The Gabon Mistrial: DOJ Prosecution of Individuals Puts Aggressive FCPA Theories Under Fire

In a blow to the U.S. Department of Justice‘s (DOJ’s) efforts to increase enforcement of the Foreign Corrupt Practices Act (FCPA) against individuals, Judge Richard J. Leon of the U.S. District Court for the District of Columbia declared a mistrial on July 7 in a case against four defendants charged in connection with an extensive undercover sting operation executed by the FBI. The trial was against four of 22 defendants charged with conspiring to pay bribes to the Defense Minister of Gabon in order to secure a $15 million equipment contract.

The mistrial has been largely attributed to weaknesses in the sting operation itself, including alleged outrageous behavior by the key informant and suggestions that the defendants were entrapped by government operatives who concealed the illegal nature of the transaction. The Gabon mistrial represents a setback in efforts by the DOJ to prosecute individuals for FCPA violations. However, its greater significance lies in highlighting that prosecutions of individuals will likely backfire on the DOJ’s enforcement efforts against companies and result in a narrowing of the DOJ’s jurisdiction to enforce the FCPA. For example, one of the DOJ’s aggressive jurisdictional theories under Section 78dd-3 failed last month when Judge Leon dismissed an FCPA count against defendant Pankesh Patel.

Pankesh Patel is a citizen of the United Kingdom. Under Section 78dd-3 of the FCPA, in the absence of some other basis of jurisdiction, a party must have committed an act within the United States in furtherance of the improper payment or offer. After oral argument, Judge Leon determined that the DOJ failed to establish jurisdiction based on allegations that Patel had mailed an agreement relating to the alleged illegal deal from the United Kingdom to Washington, D.C. since Patel’s conduct of mailing the package occurred in the United Kingdom, not “while in the territory of the United States.” 15 U.S.C. § 78dd-3(a).

The DOJ’s effort to charge Patel for sending a DHL package into the United States was not the first time the DOJ had prosecuted an FCPA case based on an aggressive interpretation of Section 78dd-3 when the conduct occurred outside the United States. In July 2004, foreign company ABB Vetco Gray UK, Ltd. (ABB Vetco) pled guilty to an FCPA violation; the information filed against the company alleged that the company had “caused a wire transfer . . . to be made by a Nigerian Agent from a bank account in London, England, to a bank account in Houston, Texas.” In October 2006, SSI International Far East, Ltd. (SSI), a South Korean company, pled guilty to violating the FCPA. The indictment against SSI alleged that the company had acted within the territorial jurisdiction of the United States by “transmitt[ing] requests to the United States for approval and wire transfer of funds.”

In other cases, DOJ prosecutors have gone so far as to suggest that they could assert jurisdiction over foreign companies based on the conduct of non-U.S. nationals taking place entirely outside the United States if emails sent from one person to another within a foreign country went through a U.S.-based server. Because ABB Vetco and SSI pled guilty, the DOJ’s arguments regarding jurisdiction under Section 78dd-3 were not subject to challenge or judicial scrutiny. However, the plain language of the statute and Judge Leon’s recent ruling in the case against Patel raises questions about the DOJ’s jurisdiction to prosecute FCPA violations in those cases.

While many companies are unwilling to face the risks associated with taking an alleged FCPA violation to trial, individuals facing a loss of liberty may have more motivation to fight and push back against the DOJ’s interpretations of the FCPA. When the DOJ brings cases against these opponents, it risks having its jurisdiction narrowed as some of its aggressive interpretations will fail under judicial scrutiny.

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ACLU, Civil Rights Groups File Suit Against Alabama’s Immigration Law

Alabama License Plate

More than just stars fell on Alabama last week when civil rights groups filed a class action lawsuit against the state’s restrictive immigration law, HB 56, charging that the law unconstitutionally interferes with federal law and will lead to racial profiling. Filed on Friday, the lawsuit makes Alabama the fifth state (joining Arizona, Utah, Indiana and Georgia) to defend itself against a costly legal challenge to Arizona-style immigration laws. Federal courts have blocked key provisions of restrictive immigration enforcement laws in every state that passed them, save South Carolina, which only recently passed a copycat law.

Signed by Governor Robert Bentley last month, Alabama’s immigration law requires local law enforcement to verify the immigration status of those stopped for traffic violations, public schools to determine the immigration status of students, employers to use E-Verify and makes it a crime to knowingly rent to, transport or harbor undocumented immigrants. The law is slated to take effect September 1, 2011.

In their lawsuit, however, the ACLU, National Immigration Law Center, Southern Poverty Law Center, Asian Law Caucus and Asian American Justice Center, charge that HB 56 interferes with federal law (in violation of the Supremacy Clause of the U.S. Constitution), subjects all Alabamians to unlawful search and seizure (in violation of the Fourth Amendment) and unconstitutionally restricts immigrants and their families from enrolling in educational institutions. According to National Immigration Law Center’s general counsel, Linton Joaquin:

“… Alabama’s law will affect the daily lives of countless residents, native-born and foreign alike. Alabama cannot constitutionally turn teachers, landlords, and community members into de facto immigration enforcement agents. We look forward to adding HB 56 to the roster of discriminatory laws that have been blocked by federal courts.”

To date, federal judges have blocked key provisions of state level immigration enforcement laws in Arizona, Utah, Georgia and Indiana, finding that they unlawfully interfere with federal government’s authority over immigration matters as well as violate the Constitution’s due process, search and seizure provisions and other protections. So it stands to reason that a federal judge will likely block key provisions of Alabama’s law, which some refer to as “SB 1070 on steroids.” Although South Carolina Governor Nikki Haley only recently signed their immigration bill S 20 into law, the ACLU and other civil rights groups have already threatened to sue.

And these laws aren’t cheap. Arizona has already doled out $1.9 million defending their law, not to mention the millions lost in tourism revenue and conference cancellations. As previously reported, Alabama stands to lose $2.6 billion in economic activity, $1.1 billion in gross state product, and approximately 17,819 jobs if all undocumented immigrants were driven from the state.

How much more evidence do state lawmakers need before they accept these laws are bad for business, state economies and most importantly, for the well-being and safety of communities in their state?

Standing Under California § 17200 Only Requires Injury From Business Practice

Drawing upon recent California Supreme Court rulings, the U.S. Court of Appeals for the Federal Circuit reversed a California federal district court’s dismissal of claims under the state’s unfair competition law, finding the court had wrongly dismissed the claims for lack of standing. Allergan, Inc. et. al. v. Athena Cosmetics, Inc. et. al., Case No. 10-1394 (Fed. Cir., May 24, 2011) (Gajarsa, J.).

Allergan, a manufacturer of an FDA-approved treatment for inadequate eyelash growth, Latisse®, brought suit alleging the defendants had infringed or induced infringement of multiple patents. Allergan also claimed defendants violated California’s unfair competition law, U.C.L. §§17200 et seq. With respect to the latter claim, Allergan contended that defendants’ manufacture, sale or marketing of hair/eyelash growth products that had not been approved by the FDA or state health regulators constituted unfair competition under the California statute.

The defendants countered that Allergan lacked standing because the statute only protects persons who have suffered a loss that is eligible for restitution. Restitution is a remedy that seeks to restore the status quo; it requires the plaintiff to have had an ownership interest in the money or property it seeks to recover. The district court found Allergan had no such interest in lost profits or market share because defendants’ profits derived from third-party consumers. Allergan appealed; its patent claims were stayed pending appeal of the unfair competition claim.

The Federal Circuit rejected the district court’s narrow view of the California unfair competition statute. While acknowledging that California voters had approved Proposition 64 to restrict standing requirements and address abuses that had resulted in frivolous lawsuits, the Court noted that the California Supreme Court’s decisions in two cases that were decided while the Allergan appeal was pending (Kwikset Corp. v. Superior Court of Orange County and Clayworth v. Pfizer, Inc.,), demonstrated that Proposition 64 did not limit standing solely to injuries compensable by restitution. Instead, a plaintiff need only allege an injury in fact that was the result of the unfair business practice. Applying this reasoning, the Court held that Allergan had adequately pleaded a claim under U.C.L. §17200.

Importantly, the Court also rejected the defendants’ claims that standing under U.C.L. §17200 required a plaintiff to have direct business dealings with a defendant. The Court denied that Proposition 64 added any such “business dealings” requirement to U.C.L. §17200 claims.

Practice Note: The Allergan decision demonstrates that while standing to file suit under §17200 is more limited than it was in the past, §17200 remains a potent tool that litigants can use to challenge a competitor’s practices.

Entrepreneur’s Guide to Litigation – Blog Series: Introduction

The words “lawsuit” and “trial” usually conjure up images based upon either media coverage of recent, significant cases or trials depicted on television and in movies. A real lawsuit and trial are significantly different than what we see on television or in the movies. Media coverage of a trial does not delve into the frequent reality of a lawsuit – the months and possibly years of pre-trial “discovery” and motion practice that occur before a case can even go to trial.

This upcoming blog series is aimed at removing some of the mystery of a lawsuit and a trial, and also at informing entrepreneurs what really happens prior to and during all those trials you see on television. The next seven blogs cover the basics on a lawsuit, from filing of a “Complaint” through trial and, ultimately, the appeal process. It can provide a complete picture of the litigation process to alert the entrepreneur what to expect as a potential party to a lawsuit.

There are other, important considerations to litigation not addressed in this series, such as insurance coverage, if any, and confidentiality agreements (known as protective orders) between the parties to a lawsuit. Additionally, a corporation usually cannot appear by one of its owners, but must be represented by counsel. Certainly, anyone that is sued or is thinking about suing another, should consult with a lawyer as soon as possible. We hope this blog series helps entrepreneurs develop a better understanding of the litigation process.

Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

A.  The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana inTexas, he has to show that the case and the parties have some connection toTexas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B.  Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. (There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court.) The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court inTexaswhen both parties are residents ofCaliforniaand neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from theTexascourt.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.