Blog Blog 2

Challenging Chevron Deference and “Informal Agency Guidance” in Criminal Prosecutions

The Washington Legal Foundation published a Legal Backgrounder by white-collar defense attorney John Lauro on July 16. The article discusses the application of the Chevron doctrine in the criminal law context.

In particular, Mr. Lauro analyzes judicial rulings on deferring to agency’s interpretation of a statute and a recent Justice Department policy that henceforth, agency guidance documents cannot create any additional legal obligations on the regulated community.  

Mr. Lauro applied that analysis retrospectively to U.S. v. Clay 832 F.3d 1259 (11th Cir. 2016), in which federal prosecutors applied an agency’s “informal guidance” regarding its interpretation of a Florida healthcare statute to secure the conviction of WellCare executives, including CEO Todd Farha.

Defense attorneys now have a new weapon in their arsenal to challenge criminal prosecutions based on informal agency guidance.

Here is the WLF Legal Backgrounder:

Originally published at the Washington Legal Foundation by John Lauro | July 16, 2020

Much has been written about the “Chevron Doctrine” and its impact on administrative law. In Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984), decided over a generation ago, the U.S. Supreme Court established a principle of judicial deference to an administrative agency’s interpretation of its operating statute where the agency reached a “reasonable” construction of an otherwise ambiguous statute. Chevron presumes that modern life has become so complicated that experts within agencies need latitude to fill in the details of how a legislative scheme should operate. The ruling became engrained in modern administrative law, while relegating the courts to a secondary role in statutory construction.

Less has been written about how Chevron deference has crept into federal criminal law and how the courts often give wide latitude to agencies to define criminal liability for regulated entities and their employees.1 Indeed, it is not unusual for a court in a criminal case to “defer” to an agency’s interpretation of a statute and accord that interpretation the force of law, even where the agency has not acted through formal rulemaking.

I was counsel in such a case several years ago where healthcare executives were convicted under the federal healthcare fraud statutes for failing to abide by an agency’s “informal guidance” regarding its interpretation of a Florida healthcare statute. The case, U.S. v. Clay, 832 F.3d 1259 (11th Cir. 2016), cert. denied, 137 S. Ct. 1814 (2017), illustrates how criminal liability can be created when the courts go too far in deferring to the administrative state.

Clay involved WellCare Health Plans, Inc., a Tampa-based public holding company for certain HMO plans (“WellCare”) providing healthcare services to Florida Medicaid patients. The Agency for Healthcare Administration (“AHCA”) administered the Florida Medicaid program. In the early 2000s, the Florida legislature decided to engage HMOs in providing health care to Medicare patients under a managed-care system, rather than using an inefficient fee-for-service reimbursement scheme. Florida intended to contain healthcare costs that consumed a substantial part of the state’s budget each year and shift that economic risk to HMOs, while providing a broader array of clinicians for Medicaid recipients.2

In connection with this new regulatory scheme, the Florida legislature passed an “80/20 Statute,” Fla. Stat § 409.912(4)(b) (2006), requiring recipients of Medicaid funds to report back to the state expenditures for the provision of behavioral health care. Under the statute, if an HMO spent less than 80% of the dollars received for the provision of behavioral health care, then it had to return the difference to the state each year. For example, if an HMO received $100 for behavioral health care, but spent only $75 for the provision of that care, then $5 would be returned to the state.3

Although AHCA was responsible for administering this new statute, it chose not to engage in formal rulemaking to determine how to complete the calculation. The agency itself was deeply divided, and many bureaucrats resisted the use of HMOs in the provision of behavioral health care.  Instead of engaging in rulemaking, AHCA merely incorporated the legislative language in its contracts with HMOs and then sent out informal letters and templates suggesting how to complete the calculation. This critical decision to use “informal guidance” led to federal criminal prosecution.

WellCare had established a specialized behavioral healthcare organization (“BHO”) to coordinate all behavioral healthcare services and to hire frontline clinicians such as psychiatrists and community mental health centers. The care the BHO delivered was not in question and state auditors noted that the BHO “exceeded requirements” in providing clinical care. WellCare, in turn, counted the total amounts it paid to the BHO for its “80/20 calculations.” AHCA never adopted a rule prohibiting this methodology and WellCare’s counsel advised the company that other healthcare companies had safely taken a similar approach. Over several years of reporting, AHCA never specifically asked, and WellCare never specifically informed the agency that it was using a BHO for the calculation.

Federal prosecutors indicted the CFO of the company, along with four other executives, including WellCare’s CEO Todd Farha. The prosecution argued that WellCare had misled AHCA by including in its “80/20 calculation” payments made to an affiliated BHO, rather than including only the payments made to “frontline” providers. The prosecution did not rely on the “80/20 Statute” or the Medicaid contracts that actually supported WellCare’s method of calculation. Instead, they pointed to AHCA’s informal “guidance,” which included letters and calculation templates. Testimony from attorneys who had represented WellCare and a medical economics expert, however, confirmed that WellCare’s calculation methodology was “reasonable.”

Following a three-month trial and a deliberation spanning nearly a month, the jury rendered a mixed verdict. Although it convicted three of the executives of healthcare fraud for one of the “80/20 calculations,” the jury acquitted all the defendants of the primary conspiracy charge. The trial judge, recognizing that the case was very unique in that WellCare provided outstanding healthcare, sentenced the defendants to probation and 1-3 years—well below the draconian sentences of over 15 years recommended by the prosecutors. The defendants appealed.

The Eleventh Circuit rendered a problematic decision that upheld the convictions. The court rejected the defendants’ defense articulated in an Eleventh Circuit decision, U.S. v. Whiteside, 285 F. 3d 1345 (11th Cir. 2002), that the government had not proven beyond a reasonable doubt that their interpretation of governing legal authority was not objectively unreasonable. In Whiteside, the Eleventh Circuit held that “where the truth or falsity of the statement centers on an interpretative question of law, the government bears the burden of proving beyond a reasonable doubt that the defendant’s statement is not true under any reasonable interpretation of the law.” Whiteside, 285 F. 3d at 1351.

Not finding any inconsistencies between WellCare’s calculations and the “80/20 Statute” or WellCare’s Medicaid contracts, the Clay court held instead that the defendants had not scrupulously followed AHCA’s informal “guidance” found in its letters and calculation templates. Despite trial testimony from a former high-ranking AHCA official who had advised WellCare that, under Florida law, regulated entities did not have to follow informal guidance that had not been subjected to formal rulemaking, the Eleventh Circuit accorded these informal communications the status of governing law. The court concluded that failing to follow the “strict” interpretation of these informal communications constituted a crime. In other words, administrative agencies could make binding law through informal “guidance” that failing to follow informal agency guidance while not expressly informing the agency of that course of action, could be a criminal violation.

The defendants’ certiorari petition focused on the Eleventh Circuit’s watered-down interpretation of mens rea from a “knowing” violation  to “deliberate indifference.”4 Although the Court denied review, one wonders how the Court would address deference to agency interpretations in connection with criminal law. Justices Thomas, Gorsuch, and Kavanaugh have expressed doubt that Chevron deference can be squared with a republican form of government based upon separation of powers in the administrative and civil context.5 It is likely, therefore, that at least three justices, and perhaps more given the criminal context, would be even less tolerant of administrative agencies “making” federal criminal law.

Providing defense attorneys with some ammunition, the Justice Department issued a memorandum in January 20186 that agency “[g]uidance documents cannot create binding requirements that do not already exist by statute or regulations. . . the Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules.” Although the memorandum was directed primarily at civil enforcement, it has equal (if not more) force with regard to criminal prosecutions, which result in the deprivation of liberty. The memorandum warns federal prosecutors that if “a party fails to comply with agency guidance expanding upon statutory or regulatory requirements [that] does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.” Under current DOJ policy, then, government prosecutors would be precluded—as they did in the Clay case—from arguing that informal agency letters could constitute binding authority on the regulated public.

Deference to informal agency guidance is yet another manifestation of the scourge of overcriminalization, which includes prosecutorial misconduct;7 relaxed standards for mens rea/criminal intent;8 ambiguous jury instructions9 and the use of negligence or conscious avoidance concepts to convict individuals.10

Chevron deference emanated from the belief that administrative agencies are simply following the law and carrying out the directions of elected official in a politically neutral way.  Those days are plainly over. Defense attorneys know all too well that the entrenched bureaucracy has its own agenda—often at odds with elected legislatures. The judiciary should not imbue unaccountable bureaucrats with the authority to create law—let alone criminal law. Citizens’ lives and freedom are at stake. Just ask the WellCare executives.


  1. See Rachel E. Barkow, Separation of Powers and the Criminal Law, 58 Stan. L. Rev. 989 (2006); Jeffrey B. Wall and Owen R. Wolfe, Why Chevron Deference for Hybrid Statutes Might Be a No-no, WLF Legal Opinion Letter, June 24, 2016.
  2. For more information on Clay, including links to the briefs in the case, see See also John Lauro, Supreme Court Cert Grant in Farha v. US Can Clarify Level of Criminal Intent Needed to Prove “Knowledge”, WLF Legal Pulse, Apr. 18, 2017; Matthew G. Kaiser, Clay v. United States: When Executives Receive Jail Time for Ordinary Business Decisions, WLF Legal Backgrounder, Mar. 13, 2015.
  3. The relevant language of the statute is as follows: “all contracts issued pursuant to this paragraph shall require 80 percent of the capitation paid to the managed care plan, including health maintenance organizations, to be expended for the provision of behavioral health care services. In the event the managed care plan expends less than 80 percent of the capitation . . . for the provision of behavioral health care services, the difference shall be returned to the agency. Fla. Stat. § 409.912(4)(b) (2006).”
  4. Lauro, supra note 2.
  5. Valerie C. Brannon and Jared P. Cole, Deference and its Discontents: Will the Supreme Court Overrule Chevron?, CONG. RESEARCH SERV. (Oct. 11, 2018).
  6. Mem. of the Associate Attorney General, Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases, at 1-2 (Jan. 25, 2018).
  7. Richard O. Faulk, Chevron Deference Conflicts with the Administrative Procedure Act, WLF Legal Pulse, Sept. 18, 2015.
  8. Lauro, supra note 2.
  9. Jeffrey Bossert Clark, Sr., Chevron Doctrine Is Opposed to Administrative Procedure Act’s Text and Legislative History, WLF Legal Opinion Letter, Aug. 26, 2016.
  10. Christine Hurt, Is ‘Conscious Avoidance’ the Next ‘Honest Services’?, The Conglomerate, July 13, 2010.
Blog Blog 2

Judge orders Dr. Paulus Released; Conviction Reversed

On March 5, 2020, the U.S. Court of Appeals for the Sixth Circuit vacated the conviction of Doctor Richard Paulus and released him from prison where he was serving a draconian five-year sentence because the federal prosecutor withheld key exculpatory evidence the jury should have considered  in deciding whether to convict him.  The court ruled this was a clear violation of the doctor’s due process rights. 

Doctor Paulus was convicted of medicare fraud because of a dispute with the government over whether his use of stents in patients with narrowing arteries was warranted in a few of his hundreds of patients. 

This case is a clear example of the government second-guessing decisions by professionals and executives over reasonable medical and business decisions where non-criminal remedies are more appropriate.  Similar unjust prosecutions were brought against CEO Todd Farha in the WellCare case and Howard Root of Vascular Solutions, both featured on the Cases section of this website.

Here is a news article describing the Paulus case in more detail.

Originally published at The Daily Independent by Mike James | March 6, 2020

Former Ashland cardiologist Richard Paulus was poised to be released from prison Friday following the reversal of his conviction for health care fraud.

U.S. District Court Judge David L. Bunning ordered his release earlier in the day, court records show.

An appeals court voided his conviction Thursday, court records show.

A three-judge panel of the U.S. Sixth Circuit Court of Appeals issued the ruling, according to court records.

The ruling sends the case back to a lower court for retrial.

Bunning’s order calls for Paulus to be released immediately but to remain on the same bond conditions as before he went to prison, with one exception.

Bunning removed a requirement for electronic monitoring, according to court records.

The appeals court judges ruled that government attorneys withheld evidence and so violated Paulus’ due process constitutional rights. They ruled that the government case was based largely on angiograms — images showing the degree of blockage in blood vessels — showing Paulus overstated the degree of blockage.

But evidence withheld from Paulus and his attorneys showed government experts based their findings on too few samples to make accurate conclusions, and that the angiograms they examined may have been “cherry-picked” by government attorneys, the panel said.

Prosecutors improperly withheld a key piece of evidence, a letter outlining an independent review by King’s Daughters Medical Center of Paulus’ work referred to as the “Shields Letter.”

The letter, from KDMC’s attorneys to government attorneys, was intended to protect the hospital at a time when it was under government scrutiny. The letter outlined a review of more than 1,000 of Paulus’ procedures, of which 75 were flagged as unnecessary.

That number came to about 7%, far lower than the amount government witnesses had testified to during the trial.

“This lower percentage was less consistent with systemic and purposeful fraud and more consistent with occasional mistakes or diagnostic differences of opinion between cardiologists,” judges wrote.

Paulus could have used the review and the letter in his defense, but Bunning “inexplicably” ordered KDMC and government attorneys not to disclose information about the review, judges wrote.

That order was issued in a hearing that included KDMC and the government but did not include Paulus or his legal team.

The judges found indications that not having the letter hampered Paulus’ defense enough to affect the verdict. The indications included a twice-deadlocked jury and Bunning’s reversal of the conviction in 2017.

Paulus’ legal troubles date back to 2015, when he was indicted on 27 counts related to accusations he had performed unnecessary cardiac stent procedures on hundreds of patients as part of a scheme to defraud Medicare, Medicaid and other insurers.

A federal court jury convicted him after a seven-week trial in 2016 of health care fraud and making false statements relating to health care matters.

He sought a new trial, but before the request was decided, Bunning reversed the conviction and acquitted Paulus.

The government appealed and an appeals court reinstated the conviction in 2018.

Bunning denied him a new trial and sentenced him to five years in May 2019.

Paulus reported to the Beckley Federal Correctional Institution in June 2019.

(606) 326-2652 |[email protected]

Blog Blog 2

Migratory Bird Treaty Act Enforcement Change Would Halt Overcriminalization

By Joe Luppino-Esposito
Director | Rule of Law Initiatives | Due Process Institute

The Department of the Interior and its Fish and Wildlife Service (Fish & Wildlife) have proposed to change their interpretation of a century-old treaty to reflect one of the most basic principles of criminal law. While it may seem obscure to most readers, I have followed the enforcement of the Migratory Bird Treaty Act (MBTA) for a while. This change is a welcomed step towards restoring fairness in certain federal prosecutions.

Historically, two elements are necessary for a person to be guilty of a crime:  actus reus—the “guilty act” —the commission of the crime itself; and mens rea—“guilty mind”—the criminal intent to commit the crime. In other words, a person should not be convicted for just thinking about doing something illegal, and no conviction should result if a person does something illegal by accident. Unfortunately, too many laws today lack mens rea, and are prosecuted as “strict liability” offenses.

The MBTA was signed in 1918 by the U.S. and Great Britain (on behalf of Canada) as a conservation program to protect migratory birds from those who would “take” them—that is, hunt or capture them—without a license. Unfortunately, the MBTA has occasionally been enforced in a way that an “incidental take” is considered a strict liability criminal offense under federal law. This, ahem, flies in the face of due process.

Currently, federal courts disagree whether an incidental take should result in a criminal conviction. On the one hand, consider the case against Brigham Oil and Gas in North Dakota. The federal government charged the company under the MBTA for criminally “taking” two migratory birds that were found dead near one of the company’s legally compliant reserve pits. The court explained why applying the law in the way the prosecutors sought would lead to unfair, and even absurd, results:

If the Migratory Bird Treaty Act concepts of “take” or “kill” were read to prohibit any conduct that proximately results in the death of a migratory bird, then many everyday activities become unlawful– and subject to criminal sanctions – when they cause the death of pigeons, starlings and other common birds. For example, ordinary land uses which may cause bird deaths include cutting brush and trees, and planting and harvesting crops.

In addition, many ordinary activities such as driving a vehicle, owning a building with windows, or owning a cat, inevitably cause migratory bird deaths.

On the other hand, the Colorado federal district court in United States v. Moon Lake Electric Association, Inc. said that criminalization was appropriate for activities that proximately caused the harm—in this case, the birds’ contact with the defendant’s power lines.

A legal memorandum of the Department of the Interior explains that the government cites conduct unrelated to the intentional harming of migratory birds—such as raising a barn that has owls nesting in it—and uses that conduct to prosecute individuals in a way that conflates actus reus and mens rea. Citing a district court opinion, the memo states that  “there appears to be no explicit basis in the language or the development of the MBTA for concluding that [the treaty] was intended to be applied to any and all human activity that causes even unintentional deaths of migratory birds.”

Fish & Wildlife has opened a comment period for a proposed rule that firmly establishes the concept of mens rea in the enforcement of this treaty. The rule would clarify that the MBTA was only meant to “criminalize actions that are specifically directed at migratory birds, their nests, or their eggs.”

I joined the governor of Alaska, criminal law reform advocates, business owners and others in commending this rule change:

“The proposed rule reinvigorates a basic tenet of criminal law: an individual’s criminal intent, or mens rea. The way the Migratory Bird Treaty Act has been enforced has too often ignored this fundamental prerequisite of criminal law. Treating accidental harm to migratory birds as a violation of the treaty unfairly criminalizes unintentional conduct. Protecting the environment is an important function of the federal government, but its enforcement regime should only use criminal sanctions against individuals and institutions who are purposefully inflicting harm on migratory birds. The proposed change aligns with the rule of law and adds credibility to the Department’s enforcement actions.”

Mens rea is a foundation of the just enforcement of criminal law—a principle that the Due Process Institute overwhelmingly supports. Restoring its primacy in the federal criminal justice system, even in a 102-year-old treaty, can spare innocent people the hardship of mounting a criminal defense. Importantly, supporting this rule clarification will do nothing to undermine the ability of the government to continue to enforce laws that protect migratory birds from those who intend to harm them. It merely clarifies that accidental harm to birds caused by otherwise lawful conduct should not serve as the basis for a criminal enforcement action.

For those interested in submitting a comment to the proposed rule, see the dedicated page at the Fish & Wildlife website here (comments due by March 19, 2020).

Blog Blog 2

The Impact of Overcriminalization in the United States

The federal criminal code has been part of United States law since the First U.S. Congress. The country’s first criminal code featured laws that addressed a mere 30 crimes, in part because the Framers of the Constitution believed that a large criminal code would compromise the United States’ hard-won freedom and the liberties of its people.

In the nearly 250 years since then, Congress has defied the wisdom of the Framers and broadened the criminal code. It now includes over 300,000 regulations and an additional 5,000 federal statutes that can lead to criminal penalties of varying degrees. Where the federal criminal code once focused on serious, immoral acts universally considered to be wrong—murder, piracy, treason, and so on—the federal criminal code of today covers an almost boundless spectrum of potentially criminal conduct. This has led to overcriminalization: the overreliance on criminal law to address myriad social problems and punish people—often severely—for simple mistakes. Overcriminalization has created a countless number of rules such that many Americans may be considered criminals, even if they don’t know it or intend it.

Overcriminalization has led to many Americans facing penalties that far outweigh the gravity of the crime they committed.

Overcriminalization also manifests when prosecutors use the criminal code and prosecution to address regulatory disagreements or infractions. There are numerous examples of such cases, and we highlight two below.

Todd Farha and the Wellcare case, US v. Clay: WellCare was a health care company that provided behavioral health services to Medicaid patients in Florida. The company was faced with interpreting a new state statute that required that 80 percent of funds were required to be spent for the provision of care, establishing a so-called 80/20 rule.  However, the state did not define what was included in the provision of care and the state agency never promulgated rules despite the legal requirement to do so.

Like many other healthcare providers in Florida, WellCare used a subsidiary,  Harmony, to deliver behavioral services services to patients. Per the 80/20 requirement, WellCare reported payments to its subsidiary, a practice that was common among providers in similar circumstances. Harmony was praised by state auditors for “exceeding requirements” in its provision of care.  

The company and CEO Todd Farha, relied on the guidance of in-house and outside counsel to comply with 80/20. The executives who ran WellCare and the counsel they consulted reasonably believed they were complying with the law and moved forward with their business.

Years later, based on a whistleblower seeking a large payout, the FBI raided the company and initiated a federal case. The executives were charged with overstating company expenses through their approach to the 80/20 law. Even though the state agency chose not to clarify the law, and the agency never promulgated rules to guide businesses, the executives were convicted of health care fraud and related offenses in United States v. Clay. The government never suggested that the WellCare rates were out of line with market pricing for their services. Moreover, there were no claims that Harmony dispensed substandard care. Recall from above that auditors had praised Harmony for its standard of care.

What may have been a regulatory conflict to be worked out through contractual dispute mechanisms, this case was instead prosecuted as a federal criminal case, sending executives to jail for reasonable business judgements made in absence of black letter statutory or regulatory guidance.

This case demonstrates the troubling ramifications of overcriminalization by highlighting the government’s ability to punish people for their interpretations of complex, vague laws—even when their interpretations of these laws are reasonable and there is no malicious intent. 

Howard Root and Vascular Solutions: Vascular Solutions was medical device company that made products that have saved countless lives. In 2011, a purported whistleblower told the United States Department of Justice that Vascular Solutions was fraudulently marketing one of their products: the Vari-Lase Short Kit. The individual was an ex-employee who went to work for a competitor and subsequently alleged that Vascular Solutions was promoting the FDA-approved product for what is known as an “off-label use.” An off-label use is an alternative use for a device or drug that is FDA-approved to treat one ailment, but may help treat another problem. While doctors may prescribe drugs and employ devices for these off-label uses—indeed, it is common practice—manufacturers are legally prohibited from promoting those applications of their products.

In 2009, Vascular Solutions CEO Howard Root sought legal counsel and launched an investigation into the allegations of the future would-be “whistleblower” in the aftermath of the ex-employee’s separation from the company. That investigation found no evidence that the company was violating the law.

Nevertheless, federal prosecutors launched a criminal case against Vascular Solutions. The Vari-Lase Short Kit represented less than one percent of the company’s sales —and more importantly, prosecutors never alleged that the product had harmed a patient, nor was there any evidence to that effect.

Root had the financial wherewithal to fight what he believed to be baseless allegations. Most federal defendants are not so fortunate. All told, Root paid $25 million in legal fees for the five years it took to prepare and defend his case before a jury. After one day of deliberation, the jury acquitted Root and his company of all wrongdoing.

These are just two cases in the federal criminal system in which vague laws and zealous prosecutions can upend the lives of executives, managers, and employees who operate their companies in good faith. If the government suspects a regulatory violation—particularly when there are no perceived victims, as in the two cases above—the criminal law and the threat of imprisonment should be the last means used to ensure compliance, not the first. Certainly, major frauds and other egregious wrongdoing should be investigated and prosecuted. But differences of opinion about vague statutes and unsubstantiated accusations of technical violations of law should not lead to $25 million legal bills or imprisonment.

The Framers’ generation knew that a vast criminal code posed a threat to American freedom. The further the law strays from clear cases of right and wrong, the more easily innocent people may be prosecuted for non-wrongful conduct. As a nation, our laws must comport with the principles of fairness and justice. Rolling back overcriminalization is an essential step toward those principles.