By Alan J. Bozer and John T. Murray, originally published in The Daily Record on Wednesday, March 27, 2019.

Fraud, Executive Law § 63(12)’s Summary Enforcement Procedures and the FCA

We previously wrote about the New York Attorney General’s (“NYAG”) broad investigatory powers under Section 63(12) of the Executive Law. Section 63(12) allows the NYAG, on short notice and without commencing a court proceeding, to issue subpoenas for documents and to take sworn testimony when investigating alleged fraud in New York State. Due to the statute’s expansive interpretation of fraudulent and illegal conduct, minimal protections are afforded to the investigation’s target. What was not discussed, and forms the basis for this article, is Section 63(12)’s summary enforcement procedures.

Section 63(12) allows the NYAG to commence a proceeding and to petition for an order on five days’ notice (1) enjoining business activity involving repeated fraudulent or illegal acts; (2) awarding restitution; (3) awarding damages; and (4) cancelling any certificate filed under the general business law. The Legislature directed the NYAG to enforce consumer and borrower protection laws to protect the public from fraudulent business practices. Section 63(12) differs from other NYAG enforcement authority, such as the Martin Act and the New York False Claims Act (“FCA”), in its short notice for judicial relief. Courts have noted the NYAG’s “imperative duty” to proceed under Section 63(12) against persons or entities “engaged in practices in which duplicity was the keynote and fraud the keystone of a commercial enterprise designed to pillage the public” (In re State ex rel. Lefkowitz v. ITM, Inc. et al., 52 Misc. 2d 39, 52 (Sup. Ct. N.Y. Cty. 1966)). This imperative duty to protect the public’s interests underlies the NYAG’s ability to move on short notice.

Section 63(12) summary proceedings are subject to CPLR Article IV (“Special Proceedings”). The time pressure may be great on the adverse party – from the NYAG’s petition to the hearing may be only five days, and the respondent must serve answering papers at least two days before the hearing (CPLR 403). The adverse party may move to dismiss without answering, but there is no guarantee the court will allow the adverse party to answer if a dismissal motion fails (CPLR 404).

In re People ex rel. Schneiderman v. Trump Entrepreneur Initiative LLC, 137 A.D.3d 409 (1st Dep’t 2016) exemplifies Section 63(12)’s summary enforcement procedures. There, the NYAG sought injunctive relief, restitution, disgorgement, damages and civil penalties upon allegations that Donald Trump and the other respondents operated an illegal educational institution (Trump University). A pre-answer motion to dismiss the petition was unsuccessful, following which answers were filed. Respondents successfully challenged the NYAG’s ability to pursue its fraud claims solely under Section 63(12) in the lower court (id. at 414), but the Appellate Division reversed and held that, contrary to prior holdings, the NYAG could use Section 63(12) as a “catchall” anti-fraud statute. The Appellate Division further upheld the trial court’s refusal to convert the summary proceeding into a plenary action and ruled that the limited discovery allowed by the court was sufficient. The Appellate Division then concluded that the limitation for this particular fraud claim under Section 63(12) is six years instead of three. The case settled shortly after this decision.

While Section 63(12) allows expedited determinations through summary proceedings, the NYAG can invoke other enforcement authority, like the FCA, and then ensuing proceedings are tried in a plenary fashion with full rights of discovery and motion practice. Joining an FCA cause of action with Section 63(12) provides additional means of recovery that would be otherwise unavailable under Section 63(12) alone. Treble damages are available under the FCA, as well as fines and attorneys’ fees, but not under Section 63(12). Conversely, restitution and injunctive relief to permanently enjoin an ongoing business practice are expressly available under Section 63(12), but not under the FCA. Together, these statutes allow recovery based not only on the plaintiff’s loss, but on the defendant’s gain. By invoking both statutes, the NYAG sacrifices Section 63(12)’s summary procedures in exchange for the expanded remedies under the FCA.

State v. MedImmune, Inc., 342 F. Supp. 3d 544 (S.D.N.Y. 2018) is instructive. A whistleblower filed a complaint under federal and state FCA against MedImmune, a drug manufacturer of Synagis, which is prescribed for infants at risk of contracting a respiratory virus. The theory underlying the original qui tam complaint was that the defendants promoted “off-label” uses that were not approved by the United States Food and Drug Administration (“FDA”). This “off-label” promotion “illegally influenced physicians to prescribe Synagis when they otherwise would not have prescribed it.” The case was stayed for a number of years while state and federal governments decided whether to intervene in the action.

After settling with two other defendants, the NYAG intervened in the case against MedImmune, alleging violations of the state FCA and Section 63(12). Though the original qui tam complaint targeted the off-label promotion, the NYAG changed course and sought to hold MedImmune based on its role in a kickback scheme. MedImmune allegedly paid kickbacks to obtain protected health information (“PHI”) from hospitals. MedImmune used the PHI to secure prescriptions for the drug from parents or physicians. The drug costs were then presented for reimbursement through New York’s Medicaid Program.

The court denied a motion to dismiss the Section 63(12) claim (342 F. Supp. 3d at 557), holding the statute “do[es] not create a new cause of action, but rather give[s] an additional remedy upon which the State can recover.” Therefore, because the court denied “the motion to dismiss the NYFCA and Section 145-b claims, it necessarily follows that this derivative motion must be denied.” This line of reasoning is contrary to the state court’s decision in the Trump case discussed above, where Section 63(12) was recognized as a form of a “catchall” fraud claim that can stand on its own – it provides a remedy whether or not it is joined with other causes of action like the FCA.

Another point in MedImmune was its discussion of the theory of “legal falsity” upon “a claim that falsely certifies compliance with a … statute, regulation or contractual term, where compliance is a prerequisite to payment.” (342 F. Supp. 3d at 554). MedImmune had signed a typically broad certification that “the signatory has ‘furnished the care, services and supplies … in accordance with applicable federal and state laws and regulations,” though kickbacks are contrary to law. The court rejected the argument that the certification was too generalized to support an FCA claim. The case remains pending.

Section 63(12), unlike other enforcement authority, allows the NYAG to seek an injunction, restitution and other damages on short notice. The differing rulings in Trump and MedImmune question whether the NYAG may proceed solely under Section 63(12). Trump recognizes Section 63(12) as a “catchall” fraud statute, while MedImmune characterizes Section 63(12) as another potential remedy contingent on other properly pleaded causes of action. Though Section 63(12) emphasizes summary determinations for the public’s benefit, the NYAG’s invocation of other enforcement authority may affect its ability to institute a special proceeding. But, as shown, speed is often excused if other causes of action allow an increase in the NYAG’s ability to recoup.

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

John T. Murray is an associate with Phillips Lytle LLP, where he concentrates his practice in the areas of commercial litigation and class action defense, as well as white collar criminal defense and government investigations. He can be reached at jmurray@phillipslytle.com or (716) 847-7018.