Author: Jonathan J. Rusch

On July 15, The Guardian reported that the Australian Department of Defence had awarded a $25,000 contract in 2018 to a U.S. ladder manufacturing company, LockNClimb, that had been debarred by the U.S. Government from receiving U.S. federal contracts.  For this contract, the Defence Department reportedly had determined that no Australian company could provide the required products — specialty ladders for aircraft maintenance — within the required timeframe.

In 2016, however, LockNClimb’s President and Chief Executive Officer, Jeffrey A. Green, had pleaded guilty in 2016 to offering a bribe to a U.S. Air Force official.  Even though the bribe in question was for only $280 in cash, Green’s felony plea resulted in a sentence that included a mere 12 days’ confinement but 36 months of supervised release.  That led, according to the Guardian, to LockNClimb’s debarment until August 2019.

After the Guardian’s initial article, a Defence Department spokesperson stated that the award “was conducted in accordance with the commonwealth procurement rules. As the procurement was for a low risk, commercial off the shelf product, it was determined that a limited tender represented the appropriate procurement method.”  At the same time, the Department acknowledged that it was not aware of LockNClimb’s debarment at the time of the award.

Note: The Guardian commented that the Defence Department’s “lack of knowledge of the US debarment is likely to raise more questions about [its] procurement processes.”  The first question, though, is what those questions should be.  Certainly information about Green and LockNClimb was readily available online at the time of the award – not only through the U.S. Department of Justice’s website, as the Guardian noted, but on the U.S. Department of Defense Inspector General’s website and the U.S. Defense Procurement Fraud Debarment (DPFD) Clearinghouse, which allows contractors to check online “to promptly confirm whether potential employees have been convicted of fraud or any other felony arising out of a contract with the Department of Defense.”

At the same time, it is fair to ask what the Defence Department’s due diligence obligation was on a contract that, in the world of defense contracting, could be characterized as miniscule.  If the Defence Department is to review its procurement procedures, it should consider whether to establish a risk-based due diligence process in which it consults certain predesignated public sources, such as the U.S. online resources mentioned above, for any contract, regardless of amount, and establishes enhanced due diligence for higher-value contracts.

It is also fair to ask whether, when one country has chosen to debar a particular contractor, other countries are obligated thereby to debar that same contractor without further consideration.  As Professor Christopher Yukins of George Washington University Law School has stated,

cross-debarment between governments and other institutions is not yet common.  Although one government may take note, and make informal inquiries, when another government or institution takes action against a contractor, generally governments are not bound by other governments’ or institutions’ debarment decisions.  Assessing cross-debarment therefore requires careful consideration of potential costs and benefits. [Emphasis in original; footnotes omitted]

Australian defense officials should take those factors into account – along with the need to maintain a consistent risk-based approach in their procurement process – in deciding what lessons to draw from their experience with the LockNClimb contract.

In the world of crustaceans, lobsters are neither the fastest nor the most powerful in terms of claw strength.  In the human world, however, recent events suggest that lobsters sometimes have the power to influence national governments:

• On July 9, the Jerusalem Post reported that after a recent lunch between Brazilian President Jair Bolsonaro and Israeli Ambassador to Brazil Yossi Shelley, the Israeli Embassy in Brazil released a photo of the two men at lunch, but used crude black X’s over their plates to conceal the fact that the two men had been eating lobster. The failed attempt at concealment made headlines in  both Brazil and Israel.
• Yesterday, the New York Times and numerous media outlets reported that French Environment Minister François De Rugy was forced to resign, after reports that in 2017 and 2018, De Rugy, while serving as President of the National Assembly, had hosted a number of lavish dinners, at taxpayer expense. Those dinners reportedly featured lobster tails and, according to the French investigative website Mediapart, “bottles of vintage wines and champagnes taken from parliamentary cellars to guests who were mainly personal friends of the couple.”

Some of the media coverage of the allegations surrounding De Rugy tended to make light of the situation, referring to the affair as “Lobstergate.”  De Rugy’s resignation, however, should be of concern within the European Union (EU), as it represents only the latest example this year of senior officials in EU countries who were forced to resign over allegations that they misused government funds for personal benefit or their positions for personal or political benefit:

• Austria: In May, Vice-Chancellor Heinz-Christian Strache resigned after media reports that in a meeting that was recorded as part of a sting operation, he had promised public contracts in return for campaign aid from a woman who falsely indicated that she was a potential Russian backer.
• Bulgaria: This spring, Justice Minister Tsetska Tsacheva, Deputy Energy Minister Krasimir Parvanov, and Deputy Sports Minister Vanya Koleva, and Agriculture Minister Rumen Porozhanov were compelled to step down, as the result of investigations into the buying of luxury apartments at below-market prices and the use of European Union funds to build guest houses that were actually put to private use.
• Croatia: State Assets Minister Goran Marić resigned yesterday over media reports of impropriety in the purchase and sales of flats and the renovation of a part of a Franciscan monastery, and Public Administration Minister Lovro Kuščević resigned last week in the face of allegations that he had put his personal financial interests ahead of the public interest.

This spate of resignations should prompt the European Commission to look beyond publishing ethical guidance for research projects and artificial intelligence, and inform EU Member States that if they do not act more aggressively to establish and enforce clear ethical standards for their respective national-level officials, it will consider doing so on an EU-wide basis.

As each of the situations described above demonstrate, ethical wrongdoing by government officials, even if it falls short of criminal violations, fosters public distrust of government.  Unlike the lobsters in Alice in Wonderland’s Lobster Quadrille, who risked only being thrown out to sea at the end of the Quadrille, national leaders who fail to hold their governments’ officials accountable for significant ethical misconduct may risk undermining the political stability of their countries.

Postscript: On July 23, France24 reported that two reports, by the office of French Prime Minister Édouard Philippe and an investigative panel of the National Assembly, “cleared [De Rugy] of excessive spending.”  The Prime Minister’s Office’s report, which “focused on de Rugy’s spending of 63,000 euros to refurbish his official apartment,” “concluded the rules were ‘globally respected’.”  The National Assembly report “concerned a dozen dinners held when de Rugy presided over parliament’s lower house. It said there were ‘no irregularities’ but looked askance at three dinners viewed as over the top.”

On July 12, a Texas state judge sentenced Daniel C. Walsh, the Chief Executive Officer of Western Capital Inc., to 18 years’ imprisonment, after Walsh had pleaded guilty on July 10 to money laundering.  Walsh had been indicted in Wichita County, Texas on first-degree felony charges of theft, money laundering, and securing execution of a document by deception.

Those charges — according to the Texas State Securities Board, whose attorneys assisted the Wichita County District Attorney’s Office in prosecuting the case — stemmed from Walsh’s “stealing $492,090 from 12 investors who purchased investments in oil wells that were supposed to be drilled in the High Island section of eastern Galveston County.”  Walsh reportedly told investors that

their money would pay for the drilling and testing of High Island wells named Sun Fee #1 and #2. The wells were supposed to be turnkey projects, a financing arrangement in which investors pay a set amount and the promoter assumes all financial responsibility for drilling the well.

Walsh, however, “mostly used investors’ money to pay his personal expenses – including a $6,000-a-month mortgage – and other costs unrelated to the Sun Fee wells.”  After he “initially raised money for the High Island wells from 2007 to 2009,” Walsh did not disclose how he had misused earlier investors’ funds when he attracted additional investors for the project.

Note: The severity of this sentence may be surprising to some, in light of the comparatively small amount of money that Walsh obtained from investors.  Under subsection 34.02(e)(4) of the Texas Penal Code, however, money laundering in which the value of the funds is more than $300,000 is a first-degree felony.  A first-degree felony, under subsection 12.32(a) of the Texas Penal Code, is punishable by imprisonment ”for life or for any term of not more than 99 years or less than 5 years.”  As a point of comparison, under section 2S1.1 of the Federal Sentencing Guidelines, a defendant who is convicted under the federal money laundering offense, 18 U.S.C. § 1956, and had no other aggravating factors and no prior criminal history would likely face a sentencing range of only 37-46 months imprisonment after acceptance of responsibility.  The sentencing judge, however, may have been influenced by the circumstances of the victims, who included “a retired real estate broker in Houston and an instructor and pilot at Sheppard Air Force Base in Wichita Falls.”

In any event, this case is a strong reminder to corporate financial-crimes compliance officers that even though federal investigations and prosecutions often command more media attention, their compliance programs need to factor state law requirements and offenses into their compliance programs, including compliance training.

On July 12, the General Court of the European Union announced that it had upheld a 2015 decision by the European Commission finding that a total of seven leading electronics companies had participated in a cartel  in the optical disk drives (ODD) market, and imposing a total of €116 million in fines against those companies.  Those companies — Sony Corporation and Sony Electronics Inc., Sony Optiarc Inc., Quanta Storage Inc., Hitachi-LG Data Storage Inc., Hitachi-LG Data Storage Korea Inc., Toshiba Samsung Storage Technology Corp., and Toshiba Samsung Storage Technology Korea Corp. – had brought actions before the General Court seeking annulment of the Commission’s decision or a reduction of the fines imposed on them.

In a total of five separate judgments covering the seven companies, the General Court made four principal findings.  First, it determined that “some of the ODDs covered by the cartel were sold in EU Member States to entities owned by Dell and HP or shipped to those states for operators acting on behalf of Dell and HP.”  As a result, the Court stated, “the Commission was correct to find that the geographic scope of the cartel at issue covered the entire EU and therefore that the EU competition law rules were applicable in the present case.” (Emphasis in original)

Second, the Court found that

the prohibition on economic operators exchanging with their competitors information on their market conduct is all the more relevant in a situation, such as that at issue, which was characterised by the presence of a limited number of competitors.” In that context, after examining a series of contacts between the cartel participants by reference to the sales that they made to Dell and HP, the Court observes that most of those contacts reveal practices which, by their object, were capable of distorting competition on the relevant market.  (Emphasis in original)

Third, the Court stated that it considers that the Commission was entitled to find, in this respect (i) that the anticompetitive practices at issue constituted a single and continuous infringement, and (ii) that they consisted of a series of instances of individual anticompetitive conduct.” (Emphasis in original) In that regard, the Court stated that it

recalls that the very concept of a single and continuous infringement presupposes a complex of practices adopted by the different parties in pursuit of a single economic anticompetitive aim. Moreover, the Court finds that the cartel participants intentionally took part in an overall network of parallel contacts pursuing a common objective of undermining the mechanisms for selecting suppliers set up by Dell and HP in order to intensify competition on the relevant market.

Finally, the Court rejected the companies’ arguments that the amounts of the fines that the Commission imposed on them were calculated incorrectly. In particular, the Court stated that it

considers that the Commission did not err in not derogating from the general method set out in the 2006 Guidelines on the method of setting fines in order to reduce the amount of the fine imposed on Hitachi-LG Data Storage and Hitachi-LG Data Storage Korea in the light of the particular circumstances on which those companies relied.  (Footnote omitted)

“In those circumstances,” the Court concluded, it “dismisses the appeals in their entirety.”

Note:  This decision by the General Court constitutes both a strong affirmation of the Commission’s 2015 decision and a strong reproof – as the Court’s deliberate highlighting of certain findings in bold indicated – of the companies’ arguments.  The companies now have two months and ten days after notification of the decision to file an appeal of the General Court’s decision with the European Court of Justice.  Such an appeal, however, must be limited to points of law only, and the General Court’s findings do not appear to give the companies much of an opportunity to prevail on legal issues.

On July 11, the United States Department of Justice announced that the United Kingdom-based consumer goods company Reckitt Benckiser Group plc (RB Group) had entered into multiple agreements, involving total payments of $1.4 billion, “to resolve its potential criminal and civil liability related to a federal investigation of the marketing of the opioid addiction treatment drug Suboxone.” This resolution – which the Department described as “the largest recovery by the United States in a case concerning an opioid drug” – includes the following components:

• A non-prosecution agreement that requires RB Group (1) to forfeit $647 million of proceeds that it received from its former subsidiary Indivior and not to manufacture, market, or sell Schedule I, II, or III controlled substances in the United States for three years; and (2) to cooperate fully with all investigations and prosecutions by the Justice Department related, in any way, to Suboxone.
• A civil settlement agreement with the Justice Department in which RB Group agreed “to pay a total of $700 million to resolve claims that the marketing of Suboxone caused false claims to be submitted to government health care programs.”  That $700 million settlement amount “includes $500 million to the federal government and up to $200 million to states that opt to participate in the agreement. This settlement “resolves the claims against RB Group in six lawsuits pending in federal court in the Western District of Virginia and the District of New Jersey under the qui tam, or whistleblower provisions of the False Claims Act.”
• A separate agreement with the Federal Trade Commission (FTC) in which RB Group “agreed to pay $50 million to resolve claims that it engaged in unfair methods of competition in violation of the Federal Trade Commission Act.” This agreement resolves FTC charges that RB Group illegally maintained a monopoly over Suboxone.  As part of this resolution with the FTC, RB Group, though it no longer manufactures or markets drug products, agreed, as part of a consent decree, “that it would notify the FTC if it began marketing drug products in the United States.”
• A provision in the settlement agreement that requires RB Group to pay $3 million to the Program Income Fund of the Virginia Medicaid Fraud Control Unit (“MFCU”), to be paid on or before August 10, 2019, as directed by the MFCU.

Even though RB Group admitted no liability in the civil settlement, the Department stated that the settlement

addresses allegations by the United States that, from 2010 through 2014, RB Group directly or through its subsidiaries knowingly: (a) promoted the sale and use of Suboxone to physicians who were writing prescriptions without any counseling or psychosocial support and for uses that were unsafe, ineffective, and medically unnecessary and that were often diverted for uses that lacked a legitimate medical purpose; (b) promoted the sale or use of Suboxone Film to physicians and state Medicaid agencies using false and misleading claims that Suboxone Film was less susceptible to diversion and abuse than other buprenorphine products and that Suboxone Film was less susceptible to accidental pediatric exposure than tablets; and (c) submitted a petition to the Food and Drug Administration on Sept. 25, 2012, claiming that Suboxone Tablet had been discontinued “due to safety concerns” about the tablet formulation of the drug and took other steps to delay the entry of generic competition for Suboxone in order to improperly control pricing of Suboxone, including pricing to federal healthcare programs.

The Justice Department announcement also extensively summarized the pending indictment against Indivior, which RB Group had spun off in 2014.  That indictment charges Indivior with conspiracy to commit wire fraud, mail fraud, and health care fraud, one count of health care fraud, four counts of mail fraud, and 22 counts of wire fraud, based on Indivior’s allegedly engaging in an illicit nationwide scheme to increase prescriptions of Suboxone Film.

Note: This resolution is notable for three reasons: (1) the total amount of forfeiture and payments in a single opioid-related case; (2) the general encouragement that it provides to the state attorneys general and other plaintiffs in their own civil opioid-related litigation against other pharma companies; and (3) the increased pressure that it places on Indivior to enter into a plea agreement with the Department.

The forfeiture allegations in the Indivior indictment already establish an expectation that, if Indivior is convicted on one or more counts, the Department will seek a financial penalty of at least $3 billion, among other assets.  Moreover, the Justice Department has now strongly signaled to Indivior that it is prepared to seek financial penalties from Indivior greater than the $1.4 billion resolution with Reckitt.  Paragraph 7 of the Settlement Agreement states that nothing in the Agreement “is an admission by the United States that the amounts paid by the Company are the maximum amounts that could be recovered from entities other than the Company,” and that “the United States is not precluded from arguing or presenting evidence that the total amount to be paid by others should be higher.”