Reflections on the “Yates Memo” and New DOJ Guidelines

This blog release is a part of a series of articles relating to the memorandum by Deputy Attorney General Sally Yates (the “Yates Memo”). The Yates Memo called for the DOJ to step up its efforts to hold corporate executives individually accountable for corporate misdeeds. The Yates Memo has set the legal community abuzz. However, many health care compliance officers may not fully appreciate the impact the Yates Memo will have on their programs, or what to do in light of the new DOJ guidelines. Compliance officers should understand the Yates Memo’s unique ramifications on health care providers.

Major cases in the pharmaceutical manufacturing and financial sectors largely influenced the DOJ’s guidelines. In those industries, fines and settlements were viewed as a cost of doing business – but they did not have the desired effect to deter wrongful actions. Historically, the DOJ and such organizations commonly entered into settlement agreements that included fines and monetary penalties, but also released corporate officers from personal liability. This practice has led to the conclusion that corporate officers were often willing to let their organizations “buy them off” of their personal liabilities, which often included the willful neglect which created the wrongdoing or active involvement in wrongdoing in the first place. The practice of settling has also created a sense that some organizations were willing to pay financial penalties as the cost of engaging in questionable business practices. Finally, it has begged the question as to whether financial penalties alone were sufficient to deter organization leadership from committing corporate wrongdoing. The new DOJ directive is intended to address all of these issues.

The Yates Memo states it is “seeking accountability from the individuals who perpetrated the wrongdoing” because “it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public’s confidence in our justice system.” In reality, individuals commit wrongful acts, and only the individuals acting on behalf of the entity can create corporate liability. Law enforcement authorities have always focused on individual conduct in corporate investigations. However, when the DOJ found that prosecuting corporations resulted in large returns, it largely turned its focus away from individuals in favor of settling with corporations. This shift in focus often left culpable individuals largely untouched. Now, the DOJ has called for eliminating the resolution of corporate cases that release individuals from personal liability absent extraordinary circumstances. Instead, it will first resolve cases against individuals for possible civil and criminal violations before resolving corporate cases, regardless of the individual’s resources or ability to pay. The guidelines now call for working up the chain of command within an organization. As a result, the DOJ must evaluate what directors, officers, senior management, and involved employees knew, or reasonably should have known, about a regulatory or criminal problem. The bottom line is that healthcare executive officers cannot expect to avoid personal liability by hiding behind their organizations’ settlements with the DOJ and OIG.

Can DOJ adhere to the Yates Memo guidelines?

For the healthcare sector, the implications resulting from the Yates Memo are great. Now, executive officers face an increased risk of personal liability and potential prosecution for engaging in wrongful acts.  In addition, showing a “blind eye,” or otherwise being negligent in preventing wrongful acts, may also result in personal liability in enforcement actions. These implications are predicated upon the assumption that DOJ prosecutors will vigorously and consistently follow the revised guidelines.  Prosecutors must, therefore, change priorities with limited resources and be prepared to expend additional time and effort to meet the guidelines.  No one can predict how diligently the DOJ will follow this new guidance, as the expected changes will definitely impact the settlement agreement process.

Currently, many healthcare organizations enter into financial settlements with the DOJ when they determine that the cost of fighting the case may exceed the cost of settlement. Also, most organizations want to dispose of any pending matters with the DOJ, rather than having an investigation hanging over the organization and its reputation. The new guidelines may stiffen organizations’ decisions to settle quickly, especially as their executives are now at greater personal risk. Such decisions are expected in the health care sector, where any individual or entity found guilty of program-related crimes, patient abuse, felony health care fraud, or felony convictions relating to controlled substances faces a mandatory exclusion for a minimum of five years. The OIG also has permissive authority to exclude individuals or entities for a variety of issues, including conviction of certain misdemeanors or failing to provide quality care. The certainty of exclusion will be an even stronger driving force for individuals to avoid pleading with the DOJ. These changes may result in fewer DOJ “quick hits settlements,” and may also require committing greater resources to resolve cases. Therefore, rigorous adherence to the Yates Memo may actually undercut effective law enforcement, as it will reduce self-reporting and cooperation.

DOJ attorneys who rely heavily on corporate cooperation may now find the going a lot tougher. They will need to face a much more protracted and detailed investigation to close cases. Individuals who face serious personal liability and possible prosecution are expected to mount a serious and vigorous defense effort that will consume significant DOJ time and resources. Furthermore, the DOJ will need to meet fairly high evidentiary requirements that necessitate more thorough investigations. But even then, sustaining prosecution before Federal judges may be difficult, because the evidence of wrongdoing will have to be very compelling. It may even be difficult to use Administrative Law Judges to rule on administrative penalties, due to the Federal Courts’ appeal rights. These obstacles may lead to a bogging down of the enforcement process which, in turn, could slow and reduce the DOJ’s recoveries, fines, and penalties. The first test cases under the Yates Memo guidelines, as well as the added burdens causing DOJ prosecutors to compromise significantly on the guidelines, are sure to be interesting.

Some Yates Memo Implications

• DOJ investigations to evaluate individual culpability will become longer and more expensive.
• The number of defendants will increase as the DOJ focuses on all culpable individuals.
• Increased concern regarding when document requests for damages may turn into investigations.
• Employees may stretch to provide evidence against superiors to protect themselves.
• Increased DOJ burdens to “reconstruct what happened based on a painstaking review of corporate documents.”
• More trials and costs, due to little incentive to plead guilty.
• Chilling effect on employees to report issues for fear of being turned in to the DOJ.
• Senior leaders may fear direct cooperation with DOJ, forcing them to prove the DOJ’s case.
• Executive reluctance to cooperate in internal investigations, fearing personal liability.
• If a company disagrees with the DOJ that wrongdoing has occurred, the company will be viewed as uncooperative, regardless of whether it has provided full and complete information to the DOJ.
• Internal investigations will need to be more prompt and complete.
• Employees will need to be warned that anything they say in internal investigations can be turned over to the government.
• More executives will decline to be interviewed without counsel being present.
• A company failing to discover a wrongdoing or offer up the full facts about individual employee conduct may be deemed uncooperative, which will result in criminal charges.
• In the civil realm, only full cooperation can earn a lower damages multiplier.
• Obtaining DOJ release for “directors, officers, and employees” will take more time and effort.
• Organizations and senior people will no long use a single law firm to resolve DOJ issues, due to potential conflicts of interest.
• Many may choose to sell or exit healthcare rather than live under the increased uncertainty.
• More will seek their own director and officer (D&O) policies, rather than seeking policies through the company.
• Implications for the D&O insurance application or exclusions for “known or should have known.”
• A rise in D&O litigation costs as more individuals attain separate defense counsels.

Nevertheless, health care entities must be prepared to deal with the impact of the Yates Memo if they want to seek cooperation credit. These entities must answer the “who did it” question by naming names and supporting their statements with evidence.

A follow up to this article will provide thoughts as to the actions compliance officers should take as a result of the new DOJ guidelines.