Yates Memo creates additional compliance risk for labs and their executives

Blog Post

On Sept. 9, 2015, Deputy Attorney General Sally Quillian Yates issued a memorandum to all federal prosecutors and civil enforcement attorneys mandating a new emphasis on prosecuting individual defendants who are legally responsible for corporate wrongdoing. The so-called Yates Memo represents a major shift in federal enforcement policy that could have a wide-ranging impact for diagnostic labs.

The United States Department of Justice (DOJ) recently has come under significant criticism from Congress and the public for not prosecuting individuals involved in corporate crimes. The perception (rightly or wrongly) was that too many corporate officers escaped prosecution, particularly for crimes occurring in the financial sector. The Yates Memo appears to be a reaction to that criticism.

Many diagnostic labs are currently the subject of federal investigations, either initiated by the U.S. Department of Health and Human Services Office of Inspector General (HHSOIG), the Federal Bureau of Investigation (FBI), or a qui tam whistleblower. Frequently, the investigations involve potential liability for both the lab entity and one or more of its employees. The Yates Memo creates new complications that must be considered in responding to a governmental investigation. It creates more questions than it answers, all of which create additional compliance risk for labs.

Details of the Yates Memo

The Yates Memo applies to all DOJ enforcement proceedings. These include traditional criminal prosecutions, qui tam whistleblower cases, and actions seeking civil monetary penalties. The Yates Memo changes the process by which cases will be evaluated and also the process by which they can be resolved.

On the case evaluation side, the Yates Memo requires the DOJ attorneys to focus on potential individual defendants from the onset of the investigation. If, after conducting the investigation, they determine that no individuals should be charged, that decision must be documented, justified in writing, and approved by a supervisor. The Yates Memo also calls for expanded information sharing between criminal and civil investigators during investigations. These changes will create greater institutional pressure for DOJ lawyers to bring charges against individuals. These changes do not, however, directly affect how a lab can or should respond to an investigation.

The Yates Memo’s directives on the resolution side will have significant implications for how labs and individuals react to a Government investigation. These changes are:

  1. the lab cannot qualify for leniency based on cooperating with law enforcement unless the lab provides to the Government “all relevant facts relating to the individuals responsible for the misconduct.”
  2. absent extraordinary circumstances, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with the corporation.
  3. civil suits will be brought against individual defendants without regard to their ability to pay.

Impact of the Memo

Perhaps the easiest way to examine the Yates Memo’s impact on how to react to a Government investigation is through a case study of a typical lab enforcement matter. Assume the following facts:

XYZ Lab learns of a Government investigation into possible violations of the Stark Law and the Anti-Kickback Statute related to Medicare billings. In particular, the Government is investigating allegations that XYZ’s marketing staff, at the direction of senior management, was offering improper financial inducements in return for referrals from physicians. XYZ’s Director and Officer Liability Insurance carrier declines to provide coverage for legal fees or investigative fees.

Before the Yates Memo:

XYZ would initiate an internal investigation through outside counsel. Counsel would interview all relevant employees, review documents, and prepare a confidential and privileged report of the facts. Counsel would also provide management with an analysis of XYZ’s potential civil and criminal liability.

The goal of this process would be to help management decide quickly whether to vigorously defend the investigation or to approach the Government about cooperation and/or a quick settlement. Among the factors management would take into account were the direct costs of litigation, the business disruption involved in responding to investigative demands, and the reputational and marketplace loss from having an investigation hanging over XYZ’s head.

If XYZ decided to pursue a settlement, it could withhold the results of its internal investigation and decline to implicate its own senior managers. XYZ could also offer to absorb a more severe sanction at the corporate level in return for leniency on behalf of senior management. Senior managers separately could seek to avoid liability by showing that they lacked the financial ability to pay a meaningful penalty. Also, by achieving a resolution that did not implicate them individually, the senior managers could more easily avoid being excluded from the Medicare program.

After the Yates Memo:

XYZ is almost immediately in a conflict position with its own senior management because, if XYZ later needs to seek leniency for itself, it may be obligated to provide the Government with information that implicates the managers. Therefore, even before commencing the internal investigation, XYZ must consider what it will do with the results of the investigation.

If the investigation shows likely criminal or civil exposure for XYZ, it will be in XYZ’s best interest to seek leniency through cooperation. After the Yates Memo, however, that course of action requires XYZ to implicate any of its employees, officers, or directors who are responsible for the illegal conduct. Making that disclosure may also require XYZ to waive its attorney-client privilege with investigative counsel. The individuals who could be implicated may be the same people who have to decide on behalf of XYZ whether to initiate an investigation. If they decide not to investigate, the Government may draw an adverse inference that XYZ is stone-walling the investigation; it therefore may try to impose more severe sanctions on XYZ. As you can see, there is an inherent conflict of interest between XYZ and its senior managers.

How can XYZ resolve this conflict? Who will make the decisions for XYZ? XYZ may need to designate an impartial senior manager or a special committee of its governing Board to decide whether to conduct an internal investigation, to receive the results of that investigation, and to make decisions on behalf of the lab based on the information received. For small labs, there may not be any such independent person or body to make that decision.

Another difficult issue is XYZ’s ongoing relationship with the individual potential defendants. In many cases, these individuals continue to be employed by XYZ, and may be running XYZ’s day-to-day operations. XYZ’s General Counsel (or outside corporate counsel) represents XYZ, not the individual officers, directors, or employees of XYZ. That lawyer must recommend the course of action that is best for XYZ.

Although they still work for XYZ, the potential individual defendants may need their own lawyers because their legal interests diverge from XYZ’s. Because there is no insurance coverage, XYZ must decide whether to pay for lawyers to represent these individuals. Once they have lawyers, XYZ normally would enter into a joint defense agreement with the individual potential defendants. After the Yates Memo, there is a risk that the Government would consider the joint defense arrangement to be inconsistent with XYZ’s obligation to provide cooperation. If they believe XYZ may ultimately “throw them under the bus” in exchange for leniency, will the individuals sign a joint defense agreement?

In the past, XYZ could encourage voluntary cooperation with its internal investigation by assuring senior managers that XYZ would do its best to resolve the matter in a way that protected the managers from individual liability, even if it meant a more severe penalty for XYZ. After the Yates Memo, that trade-off is no longer available. Is XYZ prepared to compel those managers to cooperate with the internal investigation under the threat of dismissal? From a business perspective, can XYZ afford to lose the individual potential defendants?

In the past, individuals could also protect themselves from civil liability or civil penalties by showing an inability to pay a judgment. The Yates Memo eliminates “ability to pay” as a determining factor in a civil enforcement action. It states, “The Departments’ civil enforcement efforts are designed not only to return government money to the public fisc, but also to hold wrongdoers accountable and to deter future wrongdoing ... [T]he fact that an individual may not have sufficient resources to satisfy a significant judgment should not control the decision on whether to bring suit ... [P]ursuing individual actions in civil corporate matters will result in significant long-term deterrence.” Also, as a policy matter, the Government generally prohibits a third-party, such as an insurance company or an employer, from indemnifying an individual for any monetary settlement.

Exclusion – The other shoe drops

The Yates Memo is clear: The Government is going to punish more individuals for corporate wrongdoing. Corporations are expected to sacrifice their own. There will be increased pressure for individuals to admit culpability, even if they cannot pay a financial penalty. For many in the lab field, admitting civil liability (with or without a corresponding financial penalty) is not the worst case scenario. The big hammer is exclusion.

The HHS-OIG has statutory authority to exclude individuals from federal health benefit plans. Exclusion is mandatory upon conviction of certain health care-related fraud crimes, including Medicare or Medicaid fraud. As DOJ more aggressively pursues criminal charges against lab officials, the number of mandatory exclusion cases will rise.

Similarly, the risk of permissive exclusion also will rise for both individuals and labs. HHSOIG can exclude an individual even in the absence of a criminal conviction. For example, permissive exclusion authority exists for “Any individual or entity that the Secretary determines has committed an act” involving fraud or kickbacks. 42 U.S.C. 1320a-7(b)(7). An entity may be excluded if one of its officers or directors commits certain healthcare-related acts that result in a conviction or a civil monetary penalty. 42 U.S.C. 1320a-7(b)(8). So, a lab could face vicarious exclusion based on the actions of an officer or director.

To avoid exclusion, a lab has a powerful incentive to turn over its employees. In the past, one of the strongest factors that helped avoid lab exclusion was that the lab fully cooperated with the Government’s investigation. Now, cooperation requires the lab to identify and provide evidence against its culpable employees. While full cooperation as envisioned by the Yates Memo may avoid vicarious exclusion, there is no guarantee. It is conceivable that a lab could be excluded even after fully cooperating with the Government and turning over its culpable senior manager.

The OIG also has the authority to exclude an officer or managing employee of a sanctioned entity. 42 U.S.C. 1320a-7(b)(15). Given the Yates Memo’s emphasis on individual responsibility, it is entirely possible the OIG would attempt to exclude a lab officer or owner even if that person did not personally violate the law. This approach would mirror the “Responsible Corporate Officer” doctrine under the Food, Drug & Cosmetic Act. That doctrine imposes misdemeanor criminal liability on corporate officers if they fail to properly supervise or control underlings who then violate the law. The officers need not have criminal intent, and may not even know about the illegal conduct. It is not difficult to envision a scenario where the OIG attempted to exclude a lab officer who it believed was indifferent to the lab’s compliance obligations, even if the official was not the person who violated the health care laws.


The Yates Memo is a game-changer. It raises difficult questions. Many of these questions must be addressed immediately upon learning of a Government investigation. Those decisions could have profound effect on the ongoing business operations of the lab and the manner in which the legal process proceeds.

**This article originally appeared in the December issue of G2 Compliance Advisor.

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