News Type: Blogs

Federal prosecutors are aggressively targeting the substance use disorder treatment space-an industry that some believe has been permeated with fraud and abuse. This is particularly the case in Orange County, California, referred to by some as part of the “Rehab Riviera” on account of the dense concentration of treatment facilities and sober living homes in Costa Mesa, Laguna Beach and San Juan Capistrano.

Just last week, on November 15, a marketer pleaded guilty in Orange County federal court to accepting nearly $2 million in kickback payments in return for referring patients to treatment facilities. And, by all indications, further indictments and charges are coming.

Federal authorities have been targeting marketing and personal services arrangements that exchange patient referrals for bribes, kickbacks, and other consideration.  Some providers are well-intentioned and have tried to comply with Federal and California laws without observing the nuances of those laws.  Others use these arrangements to conceal illegal patient brokering behind what outwardly appears to be safe harbor exceptions for payments to marketers and others.  Prosecutors and regulators are also eyeing remuneration that is paid directly to the patients themselves.

Prosecutors Are Prepared to Use the Tools Provided By EKRA

After getting off to a relatively slow start, enforcement of the Ending Kickbacks in Recovery Act (EKRA) has been rapidly gaining steam. EKRA prohibits anyone engaged in services covered by a health care benefit program from knowingly and willfully: (1) soliciting or receiving remuneration (including any kickback, bribe, or rebate), directly or indirectly, whether in cash or in kind, for referring a patient to a recovery home, clinical treatment facility, or laboratory; or (2) paying or offering remuneration (including any kickback, bribe, or rebate) directly or indirectly to induce a referral or an individual to a recovery home, clinical treatment facility or laboratory, or in exchange for the individual using the services of that recovery home, clinic treatment facility or laboratory.

In short, EKRA prohibits requesting, receiving, offering, or paying bribes and kickbacks for referring patients to clinical treatment facilities, and offering or paying bribes and kickbacks to a patient selecting a clinical treatment facility. Each violation of the statute carries a federal prison sentence of up to 10 years and a fine of up to $200,000.

Of note, one of the major expansions of existing criminal law is EKRA’s application to any health care benefit program, including private insurance. Previously, the federal anti-kickback statute prohibited kickbacks only in those instances where federal health care programs were involved, like Medicare. EKRA also eliminates a number of safe harbor provisions. Bottom line: conduct which may have been legal before EKRA could now be illegal post-EKRA.

Recent Criminal Cases Indicative of Heightened Scrutiny of Clinical Treatment Facilities and Those Associated With Them

As mentioned, a marketer pleaded guilty in an Orange County federal court last week for his part in a kickback scheme. The charges implicate several other unidentified treatment facilities and the owners of those facilities, as well as one other unidentified marketer.

It is apparent that charges against this marketer represent just one part of a larger, ongoing investigation into substance use disorder treatment facilities and their owners, as well as into others connected to those clinics, such as marketers and other service providers. In fact, court records suggest that this matter is related to two other criminal cases pending in Orange County.

In one of those cases, an individual who controlled two recovery facilities pleaded guilty to a single EKRA violation. In connection with his guilty plea, the defendant admitted to paying over $1 million in kickbacks to a marketer and another unidentified “body broker.” He also acknowledged concealing the kickback payments with sham contracts calling for fixed monthly payments to marketers. The defendant has agreed to forfeit $917,000 in cash that had been seized by authorities, and he faces approximately two to three years in prison when sentenced in the next few months.

In the other case, the defendant was charged in a criminal complaint and arrested by the FBI earlier this year. Thereafter, he was named in a 23-count federal indictment, charging him with multiple EKRA violations in connection with his operation of a marketing company. The government alleges this defendant was also a “body broker” who referred patients to Orange County treatment facilities in return for $500,000 in kickback payments-payments that were allegedly concealed by sham contracts that, on their face, banned payment for referrals. In actuality, the agreements were designed to conceal referral payments, and according to the indictment, the kickbacks were based on the number of patients referred and the services provided to the patients. That trial is set for early next year.

Conclusion

There is no reason to believe federal investigations and arrests will end with the three federal criminal cases discussed above. Instead, all indications are that federal authorities are actively investigating the unidentified players referenced in various charging documents, along with their associates, and others in the industry.

How can those in the substance use disorder treatment space protect themselves from running afoul of EKRA and other relevant laws going forward? For one thing, marketing agreements cannot simply be reused and relied upon by multiple facilities and individuals. Rather, the entire relationship and agreement between treatment facility and marketer needs to be examined by counsel. But more broadly, treatment facilities, their owners and operators, and marketers should confer with counsel to remain on the correct side of all applicable laws, rules, and regulations.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Meet Jane Doe, owner and operator of Chicago-based XYZ Corporation. Though business is booming at XYZ, not everything is as it should be. That’s because John-Jane’s top-performing salesperson-just departed for a cross-town competitor.

When John left XYZ, he took with him a large client base and a mountain of contact information developed over time, potentially a crushing blow to XYZ’s business. In response, and to assure this won’t happen again, Jane decided to present her remaining salespeople with agreements restricting them from competing with XYZ after the termination of their employment. She plans on requiring them to sign within ten days . . . or else.

Not so fast, Jane (and any other businessman and woman in Illinois with plans to employ restrictive covenants). Governor J.B. Pritzker has just signed into law amendments to the Freedom to Work Act (Act) that significantly limits the use of these types of contracts in Illinois.

Restrictive Covenants, Generally

It’s not uncommon for employers to ask employees to execute agreements not to compete. By their terms, these non-compete covenants restrict former employees from engaging in competitive activities after the termination of employment. More specifically, a non-compete agreement (as defined by the Act) serves to “restrict the employee from performing . . . (1) any work for another employer for a specific period of time; (2) any work in a specified geographical area; or (3) work for another employer that is similar to employee’s work for the employer included as a party to the agreement.”

Of note, most courts, including those in Illinois, frown upon non-compete agreements because they impair freedom of employment. To be enforceable, the covenants not to compete are typically required to meet three strict legal standards: they must be (1) reasonable; (2) supported by consideration (read: an employer must provide something of value in exchange for an employee’s promise to refrain from competing with his or her former company); and (3) designed to protect “legitimate business interests.”

By way of the recent amendments to the Act, which impact certain restrictive covenant agreements entered into on or after January 1, 2022 (the amendment does not apply retroactively to restrictive covenants entered into before 2022), Governor Pritzker has raised the bar on enforceability.

The Amended Law

The Act now prohibits the imposition of non-compete agreements upon employees unless their “actual or expected annualized rate of earnings exceeds $75,000 per year,” which means that it will impact the majority of Illinois’ private sector workforce. The income threshold amount is subject to $5,000 upward adjustments every five years until 2037. The law doesn’t stop there. It also bans covenants not to solicit, but only for workers earning $45,000 or less per year. This sum can be adjusted upward also, though by only $2,500 every five years through 2037.

As for the latter prohibition, the Act defines a “covenant not to solicit” as an agreement between an employer and employee that “(1) restricts the employee for soliciting from employment the employer’s employees or (2) restricts the employee from soliciting, for the purpose of selling products or services of any kind to, or from interfering with the employer’s relationships with, the employer’s clients, prospective clients, vendors, prospective vendors, suppliers, prospective suppliers, or other business relationships.”

Additional Details

Regardless of income level, most employees covered by collective bargaining agreements under the Illinois Public Labor Relations Act or Educational Labor Relations Act can’t be subject to restrictive covenants-this according to the Act. There is more. Individuals terminated, furloughed or laid off because of the COVID-19 pandemic can’t be compelled to sign non-competes either.

At the same time, the Act does allow restrictive covenants to be used against the owners, buyers and sellers of acquired businesses. In addition, and among other things, contracts can include confidentiality provisions in connection with inventions and other work product.

Acceptable Agreements Not to Compete

Despite the significant limitations on the use of restrictive covenants, these agreements are permissible if not otherwise banned (e.g. for employees earning at least $75,000 annually). However, even if allowed, non-competes will be deemed unenforceable unless: “(1) the employee receives adequate consideration, (2) the covenant is ancillary to a valid employment relationship, (3) the covenant is no greater than required for the protection of a legitimate business interest of an employer, (4) the covenant does not impose undue hardship on the employee, and (5) the covenant is not injurious to the public.”

Furthermore, the Act outlines a non-exhaustive list of factors for courts to consider when assessing whether a restrictive covenant is properly tailored to protect the employer’s legitimate business interest, including the employee’s exposure to the employer’s customer relationships or other employees; the near-permanence of customer relationships; the employee’s acquisition, use, or knowledge of confidential information through the employment; time and place restrictions; and the scope of the activity restrictions.

The Takeaway for Employers

As indicated above, enforceability of a wide swath of non-compete agreements will change beginning on January 1, 2022. As such, those doing business in Illinois must closely scrutinize their restrictive covenant practices going forward.

Moreover, where employers are permitted to impose non-compete or non-solicitation agreements upon employees, copies of those contracts must be delivered before the restrictive covenants become effective. In these circumstances, the employees must be advised “in writing to consult with an attorney before entering into [a restrictive] covenant” and be given 14 days to review their proposed agreements. These requirements apply to both new hires as well as current employees who enter into restrictive covenants after January 1, 2022.

Lastly, the amendment gives the Act sharper teeth by creating mandatory attorney’s fees rights for employees who prevails against their former employers that file civil actions or arbitrations to enforce non-competition or non-solicitation agreements. Without question, the amendment is likely to force employers to take pause before attempting to enforce restrictive covenants against a covered employee.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Last month, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) levied sanctions against Russian-based cryptocurrency exchange Suex. This move represents the first time the U.S. has sanctioned a digital currency exchange, signaling a major shift for cryptocurrency exchanges and their potential exposure to liability.

The news gets even worse for Suex. Around the same time that OFAC announced the sanctions, cryptocurrency exchange Binance announced that its compliance program had identified issues with Suex, de-platformed the exchange, and shared information from its investigation with law enforcement. Binance’s success may set a new standard for digital asset compliance programs, but time will tell whether it has set a new gold standard or will become the bare minimum.

A Haven for Bad Actors

By way of background, Suex acts as an intermediary between users looking to convert cryptocurrency holdings into fiat cash and larger, more mainstream exchanges. To be clear, Suex does not directly custody its clients’ holdings; instead, it uses accounts with larger exchanges to transact on behalf of customers. While these larger exchanges have greater liquidity and can allow for greater cash out payments, they are also held to higher standards for user identity verification. An exchange like Suex offers access to greater liquidity and more anonymity in any given transaction by using its own accounts to convert customers’ cryptocurrency holdings on the larger exchanges. While this service, known as a nested exchange, can be legitimate, investigation into Suex showed that over 40% of the exchange’s known transaction history was associated with illicit actors, like ransomware and cyber hackers.

Without access to larger exchanges, platforms like Suex lose access to the liquidity necessary to convert large sums of cryptocurrency for its users. And absent a mechanism for fiat conversion like Suex, users sitting on large sums of cryptocurrency are severely limited in their ability to discreetly spend their holdings. Thus, by blacklisting exchanges like Suex, the U.S. Treasury may be able to stymie future ransomware attacks by limiting attackers’ ability to cash out illegally obtained cryptocurrency.

Notable Policy Shifts

Some of the large exchanges enabling platforms like Suex have already begun preparing for this policy shift. Following the news about the sanctions, Binance reported that it had already de-platformed Suex earlier this year. Binance, the world’s largest cryptocurrency exchange, cited internal investigation and safeguard mechanisms that resulted in deleting Suex’s accounts even before the OFAC blacklisting.

While Binance did not list any specific parameters used for their internal auditing process, it did offer a more in-depth look at money laundering safeguards on the platform earlier this year. In June, Binance reported taking down a $500 million ransomware ring called FANCYCAT. In so doing, Binance took credit for leading to the arrest of FANCYCAT members by employing a two-pronged approach. First, Binance claimed that it implemented an “[Anti-Money Laundering] detection and analytics program,” to identify and offboard suspicious accounts. In the case of FANCYCAT, the system reportedly detected suspicious behavior and the Binance security team “mapped out the complete suspect network”-this according to a Binance blog post.

After identifying the suspect network, Binance reportedly worked with “private sector chain analytics companies TRM Labs and Crystal (BitFury) to analyze on-chain activity and gain a better understanding of this group and its attribution.” Binance then said it collaborated with law enforcement to take down the criminal group.

A New Industry Standard?

Binance’s proactive response to Suex’s potential use of the platform to facilitate criminal conduct will likely set the industry standard for compliance in this space. At the same time, the OFAC sanctions represent only the most recent step of the U.S. government in preventing an increasing threat of ransomware and cyberattacks. The Treasury reported that in 2020, ransomware payments reached over $400 million, more than four times the reported level in 2019. And though the crypto industry continues to negotiate its standards for compliance and legal exposure, the Treasury Secretary Janet L. Yellen has made clear in a recent press release Treasury’s intention to prevent any facilitation of malware attacks: “We will continue to crack down on malicious actors. . .we are committed to using the full range of measures, to include sanctions and regulatory tools, to disrupt, deter, and prevent ransomware attacks.”

This could especially spell trouble for Binance. Last year, Chainalysis (a blockchain analysis firm) published a report showing that 27.5% of the 2.8 billion worth of Bitcoin traced to criminal activity in 2019 ended up on Binance’s exchange, representing the single biggest recipient of illicit Bitcoin that year.  Binance’s recent beefing up of its compliance program is no doubt in response to concerns that it may face liability for facilitating money laundering or sanctions avoidance.

Cryptocurrency Exchanges in Treasury’s Crosshairs

The current focus of the Treasury seems to be on exchanges that directly facilitate transactions involving funds acquired through cyberattacks and ransomware (essentially, money laundering), an admittedly small group. Chainalysis has reported that a group of only five exchanges received 82% of all ransomware funds in 2020. However, as the Treasury’s position continues to crystalize, the foresight of Binance and other exchanges that take action to prevent facilitating potential money laundering can only strengthen their position against the risk of liability.

However, though Treasury’s official position, at least as of late, is the prohibition of transacting with blacklisted exchanges like Suex, it is possible, based on the use of the nested exchange model, that larger exchanges could incur liability if they fail to properly monitor and ensure compliance not just internally but with the nested services that use their platforms. Updated guidance makes clear that “OFAC may impose civil penalties for sanctions violations based on strict liability,” further clarifying the need for companies facilitating digital asset payments to have robust compliance programs in force.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Delta is very much in the news these days.

The delta variant continues to spread, bringing the total number of COVID-19 cases to 40 million since the start of the pandemic.

Delta Airlines made headlines when it recently announced that its unvaccinated employees will face $200 monthly increases on their health insurance premiums beginning November 1, citing steep costs to cover workers hospitalized with COVID.

And then there’s a delta having nothing to do with the novel coronavirus. Delta-8-tetrahydrocannabinol (THC) is a psychoactive compound naturally occurring in hemp and cannabis and believed by many to be legal at the federal level.

No doubt about it, momentum toward the federal legalization (or, at the very least, decriminalization) of cannabis is building, especially with the Cannabis Administration and Opportunity Act now pending in the U.S. Senate. That legislation would, among other things, remove marijuana from the Controlled Substances Act, introduce regulations to tax cannabis products, expunge prior convictions in some circumstances, and maintain the authority of states to set their own marijuana policies. Still, cannabis currently remains listed in the CSA as a Schedule I drug and is therefore against the federal law-this despite the rush of states making the substance legal for recreational and/or medical use-which begs the question: what exactly is delta-8 THC and is it actually a fully legal alternative to cannabis?

Delta-8 THC: A Brief Primer

THC is a mind-altering compound found in cannabis. The cannabis plant contains several different forms of THC (as well as other compounds like CBD), and not all of them are equal. Delta-9 TCH is the main psychoactive found in marijuana, and it’s the elevated concentrations of this compound that produces a “high” from the cannabis subject to the CSA.

Mostly synthesized from CBD extracted from hemp, delta-8 TCH, while similar to delta-9 THC, has a different chemical structure, making it a much milder alternative to its more potent cousin. Nonetheless, delta-8 THC is touted for producing modest feelings of euphoria, relaxation and potential pain relief.

The Question of Legality

To opine on the legality of delta-8 THC at the federal level, it’s first necessary to understand the difference between hemp and marijuana. Hemp is a cannabis plant that contains less than 0.3 percent delta-9 THC. Marijuana also comes from a cannabis plant but has a higher concentration of delta-9 TCH, more than 0.3 percent.

With that by way of background, the 2018 Farm Bill legalized hemp, which is non-intoxicating, though the legislation didn’t contemplate intoxicating levels of delta-8 THC (again, synthesized from hemp), essentially leaving the latter unregulated. Consequently, the law has created a loophole for products containing delta-8 THC (even in high amounts), so long as they are derived from federally legalized hemp containing less than 0.3 percent delta-9 THC. Indeed, by virtue of the Farm Bill, the manufacturing, distribution, sale and use of delta-8 THC in the form of gummies, vape cartridges, tinctures and the like is arguably permissible under federal law.

The key word is “arguably” because in passing the Farm Bill, Congress drew a line in the sand between marijuana, which produces a “high” and was clearly intended to remain illegal at the federal level, and hemp, which isn’t psychoactive and therefore now legal in the U.S. Clearly then, to the extent it produces a mind-altering effect-however mild-delta-8 THC violates the spirit of the law. Nonetheless, products containing delta-8 THC are being sold across the country without federal oversight.

The question of the legality gets even muddier since delta-8 doesn’t naturally occur in large amounts in hemp plants. The work around is to convert CBD or delta-9 THC into delta-8 THC synthetically, which is illegal.

States Are Weighing In

Several states have inserted themselves into the conversation about delta-8 THC-specifically, the absence of research regarding the compound’s psychoactive effects-by blocking its sale. In fact, the compound is banned or sales restricted in Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Idaho, Iowa, Kentucky, Michigan, Mississippi, Montana, New York, North Dakota, Rhode Island, Utah, Vermont and Washington.

Legal or not, calls to poison control centers nationwide are on the rise concerning the toxicity of delta-8 THC. The fact is that scientists still don’t know a lot about how the chemicals in the compound work, especially in high concentrations. Nonetheless, the consensus is that while delta-8 THC itself may not be dangerous, the worry is what it might be mixed with in a federally unregulated market.

Sellers (and Users) Beware

Delta-8-THC has found its way onto shelves in gas stations, convenience stores, tobacco shops and cannabis dispensaries from coast-to-coast-often with no age restrictions. With its ever-increasing popularity comes enhanced scrutiny, both in terms of legality and safety. And whether delta-8 is legal at the federal level may be something of an open question, those manufacturing, distributing and selling the substance must be mindful of the potential for litigation and civil exposure due to the lack of regulatory oversight, limited laboratory testing and the omnipresent possibility of product toxicity.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

In an effort to better protect homeowners, insurance coverage has been expanded and limits increased under the California FAIR Plan – the state’s insurer of “last resort.” Such was the mandate as set forth in California Insurance Commissioner Ricardo Lara’s 2019 Order No. 2019-2, which has just been upheld by the Superior Court of California for the County of Los Angeles.

A Bit of Background

The Commissioner’s 2019 Order broadened coverage provided by the FAIR Plan to offer a comprehensive homeowners policy, in addition to the FAIR Plan’s initial dwelling-fire only coverage. Traditional homeowner coverage features-for example, coverage for water damage and personal liability-were added both to assist insureds throughout California unable to find adequate fire and homeowners’ insurance, and to save consumers from having to purchase second companion policies to cover other hazards not covered by their primary homeowners’ policies.

More specifically, Commissioner Lara’s 2019 Order:

1. Increased the combined dwelling coverage limit under the FAIR plan from $1.5 million to $3 million;
2. Ordered the FAIR Plan to offer consumers a monthly payment plan and the flexibility to pay by credit card or electronic funds transfer, without fees; and
3. Required the FAIR Plan to offer a comprehensive homeowners’ policy (e., HO-3 coverage).

Litigation Ensued

These modifications were to become effective April 1, 2020, but litigation was filed in the interim. The California FAIR Plan Association disputed the 2019 Order, arguing the Commissioner did not have the statutory authority to issue it. This resulted in the filing of a petition for a writ of ordinary mandate in the L.A. Superior Court directing Commissioner Lara to vacate the 2019 Order on the basis that it was arbitrary, capricious, or lacking in evidentiary support.

Last week, the Commissioner’s office reported that Judge Mary Strobel substantially upheld the Commissioner’s authority to order broader coverage to consumers under the FAIR Plan. That being said, the ruling was not a total win for the California Department of Insurance. The court directed Commissioner Lara to remove certain liability coverages “that have no relationship, nexus, or connection to the insured property” and resubmit the 2019 Order.

Further, Judge Strobel found that the Commissioner could not require the FAIR Plan to offer payment plans “with no additional fees,” but otherwise held that he could order the FAIR Plan to provide certain payment plans or options, such as electronic funds transfer.

The Takeaway

While Commissioner Lara’s 2019 Order requiring the FAIR Plan to offer comprehensive HO-3 coverage was not outside his statutory authority, the expanding coverage must be connected-or in some way related-to the insured property. This was not the case for the HO-3 policy alluded to in the original 2019 Order, which contained certain coverages that went beyond this limitation.

More information on the California FAIR Plan can be found on its website. Of course, should you have any questions about the 2019 Order or any other insurance-related queries, do not hesitate to contact the insurance and regulatory specialists at Michelman & Robinson, LLP.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Last week, the California Supreme Court issued a decision of great importance to employers statewide. In Ferra v. Loews Hollywood Hotel, LLC, the court ruled employees must receive premium payments at their “regular rate of pay” for missed meal, rest, and recovery breaks.

This will be news to many employers that, until now, have been compensating employees at their “base hourly rate” alone for meal, rest, and recovery breaks that have been missed. But in the wake of Ferra, employers are now on the hook for what may be a higher amount, as the regular rate of pay includes all non-discretionary payments like bonuses and commissions.

For employers, the ruling is particularly troublesome because it will be applied retroactively. As such, even employers that have acted in good faith by paying premium pay for missed meal, rest, and recovery breaks, albeit at the base hourly rate, will now be exposed to liability.

A Bit of Background

In Ferra, the plaintiff alleged that her employer, Loews Hollywood Hotel, improperly calculated meal and rest period premium payments when it excluded her non-discretionary quarterly incentive bonuses from premium pay calculations. For its part, Loews successfully argued at trial and before the Court of Appeal that Ferra’s regular rate of compensation for meal, rest, and recovery period premium pay was her base hourly rate of pay, which was distinguishable from her overtime regular rate of pay. The California Supreme Court flatly disagreed and concluded that if it were to adopt the interpretation offered by Loews, employers would be incentivized to minimize employees’ base hourly rates and shift pay elsewhere, which would harm employees who are paid in some form other than a base hourly rate.

Employer Takeaways:
The widespread impact of this landmark decision is clear: employers can no longer base meal and rest period premiums on an employee’s base hourly rate alone. Consequently, employers must prepare themselves for an onslaught of class action and Private Attorney General Act (PAGA) claims based on Ferra. They are also encouraged to do all of the following:

1. Review and update all payroll policies and procedures pertaining to meal, rest, and recovery period premiums. Timekeeping and payroll systems may also need to be updated to ensure that the regular rate of pay is properly calculated, as the meal, rest, and recovery period premiums owed to employees may now vary from pay-period to pay-period depending on the forms of payment made to any given employee.
2. Given the retroactive application of Ferra, it would be wise to audit prior meal, rest, and recovery period premium payments made to employees who receive non-discretionary payments that are included in their regular rate of pay calculations-this in order to ensure those premiums have been paid accurately.
3. Employers should note that referring to a payment, such as a bonus, as “discretionary” may not necessarily exempt it from the calculation of an employee’s meal, rest, and recovery period premiums and/or overtime wages.

Of course, if you need any guidance in the aftermath of Ferra or have any other employment- or wage and hour-related questions, do not hesitate to contact the employment law specialists at Michelman & Robinson, LLP.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.