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Seventh Circuit White Collar Litigation Update – October 2017

Habeas Case Shows Importance of Documenting Plea Discussions

Sawyer v. United States, No. 15-2508 (Oct. 20, 2017)

Defendant’s lawyer and the prosecutor had informal plea discussions prior to trial in which the government offered a 15 year maximum sentence.  According to Sawyer’s habeas petition, his lawyer advised him to reject the offer and go to trial.  He followed his lawyer’s advice, and he was convicted and then sentenced to 50 years in prison.  The district court dismissed the habeas proceedings that followed – in which he claimed his lawyer’s advice was constitutionally deficient – without holding an evidentiary hearing.  No hearing was needed, according to the district court, because:  (1) Sawyer did not allege that a formal or written plea offer had been made; and (2) he only provided self-serving affidavits from himself and his family members concerning the plea offer and his lawyer’s advice to reject it.

The Court held on appeal that the district court’s decision to dismiss without holding an evidentiary hearing was erroneous.  Sawyer made out a sufficient claim of ineffective assistance at least to get a hearing.  Defendant is not required to adduce proof beyond his own testimony.  (Of course, here, he also had the sworn statements of his family members.)  More significantly, the Court rejected the notion that informal discussions about a potential plea agreement fail to trigger a defendant’s right to effective assistance. 

This case highlights the importance – for both defense and government counsel – of documenting a defendant’s decision to go to trial in lieu of even nascent plea negotiations.  Unsuccessful plea discussions may never get to the point where there is a formal offer or a draft plea agreement.  It is in precisely those cases, however, when there is likely to be little if any documentation reflecting that defense counsel communicated the offer to her client or counseled him about the risks and benefits of that offer.  Therefore, defense counsel may want to memorialize her own plea discussions with her client, as well as the client’s reasons for deciding to go to trial notwithstanding those discussions.  Likewise, to protect against a collateral attack on a later conviction, government counsel may wish to put on the record in the defendant’s presence that the plea offer had been made and rejected.  Indeed, when a defendant pleads guilty, he is subject to the court’s colloquy ensuring a knowing and intelligent waiver of his trial rights.  When the converse occurs – a defendant decides to go to trial despite having been offered a plea that significantly limits his exposure – counsel for both sides would be prudent to make some record that the decision was made intelligently.

False Claims Act Damages Require Proximate Causation; Court Joins Other Circuits in Reversing Long-Standing “But-For” Test

United States v. Luce, No. 16-4093 (Oct. 23, 2017)

Luce, the owner of a mortgage brokerage company, participated in a federal home loan insurance program administered under the Fair Housing Act.  According to the government, when Luce’s company applied to participate in the program, he falsely omitted his criminal history, which the government claims would have made his company ineligible.  The government sued Luce civilly for violations of the False Claims Act based on his allegedly fraudulent submissions.  Because there was no genuine issue concerning Luce’s criminal background and his failure to disclose it, the district court granted summary judgment to the government, awarding it economic damages equal to the amount of the loan defaults by Luce’s borrowers.  In doing so, the district court noted the Seventh Circuit’s rule requiring only that the government show that defendant’s false statements were a “but for” cause of its injuries.

The Seventh Circuit’s but-for standard has been the outlier for many years.  All other circuits to address the question have held that the government must prove that FCA damages were proximately caused by the false representations.  The Supreme Court recently held that the FCA ordinarily should be viewed through the lens of common law fraud principles, as long as those principles don’t otherwise thwart the Act’s purposes.  Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016).  Reviewing Escobar and reconsidering the purpose of the FCA and the weight of the rulings in all other circuits, the Seventh Circuit agreed in Luce for the first time that the correct test is proximate causation.

The Seventh Circuit’s previously relaxed standard had made its venue a desired one for the government or whistleblowers to bring their FCA cases.  The now-heightened standard may temper whether certain of those cases are brought at all, particularly cases based on false representations that had little to do with the damages being claimed.  In Luce, for example, it may be difficult if not impossible for the government to establish on remand that the damages from the loan defaults by Luce’s customers were the proximate consequence of Luce lying about his own criminal history.  The government may face similar problems in government contracting cases and in FCA cases involving purported minority-owned businesses.

Tax Fraud Convictions Reversed Due to Judge’s Remarks to Jury 

United States v. El-Bey, No. 15-3180 (Oct. 24, 2017)

El-Bey was a tax protestor.  Unlike most tax protestors, it wasn’t enough for him simply to refuse to pay taxes; he concocted bogus tax returns seeking refunds of hundreds of thousands of dollars in withholdings that he never paid.  He represented himself at trial pro se, and focused much of his challenge to the government’s case on his beliefs that his conduct was not illegal because he considered himself a sovereign citizen.  The evidence of his guilt was overwhelming.  But Judge Posner (sitting by designation) was not content to let the evidence speak for itself.  Increasingly frustrated with the defendant’s questioning of government witnesses about the “voluntary” nature of the tax system, the Judge commented before the jury that “paying taxes is not voluntary” and “if you don’t pay your tax, you go to jail.”  Then, when instructing the jury on the elements of the offense, the Judge went off-script in explaining materiality.  Deviating from the written instructions, he gave an example that parroted the facts of the case:  “If you tell a lie to the IRS which gets them to give you $300,000 to which you’re not entitled, that is a material falsehood.”

The Court reversed defendant’s conviction and remanded for a new trial, holding that the trial court’s comments to the jury, both during defendant’s cross-examinations and in the court’s oral instructions, conveyed a bias toward defendant and that the trial court had an opinion concerning his guilt.  Those remarks deprived defendant of a fair trial regardless of the weight of the evidence against him.

No RICO Standing for Third-Party Payers on Claims of Pharma’s Off-Label Promotion of  Drug   

Sidney Hillman Health Center v. Abbott Laboratories, No. 17-1483 (Oct. 12, 2017)

In 2012, Abbott Labs pleaded guilty to the off-label promotion of a drug named Depakote.  That drug had been approved by the FDA to treat seizures, but Abbot promoted it for a number of off-label uses, such as ADHD and dementia.  Abbott paid $1.6 billion to the government as part of its guilty plea and to resolve related False Claims Act cases. 

This civil RICO case followed.  Plaintiffs were private welfare plans (such as union funds) that paid health care benefits for their members, including members who were prescribed Depakote.  The plaintiffs asserted that they were directly injured by Abbott’s unlawful promotion of the drug because they paid for their members’ prescriptions.  The Court affirmed the district court’s dismissal of those claims.  The off-label promotion was not directed at the third-party payers, but at the patients and their doctors.  The fact that the plans parted with money as a result of Abbott’s wrongful conduct does not mean that the plans had standing as injured parties.  Too many other variables exist in the chain of events from unlawful promotion to ultimate payment (e.g., the physician’s independent decision concerning the best course of treatment) to conclude that a payer has been proximately damaged by that conduct.  Instead, the Court observed that public prosecution is the proper remedy for such wrongful conduct.

This article was first published in the October 2017 issue of the Seventh Circuit White Collar Litigation Update on the 7th Circuit Bar Association’s website.

Loeb & Loeb partner Corey Rubenstein authors this monthly newsletter containing helpful summaries and practice pointers for key Seventh Circuit Court opinions involving civil and criminal white collar matters.