U.S. v. Clay: A Federal White Collar Criminal Case to Keep an Eye On

matt_kaiser300Guest Commentary

Matthew G. Kaiser, Partner, Kaiser, LeGrand & Dillon PLLC

A court case that should be on the radar screen of all business executives and white-collar criminal-defense attorneys in 2016 is United States v. Clay, in which the U.S. Court of Appeals for the Eleventh Circuit heard oral argument on October 2.

The case, about which I authored a Washington Legal Foundation Legal Backgrounder last March, implicates the fundamental question of who decides the meaning of a law—a judge or a jury? The Eleventh Circuit will also implicitly decide whether the government can cast aside more appropriate civil or administrative remedies and prosecute corporate officers operating a business in a complex regulatory environment when their interpretation of a law is objectively reasonable.

The defendants in Clay worked for a large publicly-traded health care company, WellCare, which provided behavioral health services to Florida Medicaid patients. Payments under that program are generally governed by a number of complex statutes, regulations, and government contracts. The regulatory environment for such businesses in Florida is, at least on its face, less burdensome. In addition to the government contracts, businesses only had to comply with the so-called 80/20 Statute. The law required that 80% of Florida’s payments had to go to for the provision of behavioral health services and companies had to return amounts under the 80% threshold to the state. The state never drafted implementing regulations for the 80/20 Statute.

After checking with its lawyers, WellCare did what many other managed-care companies in Florida did—it set up a related subsidiary to provide behavioral health services. To comply with the 80/20 Statute and its contracts, WellCare reported the payments to the related subsidiary that did all the work and provided the behavioral health care services. It is undisputed that the payments to the related subsidiary were at market rates and that the subsidiary provided outstanding services.

Prior to prosecuting the WellCare executives, Florida had filed civil charges against another managed-care company that used the same subsidiary arrangement. The state dropped its claim on the eve of trial. In 2007, more than 200 FBI agents raided WellCare, swarming the company’s office, grabbing computers and documents, and terrifying employees.

A federal grand jury indicted the four WellCare executives, including the general counsel, on health care fraud charges based on federal prosecutors’ interpretation of the 80/20 Statute and WellCare’s contract. After a lengthy trial that resulted in acquittal or hung jury on most of the counts, the jury convicted the executives of making a false statement and of fraud in connection with a health care payment for just one billing year.

The defendants argued that their interpretation of the 80/20 Statute and the contract was objectively reasonable, having vetted it with counsel beforehand. Even government witnesses at trial (including three lawyers involved in the case) testified that the company’s interpretation of the 80/20 Statute and the contract was not unreasonable.

The key issue the Eleventh Circuit will consider in the executives’ appeal is whether the trial court improperly applied a precedent from that circuit, United States v. Whiteside. The court held in Whiteside that a statement is not false if it is based on an objectively reasonable interpretation of the law.

Had the trial court properly applied Whiteside, WellCare’s interpretation would have been found to be reasonable—as the government’s own witnesses testified. The defendants argue that the trial judge erred in allowing the jury to resolve the complex legal question of whether the 80/20 interpretation offered by WellCare was reasonable.

The defendants and the federal government presented their arguments before an Eleventh Circuit panel of Circuit Judges Gerald Tjoflat and Frank Hull, and District Court Judge James Randall Hall from Georgia, who was sitting by designation. The judges entertained two hours of arguments, a rarity for that court.

Reading tea leaves from an oral argument is notoriously perilous. Compare, for instance, Justice Antonin Scalia’s critical questioning of the prosecution during oral argument in the U.S. v. Yates “fish shredding” 2015 Supreme Court case with his later decision to dissent from the overturning of Mr. Yates’ conviction. But based on the October 2 argument, there’s reason to be hopeful that the panel will reverse the lower court and apply Whiteside properly.

The presiding judges clearly embraced the Whiteside framework. Often led by Judge Hull’s sharp and repeated questioning, the panel focused on the reasonableness of WellCare’s legal interpretation of the 80/20 Statute and its contract.

Indeed, at one point, Judge Hall asked former Solicitor General of the United States Seth Waxman, who is representing WellCare’s CEO, whether under Whiteside there would even be “a case” if WellCare had paid an unrelated provider instead of an affiliated subsidiary that did all the work. The panel noted that WellCare’s lawyers approved its corporate structure and reporting, and the oral argument spotlighted how far the government can go to criminalize the interpretation of complex language in a statute and a contract.

Judge Hall also pointedly asked the government, “can you tell me what provisions of the contract [with Florida to provide behavioral health services] gave [WellCare executives] notice that [their implementation of the 80/20 Statute] was not compliant with 80/20?”

The government’s attorney had no adequate response to that question, which is the central one at issue in the case. Instead, the lawyer asked permission to file additional briefs. The court denied the government permission to do so.

Much has been made about the prosecutorial policy memo Deputy Attorney General Sally Quillian Yates released in September, and rightfully its focus on prosecution of corporate officials. Federal prosecutors’ ability to carry out the recommendations of that memo hinge in part on how broadly they can apply federal criminal statutes and federal juries’ and judges’ willingness to accept such applications. An adverse decision in Clay could serve as a timely reminder to prosecutors that judicial doctrines such as the one espoused in Whiteside must be respected when seeking convictions of individuals.

One thought on “U.S. v. Clay: A Federal White Collar Criminal Case to Keep an Eye On

  1. Pingback: Supreme Court Cert Grant in “Farha v. US” Can Clarify Level of Criminal Intent Needed to Prove “Knowledge” – The WLF Legal Pulse

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s