Just a Flesh Wound? Yates Memo Alive and Well—At Least in the Third Circuit
Reviving a doctrine some False Claims Act defense practitioners had hoped was dead and gone, the Third Circuit issued a decision in March sustaining summary judgment against an individual defendant even though she had no financial stake in the corporation profiting from the fraud. United States ex rel. Doe v. Heart Solution PC et. al., No. 17-2019, 2019 WL 1187217 (3d Cir. Mar. 14, 2019).
The case centers around two individual defendants (Ms. and Mr. Patel) who had been convicted of defrauding Medicare by submitting diagnostic reports with forged signatures and false certifications of physician supervision. Those convictions were followed up by this civil action alleging the identical schemes for which the defendants had already been convicted, but adding new defendants (namely, the two corporate entities run by Ms. and Mr. Patel, respectively). The District of New Jersey granted summary judgment in the civil case based predominantly on the convictions and plea colloquies, after which Ms. Patel appealed. One principal argument on appeal was that Ms. Patel should not be held liable for the acts of the corporate entity owned solely by her husband, where she was a mere employee, and as to which she had made no admissions during the criminal case.
The argument has a certain visceral appeal; even the court acknowledged that board members and executives ("individuals with ownership interests") constitute the more typical individual FCA defendants. There is a sense of principal unfairness—perhaps even futility when it comes time to collect damages—in pursuing individual civil liability for a fraud in which the defendant had no financial stake and gained nothing. Nevertheless, the Third Circuit rejected Ms. Patel's arguments, characterizing ownership as "irrelevant" to the FCA liability question under the plain terms of the statute. Curiously, the court chose not to make the (arguably more intuitive) leap from the broad language of their guilty pleas to conclude that Ms. Patel undoubtedly exercised some control over and received financial benefits from the corporation owned by her own husband, which just so happened to mirror the scheme undertaken by her own corporation at the exact same time. Rather, the court hailed back to the 2015 guidance published by then-Deputy Attorney General Sally Yates, which endorsed FCA enforcement against individuals "at all levels" of the corporate structure (the "Yates Memo").
When issued, the Yates Memo struck a note of dread as it outlined an aggressive shift towards individual enforcement—even where the individuals in question had no ability to pay any ultimate judgment. But its viability had been called into question late last year, when now-Deputy Attorney General Rod Rosenstein announced changes to DOJ policy that appeared to signal a retreat from the Yates Memo positions. In remarks at the American Conference Institute's FCPA conference in November 2018, Rosenstein outlined a reversion to pre-Yates priorities, dictating that the "primary goal" of civil cases is to recover money, and allowing corporate cooperation credit even in cases where the corporation had not identified every single individual involved.
The Third Circuit's reliance on the Yates Memo serves as an important and practical reminder that much of the guidance there is still relevant today. The Third Circuit at least has a message for individual defendants hoping to slide under the radar due to lack of ownership status or financial interest in the fraud: None shall pass.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
