By Alan J. Bozer and James E. B. Bobseine, originally published in The Daily Record on Thursday, February 22, 2018.

White Collar Corner: DOJ Memo Suggests Narrowed Regulatory Enforcement Under President Trump

A Department of Justice (DOJ) memorandum released on Jan. 25, 2018, authored by former Associate Attorney General Rachel Brand (the Brand Memo), suggests that the DOJ will be narrowing its activity in the area of affirmative civil enforcement (ACE), including in the federal False Claims Act (FCA) context. In certain ACE cases, the rationale of the Brand Memo will strengthen certain defense arguments by targets whose alleged conduct expressly violates a federal agency guidance document interpreting the relevant statute.

Together with other recent DOJ activity, the Brand Memo reflects an emerging trend of de-emphasis on regulation and regulatory enforcement under the administration of President Donald J. Trump.

The Brand Memo reflects a growing trend under President Trump

The Brand Memo, which restricts the DOJ’s use of “guidance documents” in ACE cases, arrived just two months after a memorandum from Attorney General Jeff Sessions (the Sessions Memo) that made clear that the DOJ would no longer rely upon informal agency guidance (i.e., issued outside of the notice-and-comment rulemaking required by the Administrative Procedure Act [APA]) in order to create binding standards by which the DOJ will assess regulatory or legal compliance.

The skepticism of the current Executive Branch toward regulation and regulatory enforcement was also apparent in Executive Order 13777, issued in March 2017, which called for each federal agency to establish a Regulatory Reform Task Force (Task Force). The purpose of the Task Force is to identify existing regulations for potential repeal, replacement or modification. Similarly, in December 2017, Attorney General Sessions announced the rescission of 25 DOJ guidance documents that the DOJ’s own Task Force had identified as unnecessary, inconsistent with existing law, or otherwise improper.>

Together with the Sessions Memo, Executive Order 13777, and the December guidance rescissions, the Brand Memo reflects a potential lessening of the DOJ’s—and federal agencies’ generally—reliance upon agency guidance documents in establishing standards of conduct under federal law.

After the Brand Memo, the DOJ must limit use of agency “guidance documents”b>

The Brand Memo restricts the DOJ’s use of “guidance documents” in ACE cases. These “guidance documents” are federal agency statements meant to educate or provide non-binding legal advice to regulated entities or individuals regarding the application or interpretation of federal statutes or regulations. For example, the Centers for Medicare & Medicaid Services (CMS), the federal agency within the Department of Health and Human Services that oversees Medicare and Medicaid, has generated an extraordinary number of guidance documents. By CMS’s own count, close to 37,000 documents are available online that involve some amount of guidance in that area. This regulatory space has, in the past, proved to be fertile ground for ACE cases in the FCA context.

The Brand Memo makes clear that the DOJ may no longer:

  1. use its enforcement authority to convert such guidance documents, which are widespread in areas of federal regulation from health care to the stock market to cybersecurity, into binding rules; or
  2. use an individual’s or a company’s noncompliance with such guidance documents as a basis for proving legal violations in ACE cases.

The Brand Memo specifically references the FCA context, and makes clear that these restrictions will apply when the DOJ is enforcing the FCA by “alleging that the party knowingly submitted a false claim for payment by falsely certifying compliance with material statutory or regulatory obligations.” The Brand Memo also makes clear that these restrictions will apply only in future ACE cases, or—where practicable—matters currently pending.

It is not yet clear how the Brand Memo will affect federal regulatory enforcement

It is not yet clear how the Brand Memo will affect any individual ACE case. ACE cases are civil lawsuits brought on behalf of the United States (1) to recover government money allegedly lost to fraud or other misconduct, often brought pursuant to the FCA, or (2) to impose penalties for violations of federal health, safety, civil rights or environmental laws.

An ACE case might involve a health care provider’s alleged overbilling of federal health programs like Medicare and Medicaid; the alleged delivery by a contractor of defective goods to a federal agency; an individual’s alleged misrepresentation to a federal agency in order to obtain a grant from that agency; or a company’s alleged pollution of land for which the government sues to recover its cleanup costs. ACE cases are typically the province of “Main Justice” in Washington, D.C., and the Civil Divisions of the 93 U.S. Attorney’s offices around the country. In the Western District of New York, the ACE Unit within the Civil Division handles civil enforcement of health care fraud and government procurement fraud, among other forms of fraud against the government.

As noted earlier, the restrictions in the Brand Memo will apply only in future ACE cases, or—where practicable—matters currently pending. Notably, the Brand Memo does not define “currently pending,” or “practicable,” leaving unclear the scope of its application to ongoing DOJ investigations and lawsuits.

The Brand Memo will affect ACE cases in a variety of areas, including FCA enforcement cases alleging fraud under Medicare. As mentioned above, CMS has generated nearly 37,000 documents that involve some amount of guidance. Most of these guidance documents have not undergone notice-and-comment rulemaking under the APA. As a result, according to the Brand Memo, the failure by an individual or entity regulated by CMS to comply with the agency’s guidance may not be understood as reflecting a legal violation, and may not be used to demonstrate a violation of the FCA.

Another regulatory enforcement area in which the Brand Memo may have an effect is the federal government’s investigation and prosecution of securities laws violations. The Securities and Exchange Commission (SEC), like CMS, produces numerous documents annually by which the agency interprets the legal and regulatory obligations of individuals and entities in the financial services industry whose conduct is regulated by the SEC. To the extent that the DOJ pursues such cases, they often result from SEC referrals. The SEC’s Enforcement Division also has its own active caseload of investigations and civil lawsuits seeking penalties and compensation for investors. In the wake of the Brand Memo, the DOJ’s reliance upon violations of sub-regulatory guidance will likely be minimized. It will be interesting to see, too, if analogous arguments on behalf of targets of SEC civil investigations prove successful in the coming year.

Alan J. Bozer is a partner with Phillips Lytle LLP and is Team Leader of the firm’s White Collar Criminal Defense and Government Investigations Practice. He is active in trying criminal and civil cases, and handles appellate and arbitration work as well. He can be reached at abozer@phillipslytle.com or (716) 504-5700.

James E. B. Bobseine is an attorney with Phillips Lytle LLP where he focuses his practice in the area of litigation, including defending entities and individuals in white collar matters and government investigations. He can be reached at jbobseine@phillipslytle.com or (716) 504-5794.