Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 1 of 23 PageID #: 391
`
`
`
`
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
`
`
`UNITED STATES OF AMERICA
`
`Plaintiff,
`
`v.
`
`WALMART INC. AND WAL-MART
`STORES EAST, LP,
`
`Defendants.
`
`
`
`
`
`
`
`
`
`
`C.A. No. 20-1744-CFC
`
`
`
`BRIEF OF AMICI CURIAE OF THE CHAMBER OF COMMERCE OF THE
`UNITED STATES OF AMERICA, THE NATIONAL RETAIL
`FEDERATION, AND THE WASHINGTON LEGAL FOUNDATION IN
`SUPPORT OF DEFENDANTS’ MOTION TO DISMISS THE COMPLAINT
`
`
`Daryl Joseffer
`Christopher Kelly (DE Bar No. 2754)
`Michael B. Schon
`Megan L. Brown
`Stephen J. Obermeier
`Wesley E. Weeks
`
`U.S. CHAMBER LITIGATION CENTER
`1615 H Street, NW
`Washington, DC 20062
`(202) 463-5337
`
`Stephanie A. Martz
`NATIONAL RETAIL FEDERATION
`1101 New York Avenue, NW
`Suite 1200
`Washington, DC 20005
`
`Cory L. Andrews
`John M. Masslon II
`
`WASHINGTON LEGAL FOUNDATION
`2009 Massachusetts Avenue, NW
`Washington, DC 20036
`(202) 588-0302
`
`WILEY REIN LLP
`1776 K Street, NW
`Washington, DC 20006
`(202) 719-7000
`ckelly@wiley.law
`
`Counsel for Amici Curiae
`
`
`
`
`
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 2 of 23 PageID #: 392
`
`
`
`
`
`I.
`
`TABLE OF CONTENTS
`
`Page
`
`INTERESTS OF AMICI CURIAE .......................................................... 1
`
`II.
`
`SUMMARY OF THE ARGUMENT ...................................................... 2
`
`III. ARGUMENT ...................................................................................... 3
`
`A. DOJ’s “Collective Knowledge” Theory Runs Counter to Traditional
`Principles of Agency and Scienter. ................................................ 3
`
`1.
`
`2.
`
`3.
`
`Knowledge cannot be imputed from principal to agent. ........... 5
`
`Even if knowledge could be imputed to a company’s agent,
`scienter must be shown in a specific employee and cannot be
`imputed under any circumstances. ........................................ 6
`
`These core principles have been applied in numerous contexts
`to reject a “collective” approach to scienter. .......................... 7
`
`B. DOJ’s Collective Scienter Theory Threatens to Harm American
`Business and the Public ............................................................... 9
`
`
`
`
`
`
`
`
`
`
`
`i
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 3 of 23 PageID #: 393
`
`
`
`Cases
`
`TABLE OF AUTHORITIES
`
` Page(s)
`
`In re Alpharma Inc. Sec. Litig.,
`372 F.3d 137 (3d Cir. 2004).................................................................4,5, 7
`
`In re Apple Computs., Inc.,
`127 F. App’x 296 (9th Cir. 2005) ............................................................... 8
`
`In re Cerner Corp. Sec. Litig.,
`425 F.3d 1079 (8th Cir. 2005) .................................................................. 13
`
`Chaney v. Dreyfus Serv. Corp.,
`595 F.3d 219 (5th Cir. 2010)...................................................................... 6
`
`Ezra Charitable Tr. v. Tyco Int’l Ltd.,
`466 F.3d 1 (1st Cir. 2006).......................................................................... 8
`
`FCC v. Fox Television Stations, Inc.,
`567 U.S. 239 (2012) ............................................................................... 15
`
`First Equity Corp. v. Standard & Poor’s Corp.,
`690 F. Supp. 256 (S.D.N.Y. 1988) ........................................................ 5, 13
`
`Free Enter. Fund v. Pub. Co. Acct. Oversight Bd.,
`561 U.S. 477 (2010) .......................................................................... 10, 11
`
`Garfield v. NDC Health Corp.,
`466 F.3d 1255 (11th Cir. 2006) .................................................................. 8
`
`U.S. ex rel. Harrison v. Westinghouse Savannah River Co.,
`352 F.3d 908 (4th Cir. 2003)...................................................................... 9
`
`Higgins v. Shenango Pottery Co.,
`256 F.2d 504 (3d Cir. 1958)....................................................................... 5
`
`Kushner v. Beverly Enters., Inc.,
`317 F.3d 820 (8th Cir. 2003)...................................................................... 8
`
`Lilley v. Charren,
`17 F. App’x 603 (9th Cir. 2001) ............................................................... 13
`
`ii
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 4 of 23 PageID #: 394
`
`
`
`Mizzaro v. Home Depot, Inc.,
`544 F.3d 1230 (11th Cir. 2008) .................................................................. 6
`
`Nat’l Mining Ass’n v. McCarthy,
`758 F.3d 243 (D.C. Cir. 2014).................................................................. 16
`
`New York Times Co. v. Sullivan,
`376 U.S. 254 (1964) ................................................................................. 9
`
`Nolte v. Capital One Fin. Corp.,
`390 F.3d 311 (4th Cir. 2004)................................................................ 8, 14
`
`PDR Network, LLC v. Carlton & Harris Chiropractic, Inc.,
`139 S. Ct. 2051 (2019) ....................................................................... 11, 12
`
`In re Radian Sec. Litig.,
`612 F. Supp. 2d 594 (E.D. Pa. 2009) ........................................................... 4
`
`Saba v. Compagnie Nationale Air France,
`78 F.3d 664 (D.C. Cir. 1996) ..................................................................... 7
`
`Southland Sec. Corp. v. Inspire Ins. Sols., Inc.,
`365 F.3d 353 (5th Cir. 2004)...................................................................... 8
`
`Staub v. Proctor Hosp.,
` 562 U.S. 411 (2011) ................................................................................ 6
`
`Suez Equity Inv., L.P. v. Toronto-Dominion Bank,
`250 F.3d 87 (2d Cir. 2001) ........................................................................ 8
`
`United States v. Harra,
`985 F.3d 196 (3d Cir. 2021)..................................................................... 15
`
`United States v. Philip Morris USA Inc.,
`566 F.3d 1095 (D.C. Cir. 2009) .................................................................. 6
`
`United States v. Sci. Applications Int’l Corp.,
`626 F.3d 1257 (D.C. Cir. 2010) ......................................................... 6, 8, 14
`
`Woodmont, Inc. v. Daniels,
`274 F.2d 132 (10th Cir. 1959) .................................................................... 6
`
`iii
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 5 of 23 PageID #: 395
`
`
`
`Statutes
`
`21 U.S.C. § 821 .......................................................................................... 15
`
`Other Authorities
`
`21 C.F.R. § 1301.74(b) ................................................................................ 15
`
`28 C.F.R. § 0.100(b).................................................................................... 15
`
`Restatement (Second) of Agency § 275 (Am. L. Inst. 1958) ........................ 5, 6, 7
`
`
`
`iv
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 6 of 23 PageID #: 396
`
`
`
`I.
`
`INTERESTS OF AMICI CURIAE1
`
`The Chamber of Commerce of the United States of America (“Chamber”) is
`
`the world’s largest business federation. The Chamber represents 300,000 direct
`
`members and indirectly represents an underlying membership of more than three
`
`million businesses and professional organizations of every size, in every industry
`
`sector, and from every region of the country. An important function of the Chamber
`
`is to represent the interests of its members in matters before Congress, the Executive
`
`Branch, and the courts. To that end, the Chamber regularly files amicus briefs in
`
`cases that raise issues of concern to the Nation’s business community.
`
`The National Retail Federation (“NRF”) is the world’s largest retail trade
`
`association, representing diverse retailers from the United States and more than 45
`
`countries. Retail is the nation’s largest private-sector employer, contributing $3.9
`
`trillion to annual GDP and supporting one in four U.S. jobs. For over a century,
`
`NRF has been a voice for every retailer and every retail job, communicating the
`
`impact retail has on local communities and global economies. NRF submits amicus
`
`curiae briefs in cases raising significant legal issues for the retail community.
`
`Washington Legal Foundation (“WLF”) is a nonprofit, public-interest law
`
`firm and policy center with supporters nationwide. WLF promotes free enterprise,
`
`
`1 Amici curiae state that no party’s counsel authored this brief in whole or in part
`and no one other than amici curiae, their members, or their counsel contributed
`money intended to fund preparing or submitting this brief.
`
`1
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 7 of 23 PageID #: 397
`
`
`
`individual rights, limited government, and the rule of law. It often appears as amicus
`
`curiae to oppose penalizing individuals and businesses who lack sufficient
`
`knowledge of wrongdoing. And WLF’s Legal Studies division, the publishing arm
`
`of WLF, regularly publishes scholarly articles on the importance of scienter.
`
`Courts have generally rejected “collective knowledge” theories of scienter,
`
`under which pieces of information known to different employees are combined to
`
`impute scienter—a subjective mental state. Amici have a strong interest in defending
`
`this traditional rule because the proper standard for corporate scienter is critical
`
`under myriad statutes and regulatory programs.
`
`II.
`
`SUMMARY OF THE ARGUMENT
`
`This case seeks to hold a company responsible for the acts of its employees in
`
`filling allegedly improper prescriptions without any allegation that the employees
`
`who filled the prescription possessed knowledge of irregularities in the prescriptions.
`
`Under the “collective scienter” approach that the Department of Justice (“DOJ”)
`
`seeks to apply, a corporation can be found to “knowingly” violate a regulation if one
`
`employee, acting in good faith, makes a report of information to a compliance
`
`department, and another employee—however distant from the first—fills a
`
`prescription without knowing the reported information. This transparent attempt to
`
`sidestep DOJ’s burden of showing that someone in a company “knowingly” violated
`
`the law is improper.
`
`2
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 8 of 23 PageID #: 398
`
`
`
`At its core, DOJ’s collective approach to scienter is inconsistent with common
`
`law principles regarding agency and intent. While it is sometimes permissible to
`
`impute an agent’s knowledge to the principal, no principle of law allows the reverse.
`
`Nor is it ever permissible to impute intent (as opposed to knowledge).
`
`DOJ’s approach is not only wrong; it will have deeply troubling, far-reaching
`
`effects. It runs the risk of dampening incentives for companies to invest in robust
`
`compliance programs. If DOJ uses a company’s own findings as a repository of
`
`information that it then imputes to all employees as if they are part of an
`
`interconnected “hive” mind, it will effectively transform laws requiring scienter into
`
`strict liability regimes. This Court should reject DOJ’s “collective scienter”
`
`approach and enforce the traditional requirement that DOJ must allege that a
`
`particular person knowingly violated the law.
`
`III. ARGUMENT
`
`A. DOJ’s “Collective Knowledge” Theory Runs Counter to
`Traditional Principles of Agency and Scienter.
`
`While this appears to be the first case in which DOJ has tested its “collective
`
`knowledge” theory under the Controlled Substances Act (“CSA”), the Government
`
`is not writing on a blank slate. Courts, including the Third Circuit, have rejected this
`
`approach in a variety of contexts. As Walmart notes in its brief, “in seeking to
`
`establish corporate liability, the Government cannot rely on the mental states of
`
`disparate employees who played no role in the transaction or conduct in question.”
`
`3
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 9 of 23 PageID #: 399
`
`
`
`Op. Br. in Sup. of Mot. to Dismiss (ECF No. 27) at 7 (summarizing case law on
`
`corporate scienter).
`
`Consistent with these principles, the Third Circuit has rejected attempts by
`
`plaintiffs to use collective knowledge allegations to meet scienter requirements in
`
`the securities context. In a complaint with parallels to DOJ’s filing in this case, the
`
`plaintiffs in the Alpharma Securities Litigation alleged, in part, that “Alpharma’s
`
`New Jersey headquarters was alerted to the violation of the company’s revenue
`
`recognition policy by employees” and therefore the scienter requirement was met
`
`because the individual defendants “had access to this information.” In re Alpharma
`
`Inc. Sec. Litig., 372 F.3d 137, 150–51 (3d Cir. 2004).2 The Court rejected the attempt
`
`to impute knowledge and intent to defendant executives, based on reports by an
`
`employee of suspected irregularities; “[T]he mere fact that the information was sent
`
`to Alpharma’s headquarters and therefore was available for review by the individual
`
`defendants is insufficient” to “‘giv[e] rise to a strong inference that [defendants]
`
`acted with the required state of mind.’” Id. (noting that the complaint did not allege
`
`“that the allegations of improper accounting were ever passed up the chain of
`
`command” to defendants).
`
`
`2In re Alpharma Securities Litigation has since been abrogated because then-Judge
`Alito and his colleagues on the Third Circuit applied a too lenient standard to
`plaintiffs’ allegations under the PSLRA. See In re Radian Sec. Litig., 612 F. Supp.
`2d 594, 607 (E.D. Pa. 2009).
`
`4
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 10 of 23 PageID #: 400
`
`
`
`Though In re Alpharma Securities Litigation involved the heightened
`
`pleading standard applicable to securities fraud, the logic of the decision does not
`
`turn on that heightened standard. The Third Circuit described the allegation that
`
`information would have been known to defendants as “wholly conclusory” and
`
`“tenuous,” id., which would not satisfy the pleading standard under Rule 12(b)(6).
`
`Moreover, as explained below, the Third Circuit’s approach to collective knowledge
`
`in In re Alpharma Securities Litigation is consistent with traditional principles of
`
`agency law and scienter that apply in a wide variety of legal contexts—not just
`
`securities law. These principles apply here.
`
`1. Knowledge cannot be imputed from principal to agent.
`
`A corporation acts only through its agents. Thus, a “corporation can be held
`
`to have a particular state of mind only when that state of mind is possessed by a
`
`single individual.” First Equity Corp. v. Standard & Poor’s Corp., 690 F. Supp.
`
`256, 260 (S.D.N.Y. 1988) (Mukasey, J.). And in certain defined circumstances,
`
`under principles of agency law, an agent’s knowledge can be imputed to the agent’s
`
`principal. See Higgins v. Shenango Pottery Co., 256 F.2d 504, 509 (3d Cir. 1958);
`
`Restatement (Second) of Agency § 275 (1958).
`
`But this is not what DOJ alleges. The complaint alleges that pharmacists
`
`employed by Walmart informed Walmart’s compliance department of suspicious
`
`activity. Compl. (ECF No. 1) ¶ 142. Turning the traditional agency paradigm on its
`
`5
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 11 of 23 PageID #: 401
`
`
`
`head, DOJ seeks to take the information reported by one agent to the compliance
`
`department and then impute that report from the principal to yet another agent.
`
`That is a bridge too far—no principle of law allows a court to impute knowledge
`
`from an individual to a company and then back to other individual employees. And
`
`for good reason. There is no mosaic theory of corporate scienter.
`
`2.
`
`Even if knowledge could be imputed to a company’s agent,
`scienter must be shown in a specific employee and cannot be
`imputed under any circumstances.
`
`While an agent’s knowledge may sometimes be imputed to the principal,
`
`courts hold that scienter—the employee’s subjective state of mind—cannot be
`
`imputed.3 As the Supreme Court noted in Staub v. Proctor Hospital, “[t]he
`
`Restatement of Agency suggests that the malicious mental state of one agent cannot
`
`generally be combined with the harmful action of another agent to hold the principal
`
`liable.” 562 U.S. 411, 418 (2011); see also Restatement (Second) of Agency § 275,
`
`
`3 See, e.g., Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 241 (5th Cir. 2010) (“as a
`general rule, where ‘an essentially subjective state of mind is an element of a cause
`of action’ we have declined to allow this element to be met by a corporation’s
`collective knowledge, instead requiring that the state of mind ‘actually exist’ in at
`least one individual and not be imputed on the basis of general principles of
`agency.”); United States v. Philip Morris USA Inc., 566 F.3d 1095, 1122 (D.C. Cir.
`2009) (distinguishing “collective knowledge” from “collective intent” and
`questioning the latter’s “legal soundness”); United States v. Sci. Applications Int’l
`Corp., 626 F.3d 2357, 1274 (D.C. Cir. 2010) (“collective knowledge provides an
`inappropriate basis for proof of scienter”) (quotation omitted); Mizzaro v. Home
`Depot, Inc., 544 F.3d 1230, 1254 (11th Cir. 2008) (looking to mental states of
`individual officials); Woodmont, Inc. v. Daniels, 274 F.2d 132, 137 (10th Cir. 1959)
`(rejecting “composite knowledge” where state of mind was “essential”).
`
`6
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 12 of 23 PageID #: 402
`
`
`
`cmt.b (1958) (“Knowledge distinguished from reason to know. If knowledge, as
`
`distinguished from reason to know, is the important element in a transaction, and the
`
`agent who has the knowledge is not one acting for the principal in the transaction,
`
`the principal is not affected by the fact that the agent has the knowledge.”).4
`
`Thus, even cases that allow for “corporate knowledge of certain facts [to be]
`
`accumulated from the knowledge of various individuals” acknowledge that
`
`“proscribed intent (willfulness) depend[s] on the wrongful intent of specific
`
`employees.” Saba v. Compagnie Nationale Air France, 78 F.3d 664, 670 n.6 (D.C.
`
`Cir. 1996) (emphasis added). This Court should not permit DOJ to proceed on a
`
`theory that sidesteps the requirement that it properly allege and prove scienter by
`
`making general allegations about the information known to a corporate compliance
`
`department rather than specific employees who filled the allegedly irregular
`
`prescriptions.
`
`3.
`
`These core principles have been applied in numerous
`contexts to reject a “collective” approach to scienter.
`
`The burden to establish scienter in a particular person has been vindicated
`
`across many statutes and regulatory programs. Like the Third Circuit’s decision in
`
`In re Alpharma Securities Litigation, courts have rejected imputed scienter in the
`
`
`4 “In many situations, in order for one to be responsible, it is necessary that the act
`should be done with knowledge in a subjective sense, and it is not sufficient that one
`has means of information.” Restatement (Second) of Agency § 275, cmt.b.
`
`7
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 13 of 23 PageID #: 403
`
`
`
`context of securities and corporate fraud. As the Ninth Circuit explained, a
`
`“corporation is deemed to have the requisite scienter for fraud only if the individual
`
`corporate officer making the statement has the requisite level of scienter at the time
`
`that he or she makes the statement.” In re Apple Computers, Inc., 127 F. App’x 296,
`
`303 (9th Cir. 2005) (citing Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424,
`
`1435-36 (9th Cir. 1995)). Thus, to survive a motion to dismiss, securities plaintiffs
`
`must allege that a specific individual acted with knowledge and bad intent.5
`
`Similarly, “under the [False Claims Act], ‘collective knowledge’ provides an
`
`inappropriate basis for proof of scienter.” United States v. Sci. Applications Int’l
`
`Corp., 626 F.3d 1257, 1274 (D.C. Cir. 2010). Thus, a False Claims Act plaintiff
`
`may not “prove scienter by piecing together scraps of ‘innocent’ knowledge held by
`
`various corporate officials, even if those officials never had contact with each other
`
`or knew what others were doing in connection with a claim seeking government
`
`
`5 See, e.g., Suez Equity Invest., L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 100
`(2d Cir. 2001) (dismissing claims where “[n]othing in the complaint suggests that [a
`named officer] or anyone else at [the parent corporation] knew the contents of the
`[report].”); Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 366-
`67 (5th Cir. 2004) (“It is appropriate to look to the state of mind of the individual
`corporate official or officials who make or issue the statement.”); Kushner v. Beverly
`Enterprise, Inc., 317 F.3d 820, 827–30 (8th Cir. 2003); Garfield v. NDC Health
`Corp., 466 F.3d 1255, 1263-67 (11th Cir. 2006); Ezra Charitable Trust v. Tyco Int’l
`Ltd., 466 F.3d 1, 5-11 (1st Cir. 2006); Nolte v. Capital One Fin. Corp., 390 F.3d
`311, 313–16 (4th Cir. 2004).
`
`8
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 14 of 23 PageID #: 404
`
`
`
`funds.” U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908,
`
`918, n.9 (4th Cir. 2003).
`
`Even in the different context of defamation, plaintiffs must show the
`
`publisher’s knowledge and scienter (there, actual malice) and cannot just aggregate
`
`knowledge and intent. For example, the “mere presence of the stories in the files [of
`
`the New York Times] does not, of course, establish that the Times ‘knew’ the
`
`advertisement was false, since the state of mind required for actual malice would
`
`have to be brought home to the persons in the Times’ organization having
`
`responsibility for the publication of the advertisement.” New York Times Co. v.
`
`Sullivan, 376 U.S. 254, 287 (1964).
`
`These principles governing agency and scienter are universal and apply here.
`
`The Court should reject DOJ’s novel collective knowledge theory.
`
`B. DOJ’s Collective Scienter Theory Threatens to Harm American
`Business and the Public
`
`DOJ’s novel approach seeks to sidestep the scienter requirement by
`
`aggregating the knowledge and intent of all company employees. However
`
`righteous its goals may seem in a particular case, this theory risks causing serious
`
`harm to American business and to the public.
`
`First, it will undermine the use of compliance programs that are of critical
`
`importance to employees, vendors, and customers. It is unquestionably desirable for
`
`companies to comply with their obligations under the law. It may be desirable for
`
`9
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 15 of 23 PageID #: 405
`
`
`
`companies to go beyond legal obligations; hence the trend toward proactive
`
`compliance and some companies’ decisions to implement varied Environmental,
`
`Social, and Governance (ESG) programs. Compliance can be particularly complex
`
`for large multinationals that want to oversee and respond to the activities of hundreds
`
`of thousands of employees; they may deploy innovative tools, flexible databases,
`
`and machine learning to identify trends, problem areas, and new challenges.6
`
`Information aggregation across large organizations can be a huge benefit, but DOJ’s
`
`collective knowledge and scienter approach would turn those programs into treasure
`
`troves of evidence, observations, or data that could be used against the organization.
`
`DOJ’s approach may reduce incentives to invest in compliance and
`
`information gathering efforts. By turning organizations’ robust compliance
`
`programs against them, DOJ punishes companies who acted without any intent to
`
`violate the law instead of promoting creative and aggressive compliance programs.
`
`In the modern administrative state, voluntary compliance is an important
`
`objective. The “growth of the Executive Branch, which now wields vast power and
`
`touches almost every aspect of daily life,” Free Enter. Fund v. Pub. Co. Acct.
`
`
`6 See, e.g., Price Waterhouse Coopers, Machine learning: what every risk and
`compliance professional needs to know, https://www.pwc.com/us/en/services/
`consulting/cybersecurity-privacy-forensics/library/machine-learning-risk-
`compliance.html (last visited Mar. 3, 2021); David Ackerman, AI Compliance
`Oversight is Here… and So Are Next-Gen Compliance Officers (November 24,
`https://www.corporatecomplianceinsights.com/ai-compliance-oversight-
`2020),
`next-gen-compliance-officers/ (last visited Mar. 3, 2021).
`
`10
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 16 of 23 PageID #: 406
`
`
`
`Oversight Bd., 561 U.S. 477, 499 (2010), has led to thousands of regulations from
`
`myriad agencies. Mandates range from ensuring food safety and regulating battery
`
`transportation, to preventing money laundering and imposing export controls.
`
`Regulations touch employment, scientific research, securities offerings, marketing,
`
`accounting, supply chains, and more. Many statutes and regulations allow agencies
`
`to seek substantial civil and criminal penalties. It has been estimated that “nearly
`
`5,000 federal statutes and more than 300,000 regulations contain potential criminal
`
`penalties,”7 though it is impossible to provide a full accounting.
`
`Given the high stakes of the enforcement environment and the complexities
`
`of the various enforcement regimes, companies voluntarily make substantial
`
`investments to build robust compliance programs just to keep pace. See Clyde
`
`Wayne Crews, Jr., CEI, Ten Thousand Commandments at 3 (2018) (stating that
`
`some estimate annual regulatory compliance costs at nearly $2 trillion).8 Indeed,
`
`Federal Register public notices “normally exceed 24,000 annually, including
`
`uncounted guidance documents and other proclamations with potential regulatory
`
`effect,” id. at 5, making the tracking of obligations is a herculean task. See PDR
`
`
`7
`Explains: Overcriminalization, Heritage
`Heritage
`Foundation,
`https://www.heritage.org/crime-and-justice/heritage-explains/overcriminalization
`(last visited March 3, 2021).
`8 Available at https://cei.org/sites/default/files/Ten_Thousand_Commandments_
`2018.pdf.
`
`
`11
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 17 of 23 PageID #: 407
`
`
`
`Network, LLC v. Carlton & Harris Chiropractic, Inc., 139 S. Ct. 2051, 2061–62
`
`(2019) (Kavanaugh, J., concurring) (“[I]t ‘is totally unrealistic to assume that more
`
`than a fraction of the persons and entities affected by a regulation—especially small
`
`contractors scattered across
`
`the country—would have knowledge of
`
`its
`
`promulgation or familiarity with or access to the Federal Register.’”) (quoting
`
`Adamo Wrecking Co. v. United States, 434 U.S. 275, 290 (1978) (Powell, J.,
`
`concurring)). And importantly, most regulators offer credit to companies for such
`
`voluntary programs. See U.S. Department of Justice, Criminal Division, Evaluation
`
`of Corporate Compliance Programs at 6, 15 (June 2020) (stating that credit can be
`
`awarded for proactive compliance programs).9
`
`But proactive compliance programs may be frustrated if DOJ can turn them
`
`into weapons against companies that voluntarily establish them. Under DOJ’s
`
`approach, bits of knowledge from across a large organization that may be reported
`
`to a corporate compliance department can be stitched together with perfect hindsight
`
`to try to show corporate knowledge and intent. Here, DOJ’s theory is that a
`
`prescription can be “knowingly” filled in violation of the CSA without a single
`
`individual behaving dishonestly, so long as another employee flagged a concern to
`
`corporate compliance. This runs contrary to the traditional rule that a “corporation
`
`
`9 Available at https://www.justice.gov/criminal-fraud/page/file/937501/download.
`
`12
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 18 of 23 PageID #: 408
`
`
`
`can be held to have a particular state of mind only when that state of mind is
`
`possessed by a single individual.” First Equity Corp., 690 F. Supp. at 260.
`
`DOJ’s theory thus exposes companies to staggering liability—even where no
`
`one, identifiable employee knowingly engaged in any wrongdoing. This massive
`
`shift in liability risk all but destroys the incentive to invest in proactive compliance
`
`programs. If compliance department logs of reported information trigger strict
`
`liability for regulatory violations related to the reported information, encouraging
`
`broad reporting and investing in proactive compliance will become tantamount to
`
`creating potential evidence against the company. The court should not depart from
`
`the traditional rule rejecting collective scienter.
`
`Second, the Government’s approach inappropriately invites litigants to treat
`
`each employee’s individual opinions and judgment calls as determinative of an
`
`entire company’s knowledge and intent. As courts have recognized, however, there
`
`are often differences of opinion in a large company. As the Ninth Circuit explained
`
`in rejecting corporate scienter based on the doubts of “lower level employees,” “in
`
`any large corporation there will be differences of opinion expressed.” Lilley v.
`
`Charren, 17 F. App’x 603, 607 (9th Cir. 2001). The Eighth Circuit likewise rejected
`
`the theory that sales forecasts were fraudulent because a single regional sales
`
`manager had stated that the forecasts were “unattainable.” In re Cerner Corp. Sec.
`
`Litig., 425 F.3d 1079, 1085-86 (8th Cir. 2005). And the Fourth Circuit likewise
`
`13
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 19 of 23 PageID #: 409
`
`
`
`refused to entertain liability based on an allegation that corporate management did
`
`not believe in the adequacy of financial reserves because one executive had
`
`expressed doubts. Nolte, 390 F.3d at 315.
`
`In any large company, the collective scienter theory would “allow[] ‘a plaintiff
`
`to prove scienter by piecing together scraps of ‘innocent’ knowledge held by various
`
`corporate officials,’” as well as “thousands of ordinary employees.” Sci.
`
`Applications Int’l Corp., 626 F.3d at 1273–76. Allowing DOJ to proceed on its
`
`“collective” approach to scienter would transform internal differences of opinion
`
`into a basis for liability where the company diverts from the most cautious or
`
`pessimistic employee’s opinion—even where the opinion is unjustified.
`
`The implications of DOJ’s theory would be profound, from securities
`
`disclosures to environmental compliance to ethics to government contracting, and
`
`more. Whatever an employee thinks is problematic could be transformed into the
`
`company’s position, knowledge, and scienter. This not only interferes with a
`
`company’s supervision and control of its workers; it risks harming the public. Here,
`
`for example, if an employee reported so-called “red flags” about a prescriber, but a
`
`more experienced pharmacist determined that the prescription was legitimate, it
`
`appears not to matter. Under DOJ’s approach, the result could be that a patient’s
`
`legitimate prescription would go unfilled.
`
`14
`
`

`

`Case 1:20-cv-01744-CFC Document 41 Filed 03/04/21 Page 20 of 23 PageID #: 410
`
`
`
`Finally, DOJ’s novel approach to liability based on information reported to
`
`corporate compliance programs should be imposed, if at all, through appropriate
`
`regulations that let the agency and stakeholders weigh costs and benefits in particular
`
`settings. For example, the Drug Enforcement Administration (“DEA”) administers
`
`the CSA and has been granted rulemaking authority. See 21 U.S.C. § 821 (granting
`
`the Attorney General rulemaking authority under the CSA); 28 C.F.R. § 0.100(b)
`
`(delegating the Attorney General’s authority to the Administrator of DEA). Thus, if
`
`DEA wishes to require registered entities to establish compliance departments to
`
`track suspicious prescriptions and then alert all pharmacists within the company to
`
`the reported information, it could try to impose that requirement as an exercise of its
`
`regulatory power. DEA has created a compliance tracking and reporting
`
`requirement for the distribution of controlled substances, but not dispensing them. 10
`
`See 21 C.F.R. § 1301.74(b) (distributors must maintain “system” to identify
`
`“suspicious orders” and “inform” DEA).
`
`It is black letter law that “an agency must have clearly communicated its
`
`policies before a private party may be sanctioned . . . for violating them.” United
`
`States v. Harra, 985 F.3d 196, 213 (3d Cir. 2021); FCC v. Fox Television Stations,
`
`
`10 The CSA distinguishes betwee