurants and announced two revised orders. The first revised order governs the use of masks. The existing July 23, 2020 mask order required individuals to wear masks indoor non-residential buildings, outdoors when unable to maintain a six-foot distance from others, or while waiting for or riding public transportation. The mask order did not apply to those younger than ten years, those for which it would not be medically safe to wear a mask, individuals who are communicating with the hearing impaired, those who are alone in an enclosed non-residential space, those actively engaged in exercise, and various other exceptions.

The revised mask order leaves in place the requirements from the first order and further requires each retail establishment to post a sign that requires face-covering upon entry. Each store is additionally tasked with ensuring that each customer and employee complies with the mask order. By the terms of Governor DeWine’s announcement, a well-meaning business who fails to ensure just one customer is wearing a mask would be in violation of the order.

The second revised order relates to Ohio’s social gathering order. The existing April social gathering order, with certain exceptions, prohibited congregating in groups of ten or more individuals. The revised social gathering order, in contrast, places greater restrictions on “open congregational areas,” including outdoor dining areas. Under the newly-issued order, patrons must remain seated and masked unless they are actively consuming food or drinks. Patrons may not dance at outdoor dancing areas or meander about while dining. This order will impact bars and restaurants most directly, and Governor DeWine left open the question of whether bars and restaurants will be permitted to remain open at all. Governor DeWine indicated an announcement with respect to whether bars and restaurants will be shut down will come by November 19, 2020.

Implications for Businesses Being Investigated

Governor DeWine created an investigative team to enforce these revised orders. The Retail Compliance Unit, or “RCU,” is comprised of agents led by the Ohio Bureau of Workers’ Compensation. The RCU is empowered to audit businesses for compliance with the revised orders. A business’s first violation of a revised order as cited by the RCU will result in a written warning. A second violation will result in the closure of the business for up to 24 hours. While little is known about the RCU because it was just created last week, businesses should be aware that undercover officers are a potential source of government investigation. Just like the OIU, an RCU agent could walk into a business, examine it for non-compliance, and leave without a trace.

It appears certain that enforcement of the RestartOhio Regulations will increase after Governor’s DeWine’s announcement, and the most important takeaway for businesses is that the new orders put the onus on the business to know and enforce these new rules so that they can ensure compliance, regardless of a patron’s proclivity for mask use. Therefore, businesses should instruct their employees on these new rules, train their employees to remain vigilant to ensure its patrons wear face coverings, and instruct them how to appropriately address uncooperative customers. If they have not already, Ohio businesses should adopt the standards set out in the RestartOhio Regulations and the revised orders. Failure to adopt appropriate safety precautions could result in the business being fined or closed.

 

Fraud“Never let a good crisis go to waste” was an observation supposedly made by Winston Churchill at the Yalta Conference towards the end of the Second World War while he was pressing for the formation of the United Nations.  In 2020, Churchill’s admonition has found a less lofty home with COVID fraudsters who have abused the Paycheck Protection Program (“PPP”) by submitting false loan applications.  As explained in more detail in this earlier post, PPP authorized banks to make up to $649 billion in forgivable loans to small businesses for job retention and certain other expenses.  Alongside the announcement of PPP and its disbursements over the past summer, DOJ has been vocal about investigating PPP fraud and identifying problems in applications for PPP funds sought by individual and businesses, and its enforcement activity has recently increased.  We cautioned in a prior post here that the PPP application and repayment forms require that the borrower to make “good faith” certifications about their business and its need and use of the PPP funds.  Now, nearly eight months after the first announcement of PPP, we have identified several trends in DOJ’s efforts to investigate and prosecute PPP fraud.

First, the number of DOJ prosecutions continues to steadily increase.  In early September, DOJ reported that it had charged a total of 57 different defendants with PPP fraud.  Two months later, in early November, that number has increased to 73.  This won’t set any records, but it is evident that DOJ is continuing to monitor, investigate, and pursue criminal charges for PPP loan fraud.  Interestingly, however, both in September and this month, DOJ identified roughly 500 individuals who committed PPP fraud, suggesting that, despite its aggressive rhetoric, DOJ has not yet commenced a widescale investigation of the 5.5 million recipients of PPP loans.

Second, the vast majority of PPP fraud cases brought so far generally involve “textbook fraud,” meaning that the DOJ is bringing charges focused on clear misrepresentations like fabrication of employee numbers or the borrower’s use of PPP funds for personal purposes  This is not surprisingly, given both the size of PPP and that it is easier pursue the low-hanging fruit  involving readily-apparent fraud.  For example, in September, DOJ charged a Hawaii-based business man with PPP fraud based on three fraudulent PPP applications for over $12.8 million in funds.  This individual, per DOJ: (a) misrepresented the number of employees at his business and their compensation; (b) deposited $2 million of the PPP funds into his personal bank account; and (c) overstated how his business had been negatively affected by the COVID-19 pandemic.  In another case in October, DOJ charged two individuals in separate, but related, frauds in which each individual provided falsified documents in support of their respective PPP applications that misrepresented the size of the businesses and the number of their employees and, consequently, obtained over $24 million in funds.  Notably, one of the individuals allegedly used a portion of the loan funds to by luxury goods and a Ferrari.

Third, as the above two examples make clear, DOJ appears to be appropriately focused on larger loans, aligning with earlier Treasury statements that loans under $2 million would not be heavily scrutinized.  Where the fraud is egregious, however, DOJ may still bring charges even if the loan is less than $2 million. A recent set of charges were brought against five individuals who obtained $1.1 million in PPP loans when, in actuality, they had no actual business operations or employees.

None of this may seem particularly surprising:  the PPP was a high profile and historically large government program, triggering both increased likelihood of potential fraud and resulting criminal prosecutions.  But these last few months are probably not fully indicative of future DOJ actions.  First, there is no indication that the pace of prosecutions will slow down in the near term; if anything, under the new presidential administration, we may see an increase in fraud prosecutions.  Second, while there are likely more cases of clear-cut fraud, we would expect the DOJ to take a more expansive and creative approach to PPP prosecutions as the low-hanging fruit is resolved.  Third, the federal fraud statutes have a long statute of limitations – for example, ordinary wire fraud is five years, and wire fraud that affects a financial institution, which would likely cover most PPP fraud, is 10 years – giving the DOJ ample time to conduct investigations and prosecute them in an orderly fashion.