Introduction

In February 2026, the Securities and Exchange Commission鈥檚 (SEC) Division of Enforcement (the Division) announced significant changes to its approach to investigating and determining whether to prosecute individuals and entities suspected by the Division of having violated the federal securities laws. The Division included these changes in its first update of the (the Manual) since 2017 and promised to review and update the Manual annually going forward.

These changes reflect a significant policy departure from the approach taken in prior administrations and signal a more selective method for determining how to deploy the agency鈥檚 limited resources. They also indicate a heightened commitment to considering the defense perspective before recommending that the SEC take enforcement action. 

The latest revisions emphasize the importance of a more robust dialogue between staff and defense counsel in the Wells process, a more realistic approach to addressing collateral consequences in fashioning settlements of enforcement proceedings, and greater consistency across the Division鈥檚 many offices in determining appropriate matters to be investigated and prosecuted, the methodology for conducting investigations, the handling of the Wells process, and the exercise of prosecutorial discretion. The new Manual also includes various changes intended to achieve greater efficiencies in the work of the Division鈥檚 staff.

The Wells Process

Of particular significance are the changes to the Wells process. These updates provide the Office of the Director of the Division more direct involvement in, and control over, the decision to issue a Wells notice which indicates that the staff has reached a preliminary determination to recommend enforcement action. The 2017 Manual stated that the approval of an associate director or regional director was a prerequisite to issuance of a Wells notice. The new Manual requires that, after securing approval of an associate director or specialty unit head, the staff must also obtain the approval of the Office of Director to issue a Wells notice. This additional requirement ensures that individuals with a broader perspective on the Division鈥檚 activities will have enhanced oversight and control over decisions to pursue enforcement actions which often have serious consequences for the subjects of that action, the SEC, and the investing public.

The new Manual also contains changes designed to make the Wells process more productive for both the staff and defense counsel. These revisions provide the SEC with an opportunity to make more informed decisions when authorizing enforcement proceedings and may increase the likelihood of pre-filing settlements as the parties will have greater access to the evidence underlying their adversary鈥檚 position.

Unlike the 2017 Manual, the new Manual states:

As part of the Wells process, staff should inform the recipient of the Wells notice of the salient, probative evidence that the staff has gathered or received, which the staff may have or should have reason to believe may not be known to the recipient 鈥�

In addition, in recent years, the Division often informed recipients that they had only two weeks to prepare and deliver their Wells submission, although it frequently granted requests for short extensions of time. The new Manual states that 鈥渋n the absence of timing constraints a four-week time period [is] allowed for the recipient to provide a Wells submission.鈥� Relatedly, unlike the 2017 Manual, the new Manual provides:

In the interests of increasing transparency and efficiency of the investigative process and the SEC’s deliberations, the staff should be forthcoming about the content of the investigative file. 

The 2017 Manual stated that 鈥渢he staff has the discretion to allow the recipient of the notice to review portions of the investigative file. The new Manual provides that 鈥渢he staff should make reasonable efforts to allow the recipient鈥� to do so. This change in tone reflects the views of the Chairman, as expressed in his on October 7, 2025, at the 25th Annual A.A. Sommer, Jr. Lecture on Corporate, Securities, and Financial Law.鈥�

Finally, the 2017 Manual did not state whether a Wells notice recipient鈥檚 request for a meeting should be granted. The new Manual provides:

Requests for a post-Wells notice meeting are typically granted 鈥� [Such] meeting should be scheduled to occur within a reasonable period of time after the recipient makes a Wells submission, but in any event no later than four weeks after the receipt of the Wells submission.

The provision in the new Manual stating that such meeting 鈥渨ill include a member of senior leadership at the Associate Director level or above鈥� further promotes transparency by ensuring that the very person responsible for approval of the Wells notice and the staff鈥檚 action memorandum to the SEC recommending enforcement action must engage with defense counsel concerning the soundness of the staff鈥檚 position.

Authority to Issue Formal Orders

The new Manual also reflects the decision to discontinue the SEC’s delegation to the Division Director of authority to issue formal orders of investigation (empowering the staff to issue subpoenas), submit witness immunity order requests, and file subpoena enforcement actions. This change underscores the desire of the current administration to exert more control than in the past over decisions to deploy SEC resources in these areas and will likely promote greater consistency between the priorities of the SEC and the day-to-day work of the Division.

Simultaneous Consideration of Enforcement Action and Collateral Consequences

Finally, the new Manual restores the SEC’s prior practice of permitting settling parties to request that the SEC simultaneously consider an offer to settle a proposed or pending enforcement proceeding and any related request for SEC waivers of disqualifications that could be triggered by such settlements. These disqualifications potentially include the inability to raise capital under the safe harbor from registration afforded by Regulations A, D, and E, the elimination of the safe harbor for forward-looking statements in periodic reports, and disqualification from being able to serve as an investment advisor or an affiliate of a mutual fund. By relieving settling parties of the uncertainty about the collateral consequences of settlement, this change should inject more efficiency into the process of settling potential and pending enforcement proceedings. The additional certainty may encourage more settlement offers and allow the SEC to consider in a single meeting the conduct that prompted the enforcement recommendation and that, at the same time, drives the decision whether to grant the waiver. This change will also promote similar efficiencies at the staff level. 

Cooperation Credit

Consistent with the approach taken in the 2017 Manual, the new Manual directs the staff to consider the factors set forth in the Seaboard Report in determining the degree to which those under investigation should receive credit for their cooperation. Unlike the 2017 Manual, however, the new Manual states that the SEC 鈥渃ooperation program is overseen and administered by the Division鈥檚 Cooperation Committee鈥� to ensure that 鈥渄ecisions regarding cooperation are made in an appropriate and consistent manner.鈥� The committee is also charged with responsibility for recommending improvements to the program 鈥渨hen needed.鈥� Relatedly, the new Manual directs the staff to seek the approval of the committee before entering into cooperation agreements, deferred prosecution agreements, non-prosecution agreements, and immunity requests. Formalizing the role of the committee in this manner should contribute to enhanced coherence, consistency, and efficiency in the application of the cooperation program.

The foregoing changes should be welcomed by market participants, the SEC defense bar, and those advocating for a more effective enforcement program in pursuit of the SEC’s mission. 

For a more detailed comparison between the 2017 Manual and the new Manual, or any questions about the SEC鈥檚 enforcement process, please reach out to the authors of this alert or any of the attorneys in 麻豆直播鈥檚 Securities Enforcement and Litigation practice group.

In this episode, Benjamin Dryden, vice chair of 麻豆直播鈥檚 Antitrust & Competition Practice Group and David McMillan, managing principal of consulting and chief financial officer at PYA, discuss the recent July 3^rd ruling on the U.S. Federal Trade Commission鈥檚 (FTC) Non-compete Ban and how this will affect the health care & life sciences industry.

For more information regarding the 鈥淟et鈥檚 Talk Compliance鈥� podcast series, please click here.

Please note that the聽interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Jana Kolarik

Hello, and welcome to the Let鈥檚 Talk Compliance podcast series on Health Care Law Today, presented by 麻豆直播 & Lardner and PYA. I鈥檓 your co-host, Jana Kolarik, a partner in 麻豆直播鈥檚 Health Care Practice Group.

Angie Caldwell

And I鈥檓 your other co-host, Angie Caldwell, consulting principal with PYA. We鈥檙e excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com.

For today鈥檚 show, Ben Dryden, the vice chair of 麻豆直播鈥檚 Antitrust and Competition Practice Group and David McMillan, PYA鈥檚 managing principal of consulting and chief financial officer, are discussing the July 3^rd ruling on the FTC鈥檚 Non-compete Ban and how this will affect the health care industry. I鈥檓 going to turn it over now to Ben and David to introduce themselves.

Ben Dryden

Thank you Angie and Jana. I am Ben Dryden. I’m a partner in the Antitrust & Competition practice group of 麻豆直播 & Lardner LLP. I’m based in Washington D.C. My practice focuses on the antitrust issues that arise in mergers and acquisitions, as well as providing day-to-day and event-driven antitrust counseling for clients in the health care sector with a particular focus on antitrust issues involving labor and employment.

David McMillan

Thank you Ben. And I’m David McMillan, a principal with PYA located in Knoxville, Tennessee. Ben and I are happy to be with you here today to continue our previous conversation where we were talking in advance of the July 3rd ruling regarding the FTC’s Non-compete Ban. And so now we want to sort of unpack where we are on the other side of a recent court decision. So Ben, can you begin by telling us who made the ruling, what did we hear? And maybe unpack a little bit for us a summary of what we heard from the courts.

Ben Dryden

Happy to. So just to contextualize what the July 3rd ruling was, it was a preliminary ruling, and the idea is if you are challenging a regulation like the FTC’s Non-compete Ban, you can go into court and say, 鈥淚 need emergency preliminary relief to be granted before the court reaches the ultimate merits of the case. In other words, before the court rules on every last issue that resolves the case in its finality, I need the court to issue emergency preliminary relief.鈥� And that’s a fairly extraordinary remedy and it is a high barrier to make that showing to establish that you’re entitled to preliminary relief.

That’s what the plaintiffs did. They said this Non-compete Rule is going to impose irreparable injury on the business community by forcing businesses to expend money and compromise their ability to enforce or enter into non-compete agreements. So court, we need you to issue a preliminary injunction barring the enforcement or implementation of the Non-compete Rule before the court reaches the ultimate merits and issues a final decision that resolves every last issue in the case. So that’s what the July 3rd ruling was.

The ruling went before US District Judge Brown out of the Northern District of Texas in Dallas, and Judge Brown ruled that preliminarily, based on her review of the record so far, she believes it is likely that the plaintiffs who are challenging the Non-compete Rule are going to establish that the Non-compete Rule is unlawful. And the judge found two separate grounds for reaching that determination.

One, the judge said that just looking at the language of the FTC Act, the law that gives the FTC the power to take any action, she said the FTC Act does give the FTC some ability to make rules with respect to unfair methods of competition. But examining the history and the structure of the Act, she said, they can’t make substantive rules. They can’t define certain sets of business practices as substantively constituting unfair methods of competition. Rather, the FTC’s power to make rules of procedure are truly just procedural rules鈥斺�渉ousekeeping rules,鈥� she called them, rules of practice and rules of procedure鈥攏ot actual rules defining what is or is not an unfair method of competition.

So in the first instance, the judge said, the FTC just does not have substantive rulemaking authority, which really is what the plaintiffs who are challenging this rule are trying to establish. They care about the Non-compete Rule, but they care more broadly that the FTC is not a legislature. The FTC should not be in the business of making substantive rules; rather, they’re a law enforcer. So on the big issue that the plaintiffs are trying to prevail on, it was a favorable ruling for the plaintiffs.

The judge also said, even looking specifically at the Non-compete Ban, that ban is likely to be arbitrary and capricious, meaning the agency didn’t properly consider other alternatives and it didn’t engage in a sufficiently reasoned decisionmaking to support a broad categorical ban on non-competes from coast to coast.

So based on those two preliminary findings, the judge said the plaintiffs are likely to succeed on the merits in this case. 鈥淚 find preliminarily that the plaintiffs are probably going to win this case.鈥� But having reached that preliminary determination, that’s just one part of the puzzle. The court then has to pivot to, okay, so what’s the remedy for that? What can the court in a preliminary order do to prevent further implementation of this rule? And the court said that the plaintiffs had not made a sufficient showing at this preliminary stage to justify broadly invalidating the Non-compete Ban for every single business in the country. Rather, the judge said, 鈥淚 find that the plaintiffs are likely to prevail, so I’m going to prevent the FTC from enforcing the non-compete Rule or implementing the Non-compete Rule with respect to the plaintiffs.鈥�

So what that means in practice is, one of the plaintiffs is the US Chamber of Commerce. The court’s order prevents the FTC from suing the US Chamber of Commerce in the US Chamber of Commerce’s capacity as an employer of employees, some of whom are presumably bound by non-competes. So if, say, some employee of the US Chamber of Commerce has a non-compete agreement and the Chamber of Commerce tries to enforce that, the FTC is enjoined from going after the Chamber of Commerce for enforcing a non-compete against the Chamber of Commerce employee. But for any run-of-the-mill business in the country that may or may not even be a member of the US Chamber of Commerce, the court’s order does not apply to that company. The court’s order only applies to the plaintiffs in this case.

Now that could certainly change, and in fact we’re recording this on Thursday, July 11th, just yesterday, Wednesday, July 10th, the plaintiffs moved the court for reconsideration to say no, this was not the proper remedy. The proper preliminary remedy needs to be more broad. It needs to be universal. It’s got to be a preliminary remedy staying the implementation of the Non-compete Ban with respect to every business in the country because otherwise what are we achieving here? But as it stands right now, the court’s order only applies to the named plaintiffs in that case. It’s a pretty surprising turn of events.

David McMillan

That is interesting, Ben. So if I could quickly summarize, and you keep me honest here in my summary, that number one, this was a temporary ruling. Is that a correct statement?

Ben Dryden

It’s temporary. It’s pending a final decision on the merits, which the court has said will come on or before August 30th.

David McMillan

Okay. Secondly, the judge ruled that the FTC can’t make substantive rules, right?

Ben Dryden

Correct.

David McMillan

And as a result, the plaintiffs are likely to prevail on the merits of their case and therefore they enjoined the FTC from suing the US Chamber of Commerce from pursuing any non-competes it may have with its employees until such time that the ruling is final. So if you’re not the US Chamber of Commerce, you’re still sitting with an FTC ban that has not been struck down yet by the courts. But if you were in Vegas laying odds, this temporary ruling tends to suggest that it will be struck down when the court gets around to issuing its final ruling. We don’t know that for certain, but it seems that’s the way the compass is pointing. I know I’m not going to put you on the spot to make that prediction, but can you just give the listeners any thoughts from your perspective about whether you believe the court will respond to this latest, latest motion filed by the plaintiffs and or where we go from here?

Ben Dryden

Yeah, so a couple of reactions. One is I agree that the compass is pointing in the direction of the court ultimately issuing a broader ruling than the narrow ruling that issued on July 3rd. It’s still unclear whether a broader ruling would apply truly universally, and if it would be a categorical order that the Non-compete Rule is no longer in effect and the remedy would be vacating the Non-compete Rule in its entirety with respect to any business or any employee in the entire country. That’s certainly what the plaintiffs want to get. But there’s some footnotes and discussions and just reading between the lines in the court’s opinion, they stake out the possibility of a slightly narrower middle ground whereby the court might just order that the Non-compete Rule is vacated with respect to companies that are bona fide members of the plaintiffs.

So the plaintiffs are, there’s one individual business, it’s a tax preparation firm in Texas. That tax preparation firm is going to be able to enforce its non-competes. Other than that one specific business, the plaintiffs are the US Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview, Texas Chamber of Commerce. It is possible that the court might order that the Non-compete Ban is only vacated with respect to companies that are bona fide members of those four trade organizations. And I will abstain from handicapping what the likelihood is of that outcome. But there is a possibility that businesses, to take advantage of an ultimate decision, will need to, if they’re not currently members of, say, the US Chamber of Commerce, they might have to join and become dues-paying, bona fide members of the US Chamber of Commerce to take advantage of a broader ruling. But we’ll know more at the latest by August 30th. Between then and now, the court, as I’ve mentioned, has been asked to, on an expedited basis, reconsider its ruling and the plaintiffs have asked for a decision by Wednesday, July 17th on whether to amend the scope of the preliminary order.

It’s also possible that the Fifth Circuit gets involved and this case gets appealed, because a preliminary injunction can be appealed even while there’s still litigation going on at the trial court. So this can still go in several different directions.

The other piece to this is there’s another lawsuit pending in Pennsylvania where there was a hearing just yesterday before Judge Hodge. And Judge Hodge is a Biden appointee, whereas Judge Brown in Texas was a Trump appointee. Judge Hodge at the hearing seemed fairly skeptical of the plaintiff in that case’s arguments challenging the Non-compete Rule. So there is a distinct possibility that we have one federal court, in Texas, that issues a relatively broad ruling, invalidating or enjoining the enforcement of the Non-compete Rule. But then we have the conflicting decision from another federal court, in Pennsylvania, saying that the Non-compete Rule is valid. And this is a chaos scenario that creates a lot of uncertainty for a lot of businesses.

David McMillan

Wow, that’s really interesting. Thanks for sharing that additional context, Ben. At the risk of definitely getting outside of my lane, not being an attorney, I wanted to go back for just a moment to the statement in the ruling about the FTC not having the authority to make substantive rules.

Ben Dryden

Sure.

David McMillan

You mentioned in your comments the FTC can鈥檛 create legislation. Many of us have been reading about some of the decisions being handed down in various courts across the country since we last spoke. One, of particular import was the Supreme Court’s decision recently as they contemplated the impact of the Chevron decision from 1984. So, is there any linkage between that statement made by Judge Brown that the FTC can’t make substantive rules, in essence can’t put itself in the position of creating legislation, and what we’re trying to process in light of the Supreme Court’s decision, which happened after our last podcast as well, with respect to that 1984 Chevron precedent?

Ben Dryden

There’s absolutely a connection there. In fact, the Supreme Court’s decision reversing the Chevron framework, that decision was Loper Bright Enterprises vs. Raimondo. The judge in Texas cited that decision even though the ink was barely dry on the decision, the judge cited that as authority to help support her conclusion that the FTC does not have substantive rulemaking authority. I’ll say it’s an indirect connection.

The concept of Chevron is if the Congress passes a law that is ambiguous and an executive agency is charged with administering or interpreting that law, then Chevron gave that executive agency the ability to make reasonable inferences and interpretations of any ambiguity in the congressionally enacted legislation. That’s an issue here, because what we’re talking about is a statute that has a relatively vague provision in it that gives the FTC the ability to adopt rules of practice and procedure.

And so, there was always an atmospheric argument that if there’s some ambiguity in whether Congress has given this power to the FTC, then that ambiguity, it is reasonable for the FTC to interpret that ambiguity in the way that the FTC finds will best serve its purpose of preventing unfair methods of competition. But it’s an ancillary issue, and the court really didn’t have to make a Chevron determination, because the court just looked at the statute and said, 鈥淗ey, I’m reading the statute just as a judge reading a statute, and there’s not an ambiguity in here for me to interpret. Just based on the clear structure of the statute the FTC does not have the ability to just write laws for itself.鈥� And so the court wasn’t squarely faced with the Chevron issue, but these things are all very interconnected.

David McMillan

Interesting. Thank you for connecting those two dots for many of us who were struggling to keep up with what’s coming down from our judiciary branch right now and trying to navigate, especially in our world of health care, which as we all know has a substantive body of regulation within which to navigate. It helps us all to better understand what we’re hearing. As we move from this initial ruling to what’s next, do we have any advice to give our listeners that will help them navigate the here and now? It’s easy enough for us to say, well, the latest motion expects or asks for some clarification by the 17th, and that Judge Brown said that they would have the complete ruling done by the 30th. And it’s easy enough for us to say, oh, that’s just a couple of weeks or six weeks away. But in the meantime, employment situations, employment matters come and go daily and folks are being recruited and hired and folks are leaving and the world continues to turn.

So is there any advice or thoughts that you would want to share with our listeners as they try to navigate this very uncertain time they find themselves in as an employer?

Ben Dryden

Yes. A few practical pointers come to mind. And this all comes from just the high-level lay of the land that we seem to be drifting in a direction that will result in a relatively broad order vacating the FTC’s Non-compete Ban. But we don’t know that that’s going to be the case. And the scope of the ultimate remedy really is unclear and businesses should care not only about, 鈥淎m I going to get sued by the FTC for an unfair method of competition?,鈥� but what businesses really care about is, 鈥淚f I have a non-compete with my employee and my employee breaches that, can I successfully enforce my non-compete against that employee? Or, is that employee going to be able to tell a court that the non-compete agreement is void for public policy because the Federal Trade Commission has found it to be an unfair method of competition?鈥�

So I unfortunately think that businesses need to assume that there’s going to be some holes in the ultimate order that the court adopts. And we can’t just assume that this Rule is going to be broadly invalidated. It really might be broadly invalidated; that’s a distinct possibility. But until we see it in writing, we need to assume that some vestige of the FTC’s Non-compete Ban is going to survive.

So what do you do with that? I have a couple ideas. One is the first thing that would be required if the Non-compete Rule is to stand, either in whole or in part, the first action that’s required is that businesses are required under the FTC’s Non-compete Rule to affirmatively notify current and former employees who are subject to non-compete agreements and give them notice that their non-compete agreements are no longer going to be enforced. So that notice has to be made by September 4^th, 2024.

The court, again, will issue an order no later than August 30^th, so a few days before the deadline to give notice. But it’s going to take some time to just compile the contact list to figure out who are the employees, the current and former employees who are subject to non-compete agreements, and what is the last known mailing address or email address or cell phone number to allow us to give the notice to those employees if it turns out that we are required to give that notice. So I would say between now and let’s say August 30^th, businesses should start to undertake that effort to compile the information of who are the employees who are subject to non-competes and what is their last known contact information? I wouldn’t send out any notice until after August 30^th, let’s see what the court’s ultimate ruling is, but it’s going to take some time to compile that information. So we should get the ball rolling on that information compilation now.

The other thing I would say is, and again this is something that could probably wait until after August 30^th but before September 4^th, is businesses might need to join the US Chamber of Commerce. If it turns out that the judge鈥檚 order only applies to bona fide, dues-paying members of these plaintiff associations, then that’s going to mean if you want to enforce your non-compete agreements, you have to be a bona fide, dues-paying member of the US Chamber of Commerce. So I’m not going to say write a check to the Chamber of Commerce immediately, but be prepared to do so in short order after August 30^th if that’s the direction that the court takes.

The last point that I would make 鈥� and this is just, there’s so many issues to unpack in the Non-compete Rule. This is one we haven’t spoken about yet, but there’s a big exception in the Non-compete Rule that is relevant to this audience, the listeners of this podcast, which is that due to probably an historical accident, the Federal Trade Commission doesn’t have jurisdiction to prevent unfair methods of competition against bona fide nonprofits.

And so, to the extent listeners of this podcast represent a not-for-profit health care system, that not-for-profit health care system falls outside the FTC’s jurisdiction on this issue. Now sometimes there’s some wrinkles to that or complications to that. The classic example is you have a not-for-profit health care system that’s the parent organization, but it has set up a for-profit medical group subsidiary, which is the vehicle for employing physicians or other caregivers. If there’s a for-profit legal entity that is the employer of record, then that for-profit legal entity probably is subject to the FTC’s jurisdiction. And the Non-compete Rule probably will apply to that entity. But for listeners who represent or are members of true, bona fide not-for-profits, where every employer of record within the corporate hierarchy is a bona fide not-for-profit, you can sit tight because the Non-compete Rule doesn’t apply to those types of organizations, due to an historical error in how the FTC Act was drafted.

David McMillan

Well, that is a fascinating tidbit and likely very important for a number of our listeners; to make sure that they comprehend that and understand it. And just to reiterate the point, just because the parent corporation is nonprofit, the exception that prevents the FTC from having jurisdiction over nonprofits would not extend to any for-profit subsidiary of that nonprofit, to the extent that for-profit subsidiary was an employer of record. Should the FTC ban on non-competes be upheld through the judicial process, that for-profit subsidiary would still be subject to that ban. I just want to make sure that I said that correctly and so that our listeners hear that a couple of times.

Ben Dryden

Yeah, you said that correctly. I should say that the parameters of where the FTC’s jurisdiction begins and ends with respect to nonprofits and for-profits is very hazy. And so I think the line that if it’s a bona fide not-for-profit parent, but it has a for-profit subsidiary, I think that line is sound. That鈥檚 certainly the position that the FTC has taken publicly that, in that case, the FTC does have jurisdiction over the for-profit subsidiary. But these issues have not really been litigated and there’s sometimes unique facts and unique cases that need to be considered.

The other situation that comes up with some regularity is you have a bona fide, not-for-profit health care system that contracts with a staffing company, and the staffing company is actually providing locums or traveling nurses or what have you. If the staffing company is a for-profit 鈥� which, they all are for-profits 鈥� in that case it could be a not-for-profit hospital, but the doctor’s employer is the for-profit staffing company, and in that case, the non-compete agreement between the staffing company and the doctor or the nurse or whoever is presumably subject to the FTC’s authority.

David McMillan

Interesting. Thank you for that clarity as well because as we all know, especially since the pandemic, the use of staffing companies such as travelers for clinical caregiving has increased dramatically. And so I’m sure a lot of our listeners find themselves in that particular circumstance. So Ben, anything else that we want to make our listeners here aware of as we continue to wait for the courts to clarify this temporary or initial response that we received on July 3^rd?

Ben Dryden

I don’t know how satisfying of a conclusion this is going to be for listeners, but we are really in a chaos scenario here where it seems quite plausible that we’ll have one decision from one federal court that conflicts with another decision from another federal court. The one federal court that is likely to rule that the Non-compete Ban is illegal, it’s unclear what remedy is going to be imposed there and how many businesses will be able to take advantage of that remedy. So this remains a fast-moving situation where there’s briefing, there could be emergency appeals or could well be a conflict between one court and another court. So this is one to just really stay tuned on, but we unfortunately do have to assume the worst and be prepared for the possibility, even if it’s a small possibility, but be prepared for the possibility that this Non-compete Rule gets implemented come September 4^th.

David McMillan

So just to remind our listeners, if you’re an employer who would otherwise be subject to the FTC’s Non-compete Rule, it’s best to go ahead and be making that listing of current and former employees and their last known point of contact. Having that pulled together just in case you do need to make that notification to be compliant with whatever decision comes down with respect to the ban. So that was good advice and I wanted to repeat it for our listeners as they think about the next few weeks and what they need to be doing.

Ben Dryden

That’s right.

David McMillan

Well, in our first episode, Ben, you made the comment that, prior to this ruling, employers were faced with this patchwork of state law for those employers who have employees in multiple states, and that those employers have to navigate this patchwork of state regulation as it relates to non-competes or other types of restrictive covenants and employment agreements. It sounds like all we’ve done is added another layer of uncertainty and patchwork at the federal level to that existing state regulation. And so, like a lot of difficult situations, this seems to be getting more complex before it gets easier. We’ll hope that there’s something easier on the other side of August 30th, but we’ll prepare as if there isn’t. Is that a fair statement?

Ben Dryden

That’s fair. What I’ll say is the only solution to the complexity and the patchwork and there being 46 different sets of rules across the country, the only solution there is a federal solution, a uniform rule of non-competes. And so it’s a question whether the FTC is the proper source of that rule or instead whether that rule needs to come from Congress. And I think just to tie everything up, given what the Supreme Court said in the Loper Bright case, if there’s a solution to be had here to achieve federal uniformity on non-competes, the onus is on Congress to make that happen.

David McMillan

Well, that’s well said, Ben. And so for our listeners, we hope you’ll stay with us. Ben and I will be back as we hear more from our judicial system and as we learn more about the forthcoming decisions. As Ben has already referenced, we’ll be back to unpack that with you as those are known. We hope that you will join us again to hear Ben’s perspectives on those new rulings. Obviously, he is an expert whose counsel in this area is valuable, and we’re happy to have the opportunity to provide these particular installments of Let’s Talk Compliance in the midst of what Ben referred to as chaos. So stay tuned. We’ll be back with you just as soon as we have some more clarity. We thank you for listening again today, and now we’ll turn this back over to Angie and Jana. Thanks so much, Ben.

Ben Dryden

Thank you.

Jana Kolarik

Thank you, Ben and David for another great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let鈥檚 Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast, and visit 麻豆直播鈥檚 Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. If you liked this show, don鈥檛 forget to subscribe and be sure to rate us five stars. Until next time, I鈥檓 Jana Kolarik at 麻豆直播 & Lardner.

Angie Caldwell

And I鈥檓 Angie Caldwell with PYA. Thanks so much for listening.

The demise of Chevron opens up new potential defenses in False Claims Act (FCA) cases.

On June 28, 2024, the Supreme Court, in Loper Bright Enterprises v. Raimondo, put an end to Chevron deference to agency interpretation of silent or ambiguous portions of statutes.[1] After Loper Bright, challenges to agency regulations will not look to Chevron when deciding how to interpret silence or an ambiguity in a statute. Instead, the Supreme Court decided it is for the judiciary to interpret a statute, not an executive branch agency.

Chevron was a 40-year bedrock of administrative law, and Loper Bright is a seismic shift to the landscape of agency enforcement. Loper Bright has the potential to shake up FCA cases, especially as creative defense attorneys apply the ruling to specific cases and facts.

To explore the issue, consider a hypothetical FCA case based on the facts of Loper Bright. To summarize, in the actual case, a fishing fleet operator sought to invalidate a regulation of the National Marine Fisheries Service (NMFS) that required operators to pay the cost of a fishery monitor, where only the regulation, and not the statute passed by Congress, required a monitor for Atlantic herring fishing and required the operator to pay $750 per day for the monitor. Let鈥檚 assume hypothetically that the regulation at issue required the fleet operator to expressly certify compliance with all regulations and the operator complied 鈥� except it did not pay the $750-per-day cost for the monitor.[2] Let鈥檚 also assume the operator then submitted a claim for a federal subsidy and certified regulatory compliance, despite not having paid for the monitor. Two years later, an FCA case brought by a whistleblower (a 鈥渞elator鈥�) is unsealed, alleging the operator knowingly filed a false claim for payment, in violation of the FCA, by falsely certifying compliance with all regulations.

Can the Operator Defend by Claiming the Regulation Was Invalid?

Loper Bright potentially opens a new line of defense if a defendant can argue a regulation or agency interpretation goes beyond the authorizing statute. In our hypothetical, the operator might argue it cannot have filed a false claim because the regulation itself was based on an incorrect and therefore invalid agency interpretation of the statute. If 鈥� as in Loper Bright itself 鈥� the imposition of the cost of the monitor was an improper agency action, the question would be whether there was in fact a regulatory requirement for the operator to have violated in the first place. And if 鈥� as in Loper Bright 鈥� a court were to agree with the defendant operator, there would be no statutory or regulatory requirement to serve as the basis for the alleged FCA violation. In other words, the operator should not have followed the NMFS regulation to begin with, and the certification he had complied with all (proper) regulations was not false.

The government surely would argue, however, that unless the regulation had been found unlawful by a court and set aside before the operator submitted his certification, our operator could not use Loper Bright as license to violate a facially-valid regulation.[3] Asserting disagreement with agency regulations would be an uncertain and risky defense that may not hold up when challenged. If the court were to find the regulation was not inconsistent with the statute, then our operator also may have violated the FCA.

A defendant may further contend that an invalid interpretation of statute reflected in an agency regulation lacks the force of law and thus is more akin to sub-regulatory guidance. The Justice Manual states FCA cases should not be based on agency interpretations that lack force of law.[4] This Justice Manual provision was published in the context of sub-regulatory guidance but, post-Loper Bright, defendants may argue a court owes no deference to the agency interpretation (whether in regulatory or sub-regulatory guidance) and could argue that DOJ鈥檚 own policy does not permit an FCA case based on an invalid regulation. The government may respond that an agency may condition payment on a company鈥檚 agreement to follow requirements that are not in a regulation 鈥� such as requirements in a contract. Still, given the Justice Manual policy, this further increases litigation risk to the government when at-issue regulations are based on improper agency interpretations of a statute.

The government further may argue the appropriate challenge to the NMFS regulation was not as a defense to an FCA lawsuit (nor simply to disregard the regulation) but rather to file a lawsuit challenging the problematic agency regulation and seeking a court order invalidating the action or regulation. But nothing seems to prevent the operator from staying the parallel FCA proceedings while challenging the improper regulation. That option may be viable even for longstanding regulations under the Supreme Court鈥檚 recent decision holding the statute of limitations for challenging agency actions runs from the date a plaintiff was injured, rather than from the date of the regulation鈥檚 promulgation.[5] At minimum, that course likely would give DOJ pause to avoid litigation risk. Loper Bright provides the argument and a reason for the government to decline intervention in an FCA case.

Potential Confusion with Inconsistent Judicial Interpretations

Without Chevron deference to an agency interpretation that applies nationally, there also is a risk of conflicting rulings arising from multiple challenges to a regulation. In our hypothetical, suppose there are other entities in the same boat as our operator, and the NMFS imposed a monitoring fee on salmon fisheries off the coast of Alaska, herring off the coast of Massachusetts, and crawfish in Louisiana. Consider if courts in those circuits ruled inconsistently, with one upholding the Agency鈥檚 interpretation, one finding it invalid, and one splitting the difference and applying a new rule altogether. What is the law of the land in jurisdictions that have yet to rule on the interpretation? Future defendants could not be found to have the required knowledge of falsity (鈥渟cienter鈥�) if it does not pay the monitoring fee across the country because it is unclear as to the validity of the NMFS鈥� requirement. And, the existence of varying interpretations arguably makes the operator鈥檚 decision not to pay the fee rational, rather than reckless 鈥� undermining scienter.[6] This is a question to be determined as Loper Bright is applied to FCA cases.

What if a Court Invalidates a Regulation in an Existing FCA Case?

If a regulation with which an FCA defendant certified compliance was later invalidated, we expect the Justice Department and relators would be less likely to continue to pursue an FCA claim. Defendants who find themselves under scrutiny for a later-invalidated regulation should work to persuade the Government to dismiss the case even if the relator opposed. Here again, however, the existence of varied and conflicting rulings among district courts as to the proper interpretation of a statute could complicate the matter.

As reflected above, there are a different ways that the overturning of Chevron may play out in the context of FCA investigations and cases. At present, new and untested defenses are available.

For more information:

• What Does the End of Chevron Deference Mean for Federal Health Care Programs?
• The End of Chevron Deference and the Implications for the SEC
• Supreme Court Overturns FCA Scienter Cases
• Rising Importance of Sub-Regulatory Guidance in False Claims Act Cases

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[1] As Justice Roberts summarized in the majority opinion in Loper Bright, the Court鈥檚 鈥�Chevron doctrine requires courts to use a two-step framework to interpret statutes administered by federal agencies. After determining that a case satisfies the various preconditions we have set for Chevron to apply, a reviewing court must first assess 鈥榳hether Congress has directly spoken to the precise question at issue.鈥� Id., at 842, 104 S.Ct. 2778. If, and only if, congressional intent is 鈥榗lear,鈥� that is the end of the inquiry. Ibid. But if the court determines that 鈥榯he statute is silent or ambiguous with respect to the specific issue鈥� at hand, the court must, at Chevron鈥檚 second step, defer to the agency’s interpretation if it 鈥榠s based on a permissible construction of the statute.鈥� Id., at 843, 104 S.Ct. 2778.鈥� Loper Bright Enterprises v. Raimondo, __ U.S. ___, 144 S.Ct. 2244 (2024).

[2] Entities that receive federal funding frequently must certify compliance with rules and regulations governing the pertinent federal program (e.g., Medicare program, grant requirements, etc.).

[3] A different scenario (discussed further below) is when a regulation is invalidated as unlawful sometime between the defendant certifying compliance with it and the present-day court action. We expect DOJ would be less likely to pursue such an action, given the even greater litigation risk to DOJ and fairness and propriety concerns.

[4] The current version of this Justice Manual provision grew out of the July 1, 2021, Garland Memo. See /insights/publications/2021/08/sub-regulatory-guidance-false-claims-act-cases/.

[5] See Corner Post, Inc. v. Board of Governors, 603 U.S. __ , 144 S.Ct. 2440 (July 1, 2024).

[6] We assume the defendant operator in fact had a justifiable reason to rely on the favorable judicial applications (despite the unfavorable ones), and this was not merely an 鈥渙bjectively reasonable鈥� interpretation after the fact. See United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023) (where a claimant knew of a 鈥渟ubstantial and unjustifiable risk鈥� that its claims could be false and still submitted a claim, requisite scienter is present regardless of a statutory ambiguity).

On June 11, Senators Elizabeth Warren (D-Mass) and Edward Markey (D-Mass) introduced a bill titled 鈥�.鈥� The proposed Act would criminalize acts of senior executives who operate health care entities that, according to a prepared by Senator Markey鈥檚 office, are being 鈥渓ooted,鈥� and that looting can be traced back to the death of a patient. In addition, the proposed Act gives the U.S. and State governments the right to claw back compensation paid to certain executives over a 10-year period prior to any event deemed to be looting. The proposed Act also focuses on real estate investment trusts (REITs) and has certain additional reporting requirements for entities undergoing change of control transactions.

The proposed Act appears to be adjunct to the Health Over Wealth Act proposed by Senator Markey in May 2024, which is the subject of our blog 鈥�Private Equity: Proposed Health Over Wealth Act 鈥� What This Means for You.鈥�

In brief the proposed Act would:

• Make it a criminal act and apply a penalty of not less than one and not more than six years in prison, for executives to cause a so-called 鈥渢riggering event鈥� with respect to health care entities like nursing homes and hospitals, and such event results in a patient鈥檚 death.

• Claw back from any current or former director, officer, or control person of, or agent for, a private equity firm or target firm; any current or former shareholder or joint venture partner that participates in the conduct of the affairs of a target firm; or any private fund (i.e., a private equity firm) the compensation earned by and paid to the above persons and entities during the ten-year period prior to the triggering event.

• Authorize the United States Attorney General, and states attorneys general, to levy a civil penalty of up to five times (5x) the amount of compensation clawed back above;

• Prohibit payments from federal health programs (such as Medicare and Medicaid) to entities that sell assets or use assets as collateral for loans made to the entities by a REIT, with an exemption for REIT arrangements currently in place;

• Repeal (i) certain provisions in the Internal Revenue Code that allow taxable REIT subsidiaries to exert influence on the operations of health care entities; and (ii) the 20% pass-through deduction, passed in the 2017 Trump tax cuts, for all REIT investors;

• Require health care providers receiving federal funding to publicly report mergers, acquisitions, changes in ownership and control, and financial data, including debt and debt-earnings ratios; and

• Require the Office of Inspector General of the Department of Health and Human Services (HHS) to provide a report to Congress on the 鈥渉arms of corporatization in health care.鈥�

The proposed Act defines a 鈥渢riggering event鈥� (i.e., an event that triggers the criminal and civil penalties and disgorgement described above) to include:

• A 鈥渢arget firm鈥� being behind on salaries and wages for 25% of its total workforce for more than 90 days;
• A closure of a target firm;
• A target firm being behind on rent payments for more than 90 days;
• A target firm being in default on a loan for more than 90 days;
• A target firm filing for bankruptcy or other insolvency proceeding.

The above events appear quite broad and there would seem to be a risk that certain types of business practices that are not necessarily abusive or troublesome, could be swept into the ambit of the Act. In addition, the Act overly simply defines a 鈥渢arget firm鈥� as a 鈥渉ealth care corporation that is acquired in a change of control transaction.鈥� Arguably this could pick up virtually any corporation or similar entity engaged in health care.

The proposed Act would apply to:

• Any current or former director, officer, or control person of, or agent for, a private equity firm or target firm;
• Any current or former shareholder or joint venture partner that participates in the conduct of the affairs of a target firm; or
• Any private fund (i.e., a private equity firm).

The compensation that can be clawed back would include:

• Salaries;
• Bonuses;
• Equity based compensation (e.g., options, profits interests, stock grants);
• Advisory, management and monitoring fees;
• Profits from sales of assets and real estate;
• Severance pay; and
• Golden parachute payments.

As noted above, the penalties are draconian and will apply to the above broad categories of persons or firms. The penalties range from criminal penalties to, potentially, incredibly large disgorgements and civil penalties.

The proposed Act appears designed to put an end to the health care REIT industry as it would preclude from participation in Federal health care programs any individuals or entities that sell assets to or pledge assets, as collateral, to REITs. That is, if a provider engages in a transaction with a REIT, such as a sale leaseback deal, that provider will be prohibited from participating in Federal health care programs, such as Medicare and Medicaid.[1] The proposed Act also would eliminate the various income tax benefits attributable to REITs and available to their investors, such as the 20% pass through deduction.

Finally, the proposed Act would mandate that providers, such as hospitals and health systems, physician practices, including those who are controlled by private equity funds, ambulatory surgery centers, behavioral health providers, home health agencies and the like, provide certain information to the Federal government on an annual basis such as:

• Information on transactions in which the provider engaged in the prior year, such as change of control transactions;
• Names information, including provider numbers, of individual providers within the reporting provider;
• Financial information, such as debt-to-earnings ratios, the amount of debt incurred by the provider (including a breakdown of debt by hospital within a health system), fees charged and dividends paid to investors, information on capital gains income received by nonprofit hospital systems, etc.

The above information will be posted by HHS on a website to be made publicly available. Failure to report or reporting misleading information may result in civil monetary penalties of up to $5,000,000.

This proposed Act is a further attempt by Congressional advocates to get their arms around health care investing in the United States. Given the voting rules in the United States Senate and the fact that Republicans control the United States House of Representatives, the fate of this proposed Act is dubious, but it shows that proposals for government intervention in health care show little signs of slowing.

麻豆直播 is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, our Health Care & Life Science Sector, or to our Health Care Practice Group with any questions.

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[1] There is an exemption for providers and arrangements with REITs in place as of the effective date of any enactment of the proposed Act.

On May 6, 2024, the U.S. Food and Drug Administration (FDA) issued its significantly modifying FDA鈥檚 approach to oversight of laboratory developed tests (LDTs). The final rule is effective July 5, 2024.

The final rule amends FDA鈥檚 regulations to clarify that in vitro diagnostic products (IVDs) are devices under the Federal Food, Drug, and Cosmetic Act (FD&C Act) including when the manufacturer of the IVD is a laboratory. In addition to this amendment, FDA is finalizing its policy under which FDA will increase oversight of LDTs, a subset of IVDs, through a phased implementation of IVD requirements. This phased implementation will take place over the course of four years.

What are LDTs?

LDTs are intended to measure or detect substances or analytes (e.g., proteins, glucose, cholesterol, or DNA) in specimens taken from humans (e.g., blood, saliva, or tissue). LDTs are intended to be designed, manufactured, and used within a single laboratory that meets certain Clinical Laboratory Improvement Act (CLIA) requirements.

LDT Regulatory Approach Since 1976

FDA has long asserted its authority to regulate LDTs as devices but previously had deemed the products low risk and, therefore, opted to take a broad enforcement discretion approach to regulating these products. Under its enforcement discretion approach, FDA has not enforced certain device requirements, such as premarket review, reporting, registration and listing, quality system, etc.

FDA had historically viewed LDTs as low-risk because they were typically manufactured in small volumes in local communities for rare diseases, using low-tech instruments and specialized personnel. LDTs have become significantly more complex since 1976. Currently, many laboratories manufacturing LDTs employ high-tech instruments (such as algorithms and automation), run the LDTs in high volumes, and widely market and accept specimens from across the United States.

Both FDA and Congress have previously pursued changes to FDA鈥檚 enforcement discretion policy several times. FDA has previously attempted to modify its approach through guidance, which was never finalized, and members of Congress have introduced but failed to pass new legislation, most recently, the Verifying Accurate, Leading-edge IVCT Development Act (VALID Act).

Final Rule 鈥� FDA鈥檚 Phaseout of Enforcement Discretion

FDA issued its proposed rule in October 2023. The proposed rule proposed a phased approach to ending enforcement discretion. The proposed rule included several categories of tests that would continue to benefit from limited enforcement discretion. The final rule substantially mirrors the proposed rule but includes some additional categories of tests that will continue receiving enforcement discretion.

At a high level, the Phased Implementation of IVD requirements will be as follows:

Stage	Action
Stage 1 (May 6, 2025)	FDA will expect compliance with medical device reporting (MDR) requirements, correction and removal reporting requirements, and quality system (QS) requirements regarding complaint files.
Stage 2 (May 6, 2026)	FDA will expect compliance with requirements not covered during other stages of the phaseout policy, including registration and listing requirements, labeling requirements, and investigational use requirements.
Stage 3 (May 6, 2027)	FDA will expect compliance with QS requirements.
Stage 4 (November 6, 2027)	FDA will expect compliance with premarket review requirements for high-risk LDTs (IVDs that may be classified into class III or that are subject to licensure under section 351 of the Public Health Service Act), unless a premarket submission has been received by the beginning of this stage in which case FDA intends to continue to exercise enforcement discretion for the pendency of its review.
Stage 5 (May 6, 2028)	FDA will expect compliance with premarket review requirements for moderate-risk and low-risk LDTs (that require premarket submissions), unless a premarket submission has been received by the beginning of this stage in which case FDA intends to continue to exercise enforcement discretion for the pendency of its review.

FDA will continue exercising certain levels of enforcement discretion over several LDTs, as described below. The final rule contains key criteria each test must meet to avail itself of the enforcement discretion.

Full Enforcement Discretion:

• 鈥�1976-type鈥� LDTs (i.e., LDTs using manual techniques and legally marketed components)
• Certain Human Leukocyte Antigen Tests for Transplantation
• Forensic (Law Enforcement) Tests
• Public Health Surveillance Tests
• Department of Defense or Veterans Health Administration Performed Tests

Limited Enforcement Discretion:

• Nonmolecular Antisera LDTs for Rare Red Blood Cell Antigens
• Modifications by a Laboratory of Another Manufacturer’s 510(k) Cleared or De Novo Authorized Test (if modification would not otherwise constitute a modification requiring a submission and is within scope described in preamble)
• LDTs approved by the New York State Department of Health Clinical Laboratory Evaluation Program (NYS CLEP)
• LDTs Marketed Prior to Issuance of Final Rule (May 6, 2024) (and not modified beyond scope described in preamble)
• LDTs for Unmet Needs by Labs Integrated in the Health Care System Treating the Patient

No Enforcement Discretion:

• IVDs Offered as LDTs Within Scope of Phaseout Policy (but that do not fall within a targeted enforcement discretion policy)
• Direct-to-Consumer (DTC) Tests (compliance currently expected)
• Donor Screening Tests for Infectious Diseases and Certain Blood Typing Tests (compliance currently expected)

Potential Challenges

It is likely that this final rule will be challenged in court. FDA received over 6,500 comments on the proposed rule, many of which challenge FDA鈥檚 authority to regulate LDTs. Comments touched on a number of topics such as whether Congress granted FDA authority to regulate LDTs or whether the enactment of CLIA illustrates that authority to regulate LDTs lies with the Centers for Medicare & Medicaid Services (CMS); whether LDTs are 鈥渕edical devices鈥� under the FD&C Act; whether FDA may regulate LDTs because FDA cannot regulate the practice of medicine (which may include laboratory testing activities); whether the 60-day comment period was insufficient to give the industry time to respond; and whether the rulemaking implicates the 鈥�.鈥� If challenged in court, we may see the issuance of a preliminary injunction.

The final rule may spur Congress to act. The new final rule has vocal opponents in Congress and may prompt members of Congress to reinvigorate the VALID Act or similar legislation and such legislation, if passed, could override FDA鈥檚 efforts. The VALID Act currently contains language that places LDTs and IVDs under a single diagnostic regulatory scheme called 鈥渋n vitro clinical tests (IVCTs).鈥� The legislation would clarify the authority between FDA and CMS and settle the debate of how LDTs should be regulated.

Next Steps

Manufacturers should begin preparing themselves for compliance with requirements per the phased policy articulated above and watch out for any new FDA guidance intended to complement the final rule. In case of potential challenges, we recommend that stakeholders stay up to date with legal, legislative, and regulatory action on this issue.

麻豆直播 is here to help you address the short and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, or to our聽Health Care Practice Group聽with any questions.

The U.S. Food and Drug Administration (FDA) recently doubled down on its that existing regulatory pathways for foods and dietary supplements are not appropriate to manage the risks of cannabidiol (CBD) and a new regulatory pathway is needed. Specifically, during an , FDA Commissioner Califf stated 鈥渢he use of CBD raises safety concerns, especially with long-term use. Studies have shown evidence of liver toxicity, interactions with certain medications, and possible harm to the male reproductive system. CBD exposure is particularly concerning for children and during pregnancy.鈥�

The Commissioner then reiterated the Agency is willing to work with Congress to create 鈥渁 new regulatory pathway that would provide access, safeguards and oversight over products containing CBD in ways that existing pathways cannot.鈥� Per Commissioner Califf, a new regulatory scheme is needed that could 鈥渆ncourage better information to inform consumers about their choices.鈥�

Under the Federal Food, Drug, & Cosmetic Act, any substance, including CBD, must meet certain standards to be lawfully marketed as a dietary supplement or food additive. The lack of rules for CBD, which are long overdue, has been a pain point for the industry. With the FDA continuing to take the position that it cannot regulate CBD under current food additive and dietary supplement laws and looking to Congress to take action, CBD鈥檚 fate looks as though it will continue to remain in unregulated purgatory. Should the FDA change its stance, promulgation of new rules that explicitly address the Agency鈥檚 concerns regarding CBD is likely the swiftest way for the industry to finally have clarity. In light of the recent testimony, however, we do not anticipate the FDA will promulgate new rules to regulate CBD any time soon. The FDA鈥檚 continued failure to take any action forces industry stakeholders to operate in a world of regulatory uncertainty, which is harming the CBD industry and its consumers.

麻豆直播 is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, our Health Care & Life Science Sector, or to our Health Care Practice Group with any questions.

On April 3, 2024, Senators Edward Markey (D-Mass.) and Elizabeth Warren (D-Mass.), chaired a Senate Health, Education, Labor, and Pensions (HELP) Subcommittee on Primary Health and Retirement Security field hearing titled, . As part of the hearing process, Senator Markey released his new legislative agenda that calls for transparency and accountability for private equity (PE) in health care.

This hearing is the last in a line of Federal and state governmental inquiries into for-profit health care and attempts to regulate private equity investment in physician practices, hospitals, ambulatory surgery centers, hospice providers and long-term care facilities, among others. Recently, the U.S. Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) held a joint virtual workshop styled , aimed at examining the role of private equity investment in health care markets. This workshop was coupled with a (RFI) issued by the FTC, DOJ and United States Department of Health & Human Services (HHS) requesting public comment on deals conducted by health systems, private payers, private equity funds, and other alternative asset managers that involve health care providers, facilities, or ancillary products or services. The RFI also requests information on transactions that would not be reported to DOJ or FTC for antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act (HSR). In addition, the states of California, Minnesota, Oregon and others have either enacted laws or have proposed legislation aimed at regulating or eliminating private equity investment in health care providers in those states.

The Markey Bill is called the 鈥溾�� and has a number of provisions aimed at corporate transparency, government oversight and regulation of for-profit investment in health care. Specifically:

Reporting

The bill would require PE-backed or other for-profit owned providers (those providing services covered by Medicare under 42 U.S.C. Section 1395d) such as hospitals, hospice, nursing homes, and certain other facilities[1], to annually report to HHS on all manner of things including, but not limited to (a) debt; (b) fees collected by the PE firm; (c) dividends paid by the health care entity to the PE fund; (d) lobbying or political spending by the PE fund and health care entity; (e) sale leaseback agreements; (f) real estate, mortgage, and lease payments; (g) interest paid on lines of credit; (h) transactions with vendors or service providers; (i) staffing, disaggregated by position and ratio of staff to patients and number of job postings and vacancy rates by position; (j) number of beds in use and capacity (for hospitals); and (k) number of health care facilities or providers owned by the PE firm that have closed in the previous year.

Focusing on recently reported examples of financially troubled private equity backed companies, Federal legislators and regulators have increasingly expressed concern that PE investors and other for-profit operators of health care companies strip their investments down to bare bones, recapitalize them with debt and make distributions to themselves and other investors with the proceeds of the indebtedness, pay themselves handsome management fees and engage in expensive real estate sale-leaseback transactions. These practices, they argue, are designed to enrich the owners of these organizations at the expense of patient care and safety and the livelihoods of health care workers. They also have expressed concern over creeping acquisitions that escape HSR reporting but grow to a size, and market power, which threaten competition if left unchecked.

Accountability

The Markey bill also would require HHS to establish mechanisms to 鈥渕itigate the risks related to for profit ownership of health care entities鈥� including requirements to:

1. Establish escrow accounts to cover operating and capital expenditures for five years in case of a closure or reductions of essential health care services. The account should include enough funds to pay out contract obligations to health care providers and other staff and to supply supplemental funding to community health care or non-profit providers in the surrounding geographical areas affected by such closures or service reductions.
2. Require minimum investments in capital in any health care entity purchased; or
3. Supply financial contributions sufficient to mitigate the impact of potential closure, reduction of essential health services, workforce understaffing, or reduction in quality or safety of care or health care access.

Approvals and Licensure

The bill would require any health care entity looking to enter into an agreement to sell to, or lease from, a real estate investment trust must submit the sale or lease to HHS for review. HHS could block any agreement that would lead to a long-term weakened financial status of the health care entity or place the public health at risk.

The bill also would require that PE firms to obtain a 鈥渓icense鈥� in order to invest, directly or indirectly, in a health care entity. If a firm does not follow the provisions of this bill or engages in price gouging, understaffing, access barriers, or other metrics as found appropriate by HHS, HHS may revoke the license, requiring divestiture from health care entities in which the firm already invests.

Task Force

The bill would set up a task force chaired by HHS to monitor changes in the health care marketplace; address and limit the role of private equity and consolidation in health care; and identify and address PE or market consolidation patterns. In addition, the bill would allow HHS to prohibit a PE fund from purchasing voting securities of a health care entity and prohibit any merger or acquisition that would result in a PE fund gaining control of voting securities of a covered firm until the task force has had sufficient time to study and identify whether abuses are taking place in specific health care sectors or by health care entities related to price gouging, understaffing, access barriers, regulation compliance violations, or such other metrics as the Secretary may determinate appropriate.

Closures

The Markey Bill would require public notification and community input prior to hospital closures or service reductions. Hospitals that receive Medicare payments would be required to notify the Secretary of HHS at least 180 days prior to the discontinuation of services or a full hospital closure to allow HHS to determine whether the stated discontinuation or closure would negatively impact access to essential services and require the hospital to submit a mitigation plan to preserve access to essential services for the community via partnerships with surrounding facilities, including patient transportation plans, and a plan to support the transition of health care employees to other positions. The bill also provides that there shall be a public comment period about the mitigation plan.

Tax Treatment of Real Estate Investment Trusts

It is a common practice among PE backed entities to liquidate their real estate investments to raise additional cash. The bill as proposed would have provisions to discourage sales of health care property that would undermine the long-term financial stability of a health care entity for short term profit by closing, so called 鈥渢ax loopholes鈥� for real estate investment trusts for rental income from health care properties.

Summary

It is unclear if this legislation 鈥渉as legs鈥� but it is the most detailed proposals to date in furtherance of Washington鈥檚 concerns and disdain with respect to PE investment in health care. The bill is also consistent with the various thoughts we鈥檝e seen percolating in Washington and in various states across the country. Investors are well advised to at least understand the thinking that has led to the point and consider addressing with their elected representatives how they might navigate the increasingly choppy waters.

麻豆直播 is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, our Health Care & Life Science Sector, or to our Health Care Practice Group with any questions.

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[1] This bill does not address physician practice entities as physicians do not provide Medicare services under 42 U.S.C. Section 1395d.

Pixels, cookies, and trackers continue to be front of mind for HIPAA regulated entities seeking clarity on their ability to advertise, market, and engage with existing and prospective patients. On March 18, 2024, the U.S. Department of Health and Human Services (HHS), issued updated guidance to its December 2022 Bulletin on the topic 鈥渢o increase clarity for regulated entities and the public.鈥�

鈥淚IHI (individually identifiable health information) collected on a regulated entity鈥檚 website or mobile app generally is PHI, even if the individual does not have an existing relationship with the regulated entity and even if the IIHI, such as in some circumstances IP address or geographic location, does not include specific treatment or billing information like dates and types of health care services.鈥�

-HHS, Use of Online Tracking Technologies by HIPAA Covered Entities and Business Associates, March 18, 2024

What stayed the same?

Generally, the Bulletin can be read as a re-emphasis of HHS鈥� December 2022 Bulletin on the same topic. HHS鈥� position regarding individually identifiable health information collected on either a HIPAA regulated entity鈥檚 mobile application (app) or user-authenticated webpage (post-user login) is protected health information (PHI) remains the same. That is, HHS鈥� position is that the sharing of PHI obtained from a mobile app or user-authenticated webpage offered by or on behalf of a HIPAA regulated entity with third parties, such as social media companies, for purposes of marketing, retargeting, custom audiences, or to create a look-a-like audience will require a HIPAA compliant authorization or business associate agreement with the third party.

HHS is clear in the Bulletin that disclosing the use of tracking technologies in a privacy policy, notice, or terms of use, or posting a banner asking users to accept tracking technologies, does not constitute a valid HIPAA authorization.

Finally, and most importantly, HHS reiterates in its Bulletin that HIPAA regulated entities impermissibly sharing PHI with tracking technology vendors must follow HIPAA鈥檚 Breach Notification Rule and provide notification of a breach of unsecured PHI to HHS, the individual, and the media (when applicable), 鈥渨hen there is no Privacy Rule requirement or permission to disclose PHI鈥� and there is no business associate agreement with the tracking technology vendor.

Are there any changes?

While HHS鈥� position on unauthenticated webpages (pre-user login) did not materially change, the Bulletin does clarify that a tracking technology connecting an IP address of a user鈥檚 device with a visit to webpage addressing specific health conditions may not be PHI if the visit to the webpage is not related to an individual鈥檚 past, present, or future health, health care, or payment for health care. This seemingly would include cases such as a user visiting the website to find visiting hours or employment opportunities, a user accidently or mistakenly accessing a HIPAA regulated entity鈥檚 landing page, or a student user conducting research for academic purposes. 

However, based on the examples given by HHS in the Bulletin, if the tracking technologies are accessing information regarding an individual seeking health care services (e.g., looking at oncology services to seek treatment options, scheduling an appointment, or using a symptom tracker tool even without entering credentials), that tracking technology has access to PHI. This would mean the HIPAA regulated entity needs a business associate agreement with the third party or a HIPAA compliant authorization for the sharing.

Why did HHS update its Bulletin?

This latest Bulletin comes as a surprise given that HHS is currently defending the December 2022 Bulletin in a . The lawsuit alleges that HHS expanded the definition of 鈥渋ndividually identifiable health information鈥� by including within the definition information collected 鈥渨hen an online technology connects (1) an individual鈥檚 IP address with (2) a visit to an Unauthenticated Public Webpage that addresses specific health conditions or healthcare providers鈥︹�� The American Hospital Association argues that HHS exceeded its statutory authority by interpreting the definition of individually identifiable health information this broadly, and thus, the portion of the Bulletin specific to unauthenticated webpages should be invalidated. The American Hospital Association is not challenging the Bulletin鈥檚 position on mobile apps and user-authenticated webpages.

What should a HIPAA regulated entity do?

As was the case under the December 2022 Bulletin, HIPAA regulated entities should review their websites and mobile apps in light of the Bulletin. If tracking technologies are used on mobile apps or authenticated webpages, ensure a HIPAA compliant authorization has been obtained from the users or that a business associate agreement is in place with the third party. If tracking technologies are used on unauthenticated websites, assess where tracking technologies may be accessing information regarding an individual seeking health care services. Note that if the entity has a health condition specific website or is utilizing tools such as calendaring apps, symptom trackers, or questionnaires soliciting medical information, there is a greater likelihood that the entity鈥檚 unauthenticated webpages are collecting PHI per HHS. With regard to the  entity鈥檚 use of tracking technologies in the past that may not have complied with HHS guidance, the entity should assess its obligations under the Bulletin and HIPAA. Also, keep in mind that HIPAA is only one law to consider when assessing the use of tracking technologies 鈥� other federal and state laws may also apply and impose additional obligations.  

麻豆直播 is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, our Health Care & Life Sector, or to our Health Care Practice Group with any questions.

The Department of Justice鈥檚 (DOJ) annual revealed that it increased self-initiated investigations for the federal fiscal year ending September 30, 2023, by 1.5 times over the prior year. The DOJ also touted its accomplishments in FCA enforcement for the federal fiscal year 鈥� a record year for the DOJ. The statistics provided in the reveal the DOJ鈥檚 plans for 2024 and beyond. 

In 2023, the DOJ obtained 543 settlements and judgments 鈥� the highest number in a single year and a marked increase from 2022. The DOJ鈥檚 total recoveries of nearly $2.7 billion also increased from 2022, although those recoveries are lower than several prior years. 

	2022	2023	Increase
Settlements and Judgments	351	543	54.70%
Recoveries	$ 2,241,584,448	$ 2,689,447,914	19.98%

Looking ahead to 2024, we expect the following trends:

• Further increase of DOJ-initiated investigations
• Active FCA enforcement
• Continued focus on health care, cybersecurity, and private equity

FCA Enforcement Remains Active

There is no sign of slowdown in FCA enforcement. 鈥淭he False Claims Act remains one of our most important tools for rooting out fraud, ensuring that public funds are spent properly, and safeguarding critical government programs,鈥� the DOJ stated. Beyond its record number of settlements and judgments in 2023, the DOJ pledged even more FCA enforcement activity in 2024. In his remarks, Civil Division Principal Deputy Assistant Attorney General Brian M. Boynton said that, in 2023, the DOJ鈥檚 Fraud Section issued a record number (1,504) of Civil Investigative Demands (CIDs), which are a key tool the DOJ uses to obtain documents, interrogatory answers, and testimony in its investigation of FCA cases before bringing or intervening in suits. 

Health care fraud continued again to be the leading source of the DOJ鈥檚 False Claims Act settlements and judgments in 2023. The DOJ recovered over $1.8 billion related to health care industry matters, including managed care providers, hospitals, pharmacies, laboratories, long-term acute care facilities, and physicians. The DOJ鈥檚 recoveries in 2023 were also attributable to its recoveries related to procurement fraud, pandemic relief programs, and cybersecurity requirements in government contracts and grants. 

Record Number of DOJ-Initiated Investigations

As forecast before, the DOJ is more committed than ever to building cases itself rather than relying solely on whistleblower (qui tam) suits filed by relators. The DOJ has continued to increase its self-initiated investigations, with a substantial jump from 305 matters in 2022 to 500 new matters in 2023.   

	New Matters
	Non-Qui Tam	Qui tam	% of Non-Qui Tam Matters
2020	264	676	28%
2021	212	598	26%
2022	305	658	31%
2023	500	712	41%

This increase in government-initiated matters is an important shift in the DOJ鈥檚 tactics. This is not to say that the DOJ is abandoning qui tams 鈥� the 712 qui tam initiated cases in 2023 was the third highest ever. But this uptick partially reflects DOJ and partner agency investment in allocating resources to data mining. Use of data analytics 鈥� especially on health care claims data 鈥� continues to be a leading focus. 

The spike in government-led matters also reflects increased sharing of information across federal agencies. The focus on misuse of COVID-19 related funds is one example of this, as interagency task forces shared data to uncover wrongdoing. For example, the DOJ worked with the U.S. Small Business Administration to pursue improper payments under the Paycheck Protection Program (PPP). In 2023, the DOJ resolved approximately 270 False Claims Act matters in connection with the improper use of PPP funds. 

Priorities for 2024

Health Care. The health care industry remains the leading focus of False Claims Act enforcement. The DOJ continues to pursue cases alleging false claims in the Medicare Advantage (Part C) program, such as claims involving unsupported diagnoses. The DOJ鈥檚 press release called this an area of 鈥渃ritical importance,鈥� as Medicare Advantage is now the largest component of Medicare. The DOJ will also continue to focus on these areas:

• Claims for medically unnecessary services
• Health care providers, pharmaceutical companies, and other entities contributing to the opioid crisis
• Enforcement of the Anti-Kickback Statute
• Claims related to ancillary services, such as laboratories, diagnostic, remote monitoring, and DME companies

Cybersecurity. In his live remarks during the 2024 Federal Bar Association Qui Tam Conference, Boynton started by highlighting the DOJ鈥檚 Civil Cyber-Fraud Initiative. The Civil Cyber-Fraud Initiative, which was originally announced in October 2021, uses the False Claims Act to police cybersecurity compliance by government contractors and grantees by holding them accountable when they knowingly violate applicable cybersecurity requirements. Although the DOJ鈥檚 Civil Cyber-Fraud Initiative has yielded only a small portion of the DOJ鈥檚 False Claims Act cases so far, Boynton pledged that more cases are coming in 2024 and beyond. Companies and contractors that work with the government should not neglect the government鈥檚 cyber security requirements. 

Private Equity. Private equity funds are also in the DOJ鈥檚 crosshairs. Boynton specifically called out private equity funds as an example of a 鈥渢hird-party entity鈥� who may be subject to False Claims Act enforcement. Boynton warned that, even if a private equity fund does not directly submit claims to the government, the fund could still face FCA enforcement if it takes steps to influence or cause the submission of a false claim by entities they control. This focus could lead the DOJ to asserting unchartered theories of liability that are worth monitoring carefully. We expect 2024 to be an active year for False Claims Act enforcement, with the health care industry at the forefront of DOJ-initiated investigations. 

On February 1, 2024, the Substance Abuse and Mental Health Services Administration (SAMHSA), U.S. Department of Health and Human Services, announced a updating the regulations regarding Opioid Treatment Programs (OTPs) as part of the Biden Administration鈥檚 Overdose Prevention Strategy. These announced changes are the first update to the OTP regulations in over 20 years and significantly increase access to medications like methadone and buprenorphine that treat opioid use disorder by, among other things, making permanent prescribing of 鈥渢ake-home鈥� doses and enabling use of telemedicine to extend OTPs to a patient鈥檚 home.

What are OTPs?

OTPs provide medication assisted treatment (MAT) for people diagnosed with opioid use disorder (OUD). MAT utilizes medications (typically methadone or buprenorphine) with psychosocial counseling and other behavioral health services to treat patients. OTPs are sometimes called methadone clinics because these clinics are the only way people can access methadone treatment for opioid use disorder. OTPs may exist in a variety of settings including intensive outpatient programs, residential programs, and hospitals, but all OTPs require a specific license certification by SAMHSA, and accreditation by an independent, SAMHSA-approved accrediting body. The OTP model has been criticized as too burdensome in restricting a patient鈥檚 ability to easily access life-saving medication and treatments for OUD. The prior requirement that methadone only be prescribed at these clinics and the prior restriction on unsupervised or take-home doses of medications used to treat OUD have historically required patients to make daily visits to an OTP, even in the outpatient setting.

What did the Final Rule change?

The final rule updates OTP certificate and accreditation standards, treatment standards related to medications dispensed by an OTP and removed language regarding the DATA Waiver. The DATA Waiver requirement was removed in January 2023. SAMHSA also released a summarizing key changes along with the rationale for these changes.

Flexibility of Methadone Medication Take-Home Doses in OTPs

In March 2020, due to the COVID-19 Pandemic, SAMHSA issued exemptions allowing OTPs to dispense up to 28 days of 鈥渢ake-home methadone doses for stable patients being treated for OUD and up to 14 doses of 鈥渢ake-home鈥� methadone for 鈥渓ess stable鈥� patients. Originally meant to reduce the risk of spreading COVID-19, OTPs and patients widely supported these changes. These flexibilities were scheduled to sunset one year past the end of the COVID-19 Public Health Emergency (PHE) (May 11, 2024) or until a final rule was published.

This final rule created a permanent option allowing take-home medication including methadone, buprenorphine, buprenorphine combination productions, and Naltrexone. First, the rule allows patients to be able to access take-home medication doses for days when the clinic is closed. Beyond those doses, the OTP practitioner may use their discretion to dispense medications to patients for OUD subject to certain maximums. Within the first 14 days of treatment, the take-home supply is limited to maximum supply of seven days鈥� worth of take-home medication. Between 15-30 days of treatment, the take-home supply maximum is increased to 14 days. Finally, after 31 days, the patient may have a take-home supply up to 28 days.

Flexibility to Prescribe Medication for OUD via Telehealth without an Initial In-person Physical Evaluation

In April 2020, SAMHSA implemented regulatory flexibilities to address the impact of the COVID-19 pandemic including exempting OTPs from the requirement to perform an in-person physical evaluation for patients being treated with buprenorphine in an OTP. Notably, this flexibility did not apply to methadone. On May 9, 2023, SAMHSA extended this telehealth flexibility until one year past the end of the COVID-19 PHE, or until such time that SAMHSA published a final rule.

This final rule allows an OTP practitioner to initiate treatment of methadone or buprenorphine via telehealth without an initial in-person exam. The final rule states that if certain practitioners, including the OTP physician, primary care physician, or other authorized health care professional under the supervision of program physician determines that an evaluation of the patient can be accomplished via audio visual technology, then a licensed OTP practitioner may prescribe and dispense methadone or buprenorphine to the patient. Importantly, in the rule commentary, SAMHSA notes it is not extending the use of audio-only telehealth technology to methadone because methadone holds a higher risk profile for sedation. If audio-visual technology is not available, an audio-only device may be used to prescribe methadone but only when patient is in the presence of a licensed practitioner who is registered to prescribe and dispense controlled medications. These additional requirements significantly limit the usefulness of audio-only technology for the prescription of methadone.

SAMHSA notes that this final rule does not authorize the prescription of methadone via telehealth outside the OTP context Methadone must still be prescribed and dispensed by appropriately licensed OTP practitioners. Additionally, any medication must still be dispensed to the patient under existing OTP procedures.

Admission Criteria Changes

Additionally, the final rule removed stringent admission criteria that prevented patients from initially accessing treatment. First, the final rule removed the requirement that patients have a full year history of OUD before being able to access treatment at an OTP. Second, this final rule removes the requirement that patients under the age of 18 have two unsuccessful attempts at treatment before entering treatment at an OTP.

Scope of Practice Expansion

On the federal level, the definition of practitioner was modified to include any 鈥渉ealth care professional who is appropriately licensed by the state to prescribe and/or dispense medications for opioid use disorder.鈥� This means, subject to state laws, many more types of non-physician practitioners such as nurse practitioners or physician assistant may prescribe or order medication. However, some states may not allow non-physician practitioners such as certified nurse-midwives, nurse practitioner, physician assistants, or pharmacists to prescribe these medications.

Impact of the Final Rule

These increased flexibilities will vastly improve patient鈥檚 access to life-saving OTP services. Specifically, the changes regarding methadone prescribing are a crucial step forward in allowing patients access to this important medication. While these changes only apply to the OTP regulatory scheme, the introduction of take-home medications, the ability to prescribe medication through telehealth, changes to admission criteria, and expanding the scope of practitioners will allow OTPs to access more patients in a field that desperately needs more providers.

麻豆直播 is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your 麻豆直播 relationship partner, or to our Health Care Practice Group with any questions.