Thursday, March 15th at 6:00 am EST/11:00 am CET
You will need both the meeting number and password to join the meeting. If you do not have this information, you may contact Mercedes Cowper at +1-616-454-9939 or mcowper@primerus.com
Or, you can sign in to the Members Only section and view the call information on the ITS Practice Group tab.
Thursday, March 1st at 12:00 pm Guatemala/1:00 pm Grand Rapids, Ecuador, Panama, Grand Cayman/2:00 pm Puerto Rico/3:00 pm Brazil, Chile, Argentina/7:00 pm Paris.
AGENDA:
1) Allowing time for connections (5 min)
2) Meeting in Santiago update (5 min)
3) Organizations Primerus should be involved with (10 min)
4) Business update (15 min)
5) Wrap-up
You will need both the meeting number and password to join the meeting. If you do not have this information, you may contact Mercedes Cowper at +1-616-454-9939 or mcowper@primerus.com
Or, you can sign in to the Members Only section and view the call information on the Latin America & Caribbean Chapter tab.
Wednesday March 14th at 2:00 p.m. EST / 11:00 a.m. PST/ 1:00 p.m. CST
2:00 p.m. – 3:00 p.m. Eastern Standard Time
We welcome new members to participate in these conference calls.
To join the next conference call contact Deb Romero at 1-800-968-2211 for call-in information or sign in to the Members Only Section and go to the Bankruptcy Law tab under Practice Groups - PBLI.
Wednesday March 21st at 1 p.m. EST / 10 a.m. PST / 6 p.m. GMT
1:00 – 2:00 p.m. Eastern Standard Time
We welcome new members to participate in these conference calls.
To join the next conference call contact Deb Romero at 1-800-968-2211 for call-in information or sign in to the Members Only Section and go to the Commercial Law tab under Practice Groups - PBLI.
Report: Chinese Government Makes Moves Likely To Eliminate Hundreds of Thousands of American Auto Industry Jobs
Written By: Terrence P. Stewart, Esq.
Stewart and Stewart
Washington, DC
By the end of the decade, market distortions and discriminatory practices by the Chinese government could allow China to seize 50 percent or more of the U.S. auto and auto parts markets– at a cost of hundreds of thousands of American jobs.
That’s the conclusion of a new 251-page report, China’s Support Programs for Automobiles and Auto Parts Under the 12th Five-Year Plan released by Primerus member and international trade law firm Stewart and Stewart.
“China designates new-energy automobiles and their components as one of the seven strategic and emerging industries in which it aims to become a world leader by 2030,” says trade law attorney Terry Stewart, the report’s co-author. “China will reach this goal by growing production of vehicles and parts by 35% per year – a staggering surge backed by a government investment of $1.5 trillion in these industries over the next five years. This comes on the heels of China’s 2009 stimulus of $1.5 billion to develop key automotive parts and technologies,” Stewart said. “Auto parts targeted include batteries, electric motors, electronic control systems, and fuel cells – critical components to the next generation of motor vehicles.”
Chinese auto and parts producers benefit from an array of government policies, including export restraints of key raw materials, domestic content rules, technology transfer requirements, export requirements, and massive domestic and export subsidies, the Stewart and Stewart report shows.
“A number of these policies directly violate China’s WTO commitments,” Stewart said, adding that his firm is part of a coalition working to pressure China to change its policies.
The report says the Chinese government has created:
The report explains these policies are already increasing Chinese exports. Today, China exports 25 percent of the automotive parts it produces. Exports are to increase to 30 percent by 2015. The U.S. absorbs nearly one quarter of China’s auto parts exports, and those U.S. imports have grown at a rate of more than 25% per year since 2003.
– Mr. Stewart is the Managing Partner of Stewart and Stewart. His practice focuses on international trade matters (litigation, negotiations, policy) and customs law including trade remedies (anti-dumping, countervailing duty, safeguard matters in the U.S. and abroad including the Special Safeguard against China); helping clients understand and pursue challenges/opportunities within trade negotiations (free trade agreements, the WTO); dispute settlement under international agreements (e.g., NAFTA, WTO); development of legislative options on trade-related issues; evaluation of WTO-consistency of laws, regulations and practices of countries where clients are active.
For more information on Stewart & Stewart, please visit stewartlaw.com or the International Society of Primerus Law Firms.
Written By:Shinji Itoh, Esq.
Hayabusa Asuka
Tokyo, Japan
The Financial Instruments and Exchange Act (kin-yu shohin torihiki ho; the “Act”) regulates activities relating to securities and other financial instruments. The Act covers (i) disclosure requirements for issuers of securities, (ii) disclosure requirements for tender offers, (iii) regulations on financial instruments business operators, (iv) financial instruments firms associations, and (v) financial instruments exchanges. In this article, we overview regulations on the offering of the securities and the collective investment scheme under the Act.
I. What Are the “Securities”?
The Act concerns the “securities” (yuka shoken) and other “financial instruments” (kin-yu shohin), which terms are defined under the Act. Article 2, Paragraph 1 of the Act provides a list of traditional types of securities to constitute the “securities” for the purposes of the Act, e.g., governmental bonds, corporate bonds, CPs, equity shares, warrants and depositary receipts (“Paragraph I Securities”). Article 2, Paragraph 2 of the Act designates certain types of financial instruments as “deemed securities”, e.g., trust beneficiary interests, membership interests in certain closed corporations, partnership interests in a Civil Code partnership, a Commercial Code partnership, a limited liability partnership under special laws, and similar interests under foreign laws (“Paragraph II Securities”). The term “financial instruments” is defined to include the securities, currencies, and certain derivatives/indexes.
II. Public Offering vs. Private Placement.
(A) In principle, an offering of Paragraph I Securities to 50 or more persons constitutes a “public offering”. Before a public offering is made, the issuer of such Paragraph I Securities must file a securities registration statement with the Prime Minister. A securities registration statement is a disclosure document containing the detailed information on the securities being issued as well as the issuer. A prospectus containing the contents of such securities registration statement must be delivered to prospective investors. Exemptions from the registration requirement are available if the offering falls into a category of the following private placements. Certain transfer restrictions are imposed on the Securities for all categories of private placements.
(1) Placement to Qualified Institutional Investors only. An offering must be made to “Qualified Institutional Investors” (tekikaku kikan toshika) only. The term “Qualified Institutional Investors” are defined under a ministerial ordinance promulgated under the Act, including banks, securities houses, insurance companies and certain business corporations.
(2) Placement to Professional Investors only. An offering must be made to “Professional Investors” (tokutei toshika) only. The Professional Investors include Japan, Bank of Japan, Qualified Institutional Investors, certain corporations and individuals, and foreign corporations. The issuer of the Securities must appoint a registered “financial instruments business operator” (such as a securities company) if the offering is made to Professional Investors other than Japan, Bank of Japan and Qualified Institutional Investors.
(3) Placement to Small Number Offerees. An offering must be made to 49 or less persons.
(B) Unless 500 or more persons acquire Paragraph II Securities as a result of an offering, such offering does not constitute a public offering.
(C) Continuous reporting requirements are imposed on the issuer of the securities publicly offered.
III. Collective Investment Scheme.
A “collective investment scheme” refers to a management of moneys and other assets contributed by holders of trust beneficiary interests or partnership interests (domestic or foreign), to invest mainly in the securities and derivatives.
The collective investment scheme is often used for real estate securitizations in Japan. To avoid certain licensing requirements, real estate is held by a trust bank in trust. A special purpose vehicle (an “SPV”) holds such beneficial interest in trust (Paragraph II Securities). Typically, investors purchase partnership interests in the SPV.
In principle, an operator/manager of a collective investment scheme must be registered as a discretionary investment manager (toshi-unyo gyosha) under the Act. Conditions for the registration include the minimum capital requirement and staffing requirement. When an SPV is used as the operator/manager of a collective investment scheme, it is impossible for such SPV to satisfy the registration requirements. Two exemptions are available: (i) an SPV to hire a registered discretionary investment manager; and (ii) an SPV to become an operator of the “specially permitted business for Qualified Institutional Investors, etc.” (tekikaku kikan toshika tou tokurei gyomu) (“QII Special Business”). QII Special Business must collect funds through partnership interests (Paragraph II Securities), which are held by (x) at least one Qualified Institutional Investor and (y) less than 49 non-Qualified Institutional Investors. Non-resident, foreign investors are excluded from the number of such non-Qualified Institutional Investors. A simple notice is required to be submitted to the Prime Minister.
For more information on Hayabusa Asuka, please visit halaw.jp or the International Society of Primerus Law Firms.
Written By:Stuart Colburn, Esq.
Downs.Stanford, P.C
Austin, Texas
I. THE PROBLEM
We are killing our children. And we are killing their parents. When we are not successful killing our citizens, we destroy their lives and the lives of their families. The weapon is legal: prescription drugs.
Hyperbole aside, no one intends such damage on our citizens. America’s prescription drug abuse (PDA) problem is not nearly as well known as our War on Drugs. No war has been declared and yet American lives are being lost.
American citizens make up 4% of the world’s population. Yet, we consume 66% of the world’s legal drugs. Americans consume:
An estimated seven million Americans abuse prescription drugs: more than the number of Americans abusing cocaine, heroin, hallucinogens, ecstasy, and inhalants combined.
The Center for Disease Control estimated 11,500 people die a year from opiates, twice as many as cocaine and five times as many as heroin. Deaths have quadrupled over the last decade. We are fighting the wrong war.
In 1991, doctors wrote 40 million prescriptions for opioids. In 2007, the number of prescriptions rose to 180 million. Hospital admissions increased a staggering 400% from 1998 to 2008 with a 200% increase in the number of deaths. Two Americans die every hour from PDA.
PDA is also regional. The federal government identified three primary hubs: southern California, southern Florida, and Harris County (Houston area), Texas. In fact, one out of six Houston-area deaths is attributed to prescription drugs. In 2010, 734 million hydrocodone pills were prescribed in Houston: enough for every man, woman, and child to consume 30 doses.
Nationally, the number of deaths from PDA surpassed the number of deaths caused by alcohol and firearms. Recently, PDA deaths exceeded the number of deaths caused by motor vehicle accidents in such states as Ohio.
In Michigan, prescription drug overdose is the second leading cause of unintentional deaths. Perhaps more troubling is that 25% of those seeking medical care were younger than age 25.
PDA strikes our military forces. In 2009, our fighting forces were prescribed four times the number of pain medications they were prescribed 2001. In fact, 25% of soldiers admitted abusing prescription drugs in the last twelve months.
Although the federal government has not declared war on prescription drugs, the White House did announce a policy on April 21, 2011, calling the prescription drug epidemic “our Nation’s fastest drug problem.” The White House plan includes expanding prescription drug monitoring programs, educating doctors and patients, and expanding prosecution of pill mills.
II. Why the Prescription Drug Abuse Problem is Different than Illicit Drugs
Prescription drugs are qualitatively and quantitatively different than illegal drugs. First, abusers of prescription drugs have more access to scheduled narcotics than illegal drugs. Prescription drugs are more plentiful than their illegal counterparts. Prescription drugs are not prohibited, although they are controlled and regulated by the federal government. Manufacturers can legally make – and citizens can legally take – drugs prescribed by a doctor. There is less social stigma attached to the abuse of prescription drugs. In comparison, illegal drugs are in limited supply.
Second, abusers have greater access to not only drugs but also higher quality drugs. Large companies manufacture prescription drugs in a clean and safe facility with consistent dose and strength monitored by governmental agencies. Prescription drugs are taken orally with no risk of HIV and hepatitis B or C. The quality of illegal drugs such as cocaine or heroin is circumspect with no enforcement or regulatory safeguards. Illegal drug makers can dilute their product to expand profits without threat of regulatory sanctions or lawsuits. Deaths occur due to impurities.
Many drugs can be abused. The current favorites are as follows:
The public’s appetite for prescription drugs leads to a lucrative secondary market. The typical prescription drug abuser personally uses the drugs for nonmedical purposes. Drug diversion occurs when the prescription holder gives or sells drugs to others. For example, oxycontin has been known to sell for $40 a pill. MScontin fetched as much as $70 per pill. A Fentanyl patch was good for $50. Even Vicodin was worth $1-$4 per pill. One study revealed 85% of respondents received drugs from someone who had a prescription.
Young adults are generally the buyers and sellers in the secondary market. Kids steal from their parents’ medicine cabinets to feed their own habit or sell to others. The easy access to prescription drugs provides an adequate supply chain keeping the purchase price relatively low for other kids to enter the market. Peer pressure and addiction creates the demand. PDA moves outcasts to the “in” kids. Soon, it is accepted and “cool” to get high with prescription drugs. Kids throw “pharm parties”, where partygoers swallow handfuls of pills often not knowing what they are taking and ignorant of drug interactions. Alcohol is often the chaser. These actions can result in dangerous self-destructive behavior, injury, and death.
III. The Stakeholders
Manufacturers
Unlike illegal drug manufacturers, the pharmaceutical industry includes Fortune 500 companies who are well-respected in their communities. Drug makers spend billions in research, development and testing. They truly make miracle drugs that save lives. Numerous pain management medications have also improved the quality of life for millions of Americans. Pharmaceutical companies must make a profit and create value for their shareholders. Like any good capitalist, they must create products people want. To reach their target audience and “hit their number,” they market drugs to their potential customers first using attractive drug reps visiting doctor’s offices and later directly to consumers. Profit motive leads to better drugs but can also lead to some perversions.
Doctors
Physicians are held in high regard and command significant salaries. Like others, doctors can often be influenced by relationships and business opportunities. For example, one study of physicians found the following:
Physicians are both healers and entrepreneurs. Many in the profession view themselves as more than a provider of medical services to their patients but rather as business professionals. Prescription drugs are one profit center.
And like any good capitalists, many doctors continually look to expand their profit centers. One company marketed on LinkedIn how doctors’ offices could expand their profit margin by dispensing drugs. Physician dispensing is a hot topic across the nation. Studies show that physician dispensing increases the number of prescriptions and the cost of those prescriptions in the states that allow it. For example, payers reimburse doctors 148% more for ibuprofen in Florida and 464% more for Soma. Louisiana doctors were reimbursed 81% more than a retail pharmacy for ibuprofen and “only” 268% for Soma.
Closely associated with physician dispensing is repackaging. Repackagers deliver bulk medications to physician offices. The packages are then divided into smaller amounts for dispensing to patients. Drugs are reimbursed at higher amounts per pill. A California study noted 80% of the drugs and costs are prescribed by 20% of the doctors. A new study focused on a breakdown of the top 10%. For example, the top 10% of physicians prescribed 79% of all Schedule 2 opioid prescriptions and 87% of opioid morphine equivalents. Worse, the top 1% of California physicians are responsible for a whopping 33% of all Schedule 2 opioid prescriptions and 41% of all Schedule 2 opioid morphine equivalents.
The business of some medical providers is supplying pain medications. Some of these providers and businesses have come to be known as “pill mills.” States are choosing to regulate the business of prescribing drugs. For example, Texas recently began regulating pain management facilities. The Texas legislature heard horror stories of pill mills popping up in strip centers around town with long lines and accepting little or no insurance. The “Houston Cocktail” was a prescription for three drugs that should never be prescribed together: hydrocodone, valium, and Xanax. From January 2009 to March 2010, one Houston doctor wrote more than 43,000 prescriptions for the Houston Cocktail. In 2009, 70% of the 144,000 prescriptions of the Houston Cocktail were in fact from Houston. After Esther Scarborough’s son died of an overdose after his first visit to a Houston-area pain clinic, she said, “These doctors are using our loved ones as cash cows or ATM machines. They make a lot of money off these drugs.” The pill mill bill requires facilities and their owners to register if they derive 50% or more of its business from writing pain prescriptions. All facilities must be owned by a doctor who spends at least 33% of his time treating patients at the facility. After the pill mill bill became law, there was a 45% drop in scheduled narcotics prescribed in Houston compared with the same time the year before.
Dr. Gerald Ratinov was the largest prescriber of hydrocodone in the State of Texas. Prosecutors and law enforcement successfully used the pill mill bill to crack down against doctors improperly prescribing or diverting scheduled narcotics. Dr. Ratinov is now in jail.
The pill mill bill author, Senator Williams (R-The Woodlands), successfully passed a new law (SB 158) in 2011 that makes it a crime for individuals, including patients and people in the industry, to divert drugs. A patient may no longer conceal a material fact when seeking or filling a prescription. Concealment of a material fact is defined as follows: “For purposes of this subsection, a material fact includes whether the person has an existing prescription for a controlled substance issued for the same period of time by another practitioner.” The addict or diverter who attempts to fill a prescription for a drug, while already receiving that drug for the same period from a different source, commits a crime.
Few doctors receive education and training about drug addiction and drug diversion. This is especially true for more mature doctors.
Pharmacies
Pharmacies make money dispensing pharmaceuticals. But pharmacies have also become victims. More pharmacies report robberies. In fact, there has been an 81% increase in robberies since 2006 resulting in 1.3 million pills stolen. Some robberies have turned lethal. In Long Island, NY, a robber shot the pharmacist, teenage store clerk, and two customers in her pursuit of hydrocodone. An Idaho man dressed in a suit and tie threatened “to light this place up” if not provided oxycontin. Robbers are taking some extreme measures including squeezing into air-conditioning shafts, using an electric saw to cut off a door knob, and in one instance, a woman attempted to break in a Walgreens drive-through window with a crowbar. Some pharmacies are posting signs saying the do not carry oxycontin or oxycodone.
The Payers
Insurers pay 80% of the nation’s $230 billion drug bill and are therefore the main financiers and enablers of drug diversion. The Coalition Against Insurance Fraud indicates PDA costs $72.5 billion per year. In 2006, almost one half of Aetna’s member fraud investigation involved prescription drug benefits.
Prescription drug costs are rising faster than inflation and the medical CPI (medical inflation). Payers are implementing strategies to combat the high cost and higher utilization of scheduled narcotics. A cottage industry of prescription benefit managers (PBM) has developed to combat utilization and costs of prescription drugs. Each payer is developing internal procedures to identify potential drug abuse or diversion. But each state has different laws and attitudes towards PDA complicating their efforts.
The Patient
Patients are being prescribed and are taking more pain medications. More frequent prescriptions and more pills inevitably lead to more addicts. Addicts rob, steal and lie. Their addiction affects those they love, destroying families. One judge recently explained the cycle: “The addict soon breaks the law and either steals or diverts the drugs to fund the drug habit. Eventually, the addict is arrested for violation of a state or federal law leaving his family to pick up the pieces. Patients do not choose the addiction but the statistics of the lives affected do not lie.” Some patients trust the physician. Others may have ulterior motives. Detoxication programs are not a failsafe cure and often administered after so many lives are destroyed. They are costly when compared to strategies to stop the addiction from ever taking hold of the patient.
VI. Strategies
Government Regulation
Prescription drug abuse and diversion is a problem requiring close interaction between public and private sectors. Stakeholders must work together using tools at their disposal in a coordinated effort to fight supply and demand. The most successful action the government can take in partnership with other stakeholders is a prescription drug monitoring program (PDMP). Some states have created their own programs with varying degrees of success. A model program includes:
A PDMP must be mandatory for either doctors or pharmacies and must be in real time. No comprehensive strategy will be successful without it. The front line suppliers (doctors who prescribe and the pharmacies who fill) will instantly know if the patient is taking prescription drugs from another source reducing supply. The PDMP protects the front line suppliers from charges of creating an addict. Regulators can monitor the prescribing habits of outlier doctors for more education or oversight.
Physicians
The public has an unreasonable view of the knowledge base of healthcare providers. Although every doctor graduated from medical school, knowledge itself comes from specialized training. Scheduled narcotics should only be prescribed by doctors with the requisite training and experience. Those doctors granted the additional license to prescribe scheduled narcotics would be subject to additional regulation.
Physicians should be required to check with the PDMP database before writing a prescription for dangerous drugs. A doctor who fails to comply risks prescription license forfeiture and possible lawsuits. A physician who does verify using the database should enjoy immunity from lawsuits.
Prescribers of narcotics should enter into drug contracts with their patients. Routine and random monitoring of the patient’s urine will confirm the drugs are being taken (to avoid drug diversion) and at the right levels (to avoid abuse). Violations of the drug contract should be reported to the PDMP database.
Drug dispensing by physicians does have some benefits. Critics argue physician dispensing can result in abuse by the inevitable bad actors statistically present in every large group. Indeed, the cost to human life and dollars are staggering even if only 1% of all providers were problem dispensers. If physician dispensing is allowed, the reimbursement rate should be no higher than the retail pharmacy removing the profit motive to dispense more drugs or stronger, more addicting (and expensive) drugs. The physician dispenser should be allowed to bill extra for drug contracts and urine testing.
Pharmacies
Pharmacies should be required to participate in a prescription drug monitoring program for scheduled narcotics before dispensing scheduled narcotics.
Pharmaceutical Companies
Drug companies should design drugs to deter abuse. Drug companies employ manufacturing techniques making it more difficult or impossible for drugs to be ground up into a powder. Pharmaceutical companies should not be allowed to market scheduled narcotics for off-label use. (The most famous example is Fentanyl, an end-stage cancer pain drug, marketed for low back pain.)
Consumers
Public education about prescription drug abuse should be paramount on billboards and in our school systems. Every day, 7,000 young people abuse prescription narcotics for the first time. Patients who receive a prescription or scheduled narcotics should also undergo approved education and information.
Payers
Payers should implement strategies designed to identify addicts, diverts and outliers. Payers should urge policy makers to adopt PDMP and common sense laws giving regulators the information and power necessary to fight PDA. Payers have ever more increasing sophisticated software able to perform advanced predictive modeling and performance analytics that can identify outlier doctors and possible addicts. Communication with other stakeholders early in the process works well both as preventive education and as proactive identification of early PDA. Use of PBM and drug formularies are currently available for implementation.
V. Conclusion
Many people believe America is losing (or lost) the war on drugs. That war is important. But PDA kills more people and causes more family destruction than all illegal drugs. All stakeholders should be collectively engaged in the search for solutions to PDA and when necessary demand action. Doing nothing creates addicts and destroys families.
For more information on Downs.Stanford, P.C, please visit downsstanford.com or the International Society of Primerus Law Firms.
Written By: William A. Coates, Esq.
Roe Cassidy Coates & Price, P.A.
Greenville, South Carolina
The responsible corporate officer doctrine established what amounts to strict liability for certain corporate officials and employees in criminal cases. The doctrine is now being used by many regulatory agencies, particularly those dealing with healthcare and pharmaceuticals, as a tool to debar employees and officials from the industry of which they have been a part for many years. This is the case even though no criminal intent was involved and in some cases, no criminal conviction obtained.
The responsible corporate officer doctrine was enunciated by the United States Supreme Court over 40 years ago in the case of United States v. Park, 421 U.S. 658 (1975). Park was the CEO of a national food chain with approximately 874 retail outlets and 36,000 employees. The government charged the food chain and Park with holding food that had become adulterated in a company warehouse, a violation of the Federal Food Drug and Cosmetic Act. The company entered a guilty plea. Park went to trial and was convicted. Park did not personally participate in the actions which caused the violations, yet the Supreme Court rejected the argument that a conviction required proof that the executive intended to cause a violation or was even aware of the offending conduct. The Court found that the government established a prima face case by introducing evidence “that the defendant had, by reasons of his position in the corporation, responsibility and authority either to prevent in the first incident or promptly to correct, the violation complained of, and that he failed to do so.” 421 U.S. at 673-74. Thus, the responsible corporate officer doctrine began an expansive journey.
A violation of any number of federal statutes will give rise to mandatory debarment. Debarment is exclusion from participation in the affected federal program. For example, a violation of certain portions of the Clean Air Act and Clean Water Act will result in mandatory debarment. The same is true for felony convictions related to federal healthcare programs and certain state healthcare programs. 42 U.S.C. § 1320a-7(a).
In addition to mandatory debarment, federal law also provides for permissive debarment. Debarment relating to healthcare program decisions is administratively made by the Office of Inspector General (OIG) of the Department of Health and Human Services (DHHS). Utilizing the responsible corporate officer doctrine, the OIG has been taking an increasingly aggressive stance in seeking to debar individuals who have not been convicted of a felony, and in once instance have not been convicted of anything at all.
The case of Freidman v. Sebelius, 755 F.Supp. 2nd 98 (D.D.C. 2010) is illustrative. Purdue Frederick Company (Purdue) pled guilty to a felony due to misstatements made to healthcare providers regarding the addictiveness of the drug oxycontin. Purdue was assessed a total of $600 million dollars in criminal fines and civil monetary sanctions. In addition, the government required three of the company’s executives to plead guilty to misdemeanor off-label marketing as responsible corporate officers. Under Park, no intent was required for conviction, as the positions of the executives made them “responsible” for preventing or correcting the misbranding. While these executives agreed to the plea, none of them admitted to any personal knowledge of the violations. Several months after the plea and sentencing, the OIG excluded the executives from participation in any federal healthcare program pursuant to 42 U.S.C. § 1320a-7(b)(1) which allows for the exclusion of an individual convicted of a “misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct.” The OIG excluded the executives for 20 years. The executives appealed through the administrative process, which ultimately resulted in a reduction of the exclusion to 12 years. The executives then appealed to the United States District Court for the District of Columbia arguing that any exclusion should be based solely on their personal conduct. The executives argued that inasmuch as they had no personal knowledge of the conduct involved, they should not be excluded simply because of their positions in the company. The District Court found that personal knowledge of the false off-label marketing was not required for debarment. The Court reasoned that because the misdemeanor convictions were related to the fraud detailed in the statement of the offense adopted at the time of the guilty plea, the permissive exclusions were proper. The decision of the District Court has been appealed to the Circuit Court of Appeals for the District of Columbia.
More opportunity for mischief lies in the government’s use of the permissive exclusion contained in 42 U.S.C. § 1320a-7(b)(15). This paragraph applies to two types of individuals: (a) Owners who knew or should have known of the actions which constitute the basis for the underlying conviction, or (b) officers or managing employees (one who exercises operational or had general control over the entity or who directly or indirectly conducts the day-to-day operations of the entity. See 42 U.S.C. § 1320a‑5(b)). There is no requirement that the officer or managing employee know or should know about the underlying corporate misconduct. While this is consistent with the Park doctrine, it has been applied in at least one instance to an individual who was not convicted of anything.
Forest Pharmaceuticals pled guilty to two misdemeanors, one involving illegal promotion of a certain drug and the other involving illegal distribution of an unapproved drug. In addition, the company pled guilty to a felony for lying to the FDA during an inspection. The company paid a total of $313 million dollars to resolve all criminal, civil, and forfeiture matters. In addition, the company entered into a Corporate Integrity Agreement (CIA) with the OIG.
Only after all of the above was completed did the OIG advise Howard Solomon, the CEO of Forest Laboratories (parent of Forest Pharmaceuticals), that it intended to exclude him from federal healthcare programs pursuant to Paragraph (b)(15). Solomon was neither charged nor convicted of a crime. The government never advised him he was a target of either: (a) The government’s investigation of Forest Laboratories, or (b) any proposed exclusion. Yet, the government proposed to permissively exclude Solomon in reliance upon Paragraph (b)(15) and the Park doctrine. Solomon resisted. Ultimately, the government dropped its exclusion action; however, there is no indication the government has changed its policy of aggressively pursuing debarment of corporate executives.
Counsel for healthcare entities and their employees should be aware of the OIG’s aggressive stance regarding debarment. Counsel should be alert to these possibilities even at the beginning of an investigation which, on its face, does not appear to be criminal such, as a civil investigative demand. Needless to say, counsel engaged in settlement negotiations (whether civil or criminal), with the government need to keep the possibility of exclusion at the forefront. At a minimum, executives should be advised of the option to obtain advice from counsel separate from the company’s counsel. Counsel for any corporate executives should work closely with counsel for the organization regarding the scope of any factual recitations in any document or proceeding. This will minimize the potential that any admissions can be used in any subsequent exclusion proceeding.
For more information on Roe Cassidy Coates & Price, P.A., please visit roecassidy.com or the International Society of Primerus Law Firms.
Written By: Dennis L. Monroe, Esq.
Monroe Moxness Berg PA
Minneapolis, MN
Sometimes it is said that the eyes are the window to the soul, and I would say the same is true about a company’s profit and loss statement (“P&L”). Profit and loss statements are the window to a company’s success. This article encapsulates my 30 plus years of looking at P&Ls for the franchise community.
I like to see P&Ls divided into seven categories. The following is a list of these seven categories, along with my in-depth description.
Sales
The most important exercise when analyzing your sales is to make sure you understand each component of sales, by type and by product. Sales needs to include an in-depth review of customer counts, customer check averages, sales by day part, sales by day of the week and any other way you can slice and dice sales. I particularly like “sales by customer” or sometimes called check average, which can help determine where you need to be on your pricing threshold. Sales by customer data also helps you analyze customer trends, which is a key element in today’s volatile sales market.
Cost of Goods Sold There are two components in this category:
You can further break these categories down into various labor components such as front of the house, back of the house, senior management and contract labor.
Gross Margin
Sales less cost of goods sold equals gross margin. This is the first real key matrix. Each industry in the franchising world has a different matrix as it relates to costs of goods sold, gross margins and income from operations. For instance, if you are in the restaurant or auto aftermarket industry and are working with a high cost to goods sold ratio and significant labor and high product cost, we normally see gross margins in the 30-40% range. It is very important to analyze your gross margins based on other businesses in your industry. In addition, many franchise businesses determine the bonus for the management team based on gross margins.
Operating Expenses
Sometimes labeled as controllable and uncontrollable expenses, this category includes a wide variety of expenses. Below are some of the major categories:
Operating Income.
We subtract operating expenses from gross margin and arrive at operating income which is the holy grail of franchise unit economics. There has been much written on this subject but there are a few general observations that can be made. We like to see the unit level economics for store operating profit in the neighborhood of 15%. Once we start getting much lower than 15%, it may become difficult to pay for corporate overhead and debt service. Many units do not start out with that type of profitability; and sometimes in the franchise world, because of royalty payments, it is difficult to get to 15%. However, I still believe 15% is a threshold amount; and, I prefer to see store operating profit for each unit closer to 20%. This operating profit is the real source of cash for the business.
Other Income and Expenses
From operating income we then subtract the non-store or over store expenses, which we call other income and expenses. The first item in this group would be interest expense (netted with interest income), depreciation and amortization. Sometimes we include pre-opening expenses if it is a new facility which for GAAP purposes needs to be an expense. Corporate overhead, management fees or corporate allocation are the cost of services that are supplied by the overstore management. If it is a single unit and there are no other units to spread this expense to, then this would normally be G&A under operating expenses. The corporate overhead can be a very subjective allocation or it may be governed by a management agreement. The depreciation we are speaking of here is depreciation on a GAAP basis and should come close to the approximate useful life of the assets that are being depreciated. Therefore, in many ways, it is a real expense.
Net Income
Net income is the deduction of all of the above to come up with the bottom line; that is, the economic effect of the business to the owners. I have omitted any taxes in arriving at net income because most entities involved in the franchise industry are flow-through entities, such as Sub Chapter S corporations or LLCs and pay minimal tax.
P&L Problems
One other P&L term which I would be remiss in not discussing is the famous EBITDA. In most cases this is equal to operating income less corporate overhead and adding back any depreciation amortization and interest and taxes. This really is the ultimate free cash flow.
In conclusion, there are no items on the P&L that should not be analyzed. Benchmarking with other franchisees or other like industry companies is key.
Dennis L. Monroe is a shareholder and Chairman of Monroe Moxness Berg PA, a law firm specializing in multi-unit franchise finance, mergers and acquisitions, and taxation. Monroe Moxness Berg PA is located at 8000 Norman Center Drive, Suite 1000, Minneapolis, MN 55437-1178; (952) 885-5999. For previously published articles, and other Monroe Moxness Berg PA information, please refer to our Web site at www.MMBLawFirm.com.
For more information on Monroe Moxness Berg PA, please visit www.mmblawfirm.com or the International Society of Primerus Law Firms.
Written By: David S. Schaffer, Esq. and Barry P. Kaltenbach, Esq.
Kubasiak, Fylstra, Thorpe & Rotunno, P.C.
Chicago, Illinois
For corporate counsel, the first several days following a bankruptcy of one of your company’s business partners can produce a flurry of activity and considerable confusion. You often have to make quick decisions – both in responding to internal queries asking “what do we do now?” and in analyzing whether to engage outside creditor’s rights counsel to assert or defend claims. Understanding the immediate implications of a bankruptcy filing can help you guide your company through what can become a very complex process.
1. Effect of the Automatic Stay
While most attorneys understand the most common effect of the “automatic stay” that Section 362 of the Bankruptcy Code provides (i.e., freezing litigation against the debtor), there is often confusion regarding the scope and extent of the stay. The automatic stay is just that – automatic. It takes effect immediately upon the debtor filing bankruptcy. Thereafter, almost any action that your company takes to collect from the debtor will violate the stay and expose your company (and potentially individuals within) to sanctions. It applies not just to litigation, but to alternative dispute resolution and to informal collection efforts. It also applies even if the debt is non-dischargeable in bankruptcy. Formal notice of the bankruptcy is not necessary. Upon having reason to believe a bankruptcy has been filed, you are “under a duty to seek further information which should reveal the applicability and scope of the automatic stay.” In re Stewart, 190 B.R. 846, 850 (Bankr. C.D. Ill. 1996). Failure to seek this “further information” can transform an inadvertent violation of the stay into a willful violation. If your company improved its position by unintentionally violating the automatic stay, its continuing retention of that position also serves as a continuing violation of the stay. In re Weatherford, 413 B.R. 273, 287 (Bankr. D.S.C. 2009).
2. Reclamation
So what can you do? One important action that is permissible is to promptly send a notice of reclamation. Section 2-702 of the Uniform Commercial Code provides that once a seller of goods discovers the buyer is insolvent, the seller may refuse to ship further goods absent cash payment, even if an existing contract provides for credit. The seller also has the right to reclaim goods already shipped, provided the notice of reclamation is sent within ten days after the debtor receives them.
Section 546 of the Bankruptcy Code modifies this time period in bankruptcy cases by extending the ten day period to forty-five days. If the forty-five day period expires post-bankruptcy, the notice then must be sent within twenty days of the bankruptcy filing, so it is critical to move quickly. If the debtor has already sold the goods in the ordinary course of its business, then the notice is ineffective. This does not leave the seller without a remedy, however. The seller will be able to assert a priority claim as to the value of goods received by the debtor up to twenty days pre-bankruptcy. While this offers some protection, sellers of goods should nonetheless promptly send the notice of reclamation.
3. Preferences
Another issue that may confront a creditor early in the bankruptcy process is avoidance of preferential payments, or “preferences.” Section 547 of the Bankruptcy Code permits a debtor to “avoid” (i.e, recover) payments it made to creditors within the 90 days preceding its bankruptcy filing, if the payments were on account of an antecedent debt and they would permit the creditor to receive a greater distribution than the creditor would obtain upon liquidation. Section 547 also provides a number of defenses to avoidance, including that the payment was made contemporaneously (as opposed to by credit), that the creditor subsequently provided new goods, and that the payment was made in the ordinary course of business. Additionally, payments of less than $5,850 are not subject to avoidance at all.
4. Critical Vendors: Be Careful
In reorganizations, the debtor may seek court approval to designate your company as a “critical vendor” in order to keep you doing business with it. The theory behind the critical vendor doctrine is that paying certain vendors benefits all creditors by permitting the debtor to stay in business. Motions seeking to approve critical vendor payments are often “first day” motions that a debtor presents to the presiding judge immediately after filing its petition. Understanding the use and the implication of critical vendor orders is essential to successfully navigating the first few days of a debtor’s bankruptcy.
a. Judicial Uncertainty
Many critical vendor orders authorize the debtor to pay those vendors that it deems critical for its continued operation. Some courts have raised serious concern about the validity of this type of “blank check” critical vendor order. See, e.g., In re Kmart Corp., 359 F. 3d 866 (7th Cir. 2004). In Kmart, the Court of Appeals for the Seventh Circuit held that a bankruptcy court could only approve critical vendor payments if it first made factual findings that the vendor was truly critical, that the vendor refused to do business under any other terms (even cash on delivery) unless its pre-petition claims were paid, and that non-critical vendors would be better off if critical vendor payments were made. As a result of this ruling, those Kmart vendors who had received critical vendor payments had to refund them. More detailed factual findings by the bankruptcy court might have prevented this outcome.
In re Meridian Automotive Systems-Composites Operations, Inc., 372 B.R. 710 (Bankr. D. Del. 2004), provides another good example of a creditor believing erroneously that a critical vendor order afforded it protection. The order provided that the debtor could make critical vendor payments in the exercise of its business judgment, but it did not identify the critical vendors by name, nor approve specific payment requests. The bankruptcy court later questioned whether the payments were truly made pursuant to the critical vendor order (and thereby protected by it), since the order lacked any level of detail. Moreover, the mere fact that the creditor received critical vendor payments did not afford it a defense to an avoidance claim.
b. Need to Comply with the Order
Even a properly drafted critical vendor order affords no protection if a creditor fails to strictly comply with the order. See, e.g., In re Hayes Lemmerz Int’l, Inc., 313 B.R. 189 (Bankr. D. Del. 2004). In Hayes, the creditor accepted critical vendor payments after agreeing to continue to do business with the debtor under regular business terms. Thereafter, the creditor attempted to negotiate a better deal and threatened to hold up delivery. The bankruptcy court held that this violated the order and the creditor was required to disgorge the payments it had already received.
c. Key Aspects of the Order
Because critical vendor orders have become a routine part of “first day” bankruptcy operations, corporate counsel may be called to negotiate or approve them before having a chance to fully consult with outside counsel. While all orders are subject to reversal, and nothing is foolproof, when agreeing to continue to do business with debtors, certain basic safeguards can be put into place. The order should identify your company as a critical vendor and require (not make optional) the payment of specific claims. The order should also waive avoidance actions based on pre-petition payments. When feasible, the order should contain detailed factual findings and make clear that, but for the critical vendor payment, your company will not do future business with the debtor. Finally, make sure your company is aware that the order must be honored as-is and new terms cannot be negotiated without court approval.
Taken together, awareness of these issues can help you advise your company on how to avoid inadvertently stepping in front of the onrushing train that is the first few days of a bankruptcy filing.
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