Client Alert

United States Supreme Court Denies Certiorari in Controversial Foreign Corrupt Practices Act Case: Expansive Enforcement of the FCPA Likely to Continue

October 13, 2008

On October 6, 2008, the United States Supreme Court denied a petition for writ of certiorari in the controversial case of United States v. Kay, leaving intact decisions from the Fifth Circuit Court of Appeals that are viewed as having greatly expanded the scope of liability under the Foreign Corrupt Practices Act (“FCPA”). In light of the Kay opinions and the Court’s decision not to review them, the Justice Department and SEC should be expected to continue taking broad views on the types of conduct that are prohibited by the FCPA—meaning that companies, in their training and compliance programs, would be well advised to do the same.

David Kay and Douglas Murphy were both executives at American Rice, Inc. a public company that exports rice to various parts of the world. In the 1990s, American Rice, through a foreign subsidiary, exported rice to Haiti. At the time, the Haitian government imposed significant duties and taxes on rice importers. Kay and Douglas, in order to reduce the taxes American Rice had to pay, authorized various payments to Haitian government officials. After the company learned of the payments, and self-reported, Kay and Douglas were eventually indicted on over a dozen counts, including violations of the anti-bribery provision of the FCPA, which makes it a crime to “willful[ly]” bribe a foreign official to “obtain[] or retain[] business.” 15 U.S.C. §§ 78dd-1(a)(1), 78ff(a). At trial, Kay and Douglas were convicted on all charges. Kay was sentenced to thirty-seven months’ imprisonment and two years’ supervised release. Murphy was sentenced to sixty-three months’ imprisonment and three years’ supervised release. Both Kay and Douglas were also assessed monetary penalties.

Throughout the proceedings, Kay and Douglas had argued that because the bribes were allegedly made in order to reduce the taxes American Rice had to pay, the payments were not made in order to obtain or retain business and hence were not prohibited under the FCPA. See, e.g., U.S. v. Kay, 200 F. Supp. 2d 681, 682 (S.D. Tex. 2002) (“Kay I”) rev’d 359 F.3d 738, 756 (5th Cir. 2004) (“Kay II”). Moreover, they argued that even if it was determined that their actions fell within the scope of the FCPA, the “obtaining or retaining business” language of the Act was so ambiguous that enforcement against them would constitute a violation of due process. See, e.g., U.S. v. Kay, 513 F.3d 432, 440-46 (5th Cir. 2007) (“Kay III”). Also of relevance, Kay and Douglas argued that because they were never alleged to have known they were violating the FCPA, they could not be deemed to have “willfully” violated the Act. Id. at 447-51.

The Fifth Circuit rejected all of the above arguments. With respect to the argument that the FCPA did not apply to bribes made to reduce taxes owed, the court held that any payment to a foreign official that had the effect of lowering operational costs for a company could be considered to be providing an unfair advantage over competitors and thereby assisting the company in “obtaining or retaining” business in violation of the FCPA. Kay II, 359 F.3d at 751-56. As to the claim that the ambiguity of the “obtaining or retaining business” language was violative of the due process clause, the court disagreed, holding that “[a] man of common intelligence would have understood that [] in bribing foreign officials, [defendants were] treading close to a reasonably-defined line of illegality” such that it would be improper to allow them to “split[] hairs” and “argue successfully that the FCPA’s standards were vague.” Kay III, 513 F.3d at 442. Finally, the court rejected defendants’ positions on willfulness, holding that knowledge under the FCPA did not require defendants to have specific knowledge about the FCPA or its prohibitions, but rather required only that defendants knew generally that their actions were illegal. Id. at 446-51.

For Kay and Douglas, the Supreme Court’s decision not to review the decisions of the Fifth Circuit means that they must begin serving their sentences. For companies that fall within the broad jurisdictional scope of the FCPA, the denial of certiorari in U.S. v. Kay means that government’s trend of expansive enforcement is likely to continue. Specifically, companies and their employees must be aware that the government may take the position that any payment made to a foreign official to secure a business advantage of any sort assists in “obtaining or retaining business” in violation of the FCPA.¹ Moreover, companies and their employees must be cognizant that courts may follow the Kay decisions and be wholly unsympathetic to technical arguments that payments to foreign officials fall within a “gray zone” of FCPA liability. Finally, the Kay decisions reaffirm that ignorance of the FCPA and its nuances will not be deemed a valid excuse under the law. Accordingly, companies would be well served by ensuring that their FCPA training and compliance programs provide similar broad definitions of prohibited FCPA conduct and thresholds for FCPA liability.

^{1. The FCPA provides that payments made to facilitate or expedite “routine governmental action . . . ordinarily and commonly performed by a foreign official,” see 15 U.S.C. §§ 78dd-1 (b), (f)(3), are exempt under the Act. Given the holding in Kay, the continued practical viability of this “facilitating payment exemption” is questionable.}

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