(From Legal Scholarship Network: Legal Studies Research Paper Series, University of North Carolina
Reflections on Certification, Interpretation, and the Quest for Fraud That 'Counts' under the False Claims Act
Joan H. Krause
Sometimes, we lie when we speak; sometimes, we lie when we don’t. Striking the right balance is the essence of the June 2016 Supreme Court opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, which challenged the applicability of the Civil False Claims Act (FCA) to a defendant who falsely implied that it was in compliance with Medicaid requirements in order to obtain payment from the government. In a unanimous opinion, the Justices affirmed the validity of the implied certification theory but warned that misrepresentations must meet a demanding “materiality” standard to be actionable. While both parties were quick to claim victory, in the long run the decision is likely to satisfy no one and to raise as many questions as it answers.
Ironically – or perhaps fittingly – for a case expected to redefine the contours of fraudulent omissions, the opinion was notable as much for what it didn’t say as for what it did. Without citing to the extensive appellate FCA case law on either implied certification or materiality, and relying little on the statutory text itself, the Justices drew primarily from the common law. They explicitly declined to set bright-line rules, opting instead for a fact-intensive, commonsense approach more reminiscent of Justice Stewart’s famous proclamation regarding pornography (“I know it when I see it”).
This essay confronts the fundamental question underlying implied certification litigation: what type of fraud should “count” under the FCA? Neither the statutory language nor 150 years of case law – nor Escobar itself – has provided a coherent mechanism for distinguishing irrelevant noncompliance from more significant misrepresentations that go to the heart of what the government believes it is buying. Situating Escobar within the historical context of FCA certification theories, this essay identifies the crucial issues left open by the opinion, including how, when, and by whom this new materiality standard will be assessed. Escobar not only represents a lost opportunity to resolve these debates; it introduces confounding new questions that virtually guarantee befuddled litigants will have no choice but to seek clarity through future litigation.
-September 16, 2016
Crowdfunding and the Not-So-Safe SAFE
Joseph M. Green and John F. Coyle
On May 16, 2016, the much-anticipated era of retail crowdfunding officially began in the United States. While it is far too early to pass judgment on the long-term prospects of the crowdfunding project more generally, it is possible at this juncture to assess how certain aspects of crowdfunding are developing. With respect to the menu of financing instruments being offered to prospective investors, we believe that early market participants are potentially sabotaging the crowdfunding experiment by making widespread use of a relatively new startup-financing instrument — the simple agreement for future equity (SAFE) — that may frustrate the ability of investors to share in the upside of successful crowdfunding companies.
The SAFE was developed by Y Combinator, the well-known startup accelerator based in Silicon Valley, as a means of investing in startups that expected to raise institutional venture capital at a later date. Although the SAFE resembles a classic seed-stage convertible note in most respects, it lacks the convertible note’s maturity date and does not accrue interest while it remains outstanding. It does not pay dividends, and the SAFE holder has no right to vote on matters submitted to shareholders. The SAFE is, in essence, a contractual derivative instrument that amounts to a deferred equity investment. It will prove valuable to the holder if, and only if, the company that issues it raises a subsequent round of financing, is sold or goes public.
The key problem with the use of SAFEs in crowdfunding is that many of the companies issuing them are unlikely ever to raise institutional venture capital. If a crowdfunding issuer never raises this type of capital, then the retail investors who hold that issuer’s SAFEs may find themselves in possession of a security that, in addition to granting the holder no voting rights or other investor protections, may never provide them with a return on their capital — or a return of their original investment amount — even if the company is successful. Sophisticated investors who invest in SAFEs in the context of early-stage technology companies knowingly assume these risks because they only invest in companies they expect will successfully raise venture capital in short order following their investment. By contrast, retail investors who invest in SAFEs offered by companies that are unlikely to raise venture capital may not fully appreciate the risks that they are taking by purchasing those SAFEs.
There are a number of ways by which this mismatch between instrument and company might be addressed. Our preferred approach is for the funding portals simply to remove the SAFE from their menu of financing instruments. A crowdfunding company that is a likely candidate for raising future venture capital and wants to issue a SAFE-like security could instead issue a standard convertible note, which is similar to the SAFE in many respects but offers more protections to retail crowdfunding investors. Alternatively, the company could issue debt, common equity or preferred equity. These alternatives are, in our view, more suitable vehicles for channeling retail investment capital to crowdfunding companies than is the SAFE.
-September 16, 2016
Melissa B. Jacoby and Edward J. Janger
Bankruptcy courts have become fora for the sale of entire companies as going concerns, as well as for the liquidation of assets piecemeal. This book chapter teases out the advantages and disadvantages of conducting such sales under federal bankruptcy law as compared to state law. We first describe the forms that bankruptcy sales can take, and the contexts in which they occur. Next, we explore the concept of “bankruptcy-created value,” identifying the ways in which the federal bankruptcy process can create value over and above what can be realized through compulsory state processes. We then identify several procedural and governance-based concerns about all-asset sales, and discuss how our recent proposal, the Ice Cube Bond, would address them. Finally, we explore the related issues of credit bidding and the permissible scope of sale orders that declare assets to be “free and clear” of various kinds of claims and property interests.
-August 16, 2016
Introduction: Refining Child Pornography Law: Crime, Language, and Social Consequences
Carissa Byrne Hessick
This is a page proof of the Introduction to Refining Child Pornography Law: Crime, Language, and Social Consequences (Michigan Univ. Press 2016), which presents the work of experts in law, sociology, and social work who study child pornography law and its consequences. The legal definition of child pornography is, at best, unclear. In part because of this ambiguity and in part because of the nature of the crime itself, the prosecution and sentencing of perpetrators, the protection of and restitution for victims, and the means for preventing repeat offenses are deeply controversial. This edited volume clarifies the questions surrounding child pornography law and begins to formulate answers. Focusing on the roles of language and crime definition, the contributors discuss the increasing visibility child pornography plays in the national conversation about child safety, and present a range of views regarding the punishment of those who produce, distribute, and possess materials that may be considered child pornography. The Introduction includes brief summaries of subsequent chapters.
-July 29, 2016