United States: Judge Issues Opinion on Definition of "Foreign Official"

In three recent cases, defendants prosecuted under the U.S. Foreign Corrupt Practices Act ("FCPA") challenged their indictments using a similar argument – employees of state-owned entities do not fall within the definition of "foreign official" under the FCPA. United States v. O'Shea, No. 4:09-cr-00629 (S.D. Tex. Mar. 7, 2011); United States v. Noriega, No. 2:10-cr-01031-AHM (C.D. Cal. Feb. 28, 2011) (hereinafter "Lindsey Manufacturing"); United States v. Carson, No. 8:09-cr-00077-JVS (C.D. Cal. Feb. 21, 2011). To violate the FCPA, a corrupt payment must be directed to a "foreign official." The FCPA defines "foreign official" as:

15 U.S.C. §78dd-2(h)(2) (emphasis added). Although the FCPA does not define "instrumentality," in a variety of settlements and charging documents, the Government has broadly interpreted the word to include state-owned entities and thus has applied the FCPA to cover bribery of employees of state-owned corporations.

On April 20, 2011, Judge Howard Matz of the Central District of California entered a written order – further explaining his April 1, 2011 oral ruling from the bench – and denied the Defendants' Motion to Dismiss in Lindsey Manufacturing. This was the first court opinion to directly address whether the definition of "foreign official" under the FCPA includes employees of state-owned entities.¹

Background: In February 2011, Defendants in Lindsey Manufacturing moved to dismiss their indictment in full. The indictment charged Lindsey Manufacturing Company, the President, and the CFO for conspiracy with a third-party sales representative to violate the FCPA as well as certain substantive FCPA violations related to sales of products to the Mexican Comision Federal de Electricidad ("CFE"). During the relevant time period, CFE was responsible for supplying electricity to all of Mexico other than Mexico City. In their Motion to Dismiss, Defendants focused on three core arguments.² First, Defendants argued that the FCPA's text³ and legislative history⁴ demonstrated that employees of state-owned entities are not "foreign official[s]" because no corporation could qualify as an "instrumentality" under the statute. Second, Defendants argued that, to the extent the Court found the term "instrumentality" even the slightest bit ambiguous, the Court should dismiss the case in favor of Defendants' interpretation due to the rule of lenity. The rule of lenity requires the Court to interpret a criminal statute in favor of the Defendant if the statute is sufficiently ambiguous or vague.⁵ Third, Defendants argued that, even if the Court found that state-owned entities fall within the scope of the FCPA, the indictment should still be dismissed because the statute was unconstitutionally vague and indecipherable when applied to Defendants.⁶

In opposing the motion, the Government first focused on the facts surrounding CFE and argued that the Defendants' Motion to Dismiss was premature because it was premised upon a factual question regarding the nature of CFE as a state-owned entity. Further, the Government argued that the FCPA's text⁷ and legislative history,⁸ as well as prior FCPA-related judicial rulings,⁹ instead supported their interpretation that employees of state-owned entities constitute "foreign officials." The Government also countered Defendants' rule of lenity and void-for-vagueness arguments.¹⁰

Court Ruling: In his April 20, 2011 written order, Judge Matz held that "a state-owned corporation having the attributes of CFE may be an 'instrumentality' of a foreign government within the meaning of the FCPA, and officers of such a state-owned corporation . . . may therefore be 'foreign officials' within the meaning of the FCPA."¹¹ The ruling focused on the undisputed facts specific to CFE and the definition of "instrumentality." The undisputed facts relating to CFE included: 1) the Mexican Constitution designated the supply of electricity as solely a governmental function; 2) Mexican statutory law, specifically Mexico's Public Service Act of Electricity of 1975, defined CFE as a public entity and mandated that CFE's governing board be composed of public officials; and 3) CFE's own website defined it as an agency of the Federal Government.¹² Judge Matz also based his ruling on the definition of "instrumentality." Adopting the Defendants' definition, the Court "look[ed] for defining similarities between agencies and departments and consider[ed] only entities that share these qualities to fall within the definition of 'instrumentality.'"¹³ The Court provided a "non-exclusive list" of government agency and department characteristics that meet this description, including:

• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.
  
• The key officers and directors of the entity are, or are appointed by, government officials.
  
• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
  
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
  
• The entity is widely perceived and understood to be performing official (i.e., governmental) functions.¹⁴

The Court noted that "CFE ha[d] all of these characteristics."¹⁵

Because the ruling relied on the undisputed facts specific to CFE and the definition of "instrumentality," the Court explained it was unnecessary to discuss the FCPA's "structure" and legislative history. However, the Court still opined on both issues, finding the Government's use of the Charming Betsy canon of construction particularly persuasive¹⁶ and the legislative history of the FCPA inconclusive.¹⁷ The emphasis on the Charming Betsy canon, which requires courts to interpret statutes to comport with United States treaty obligations, suggests that the Court adopted the proposition that the FCPA be construed in a manner that harmonizes it with the OECD Convention.

Notably, the Court's ruling is a very narrow one. First, the Court clearly rejected the Defendants' argument that no corporation could qualify as an "instrumentality." Second, the Court left open the question of whether all corporations that perform some public function qualify as "instrumentalit[ies]." Finally, the Court's ruling about CFE was based on unusual facts which were unique to the entity. These key aspects of the Court's ruling appear to leave the door open to future challenges.

The resolution of the challenges in O'Shea and Carson are still pending. The O'Shea matter has been fully briefed as of April 18, 2011.¹⁸ The facts from Carson may present a more complex and robust challenge than Lindsey Manufacturing. In Carson, the alleged state-owned entities consist of multi-national companies from multiple countries, including some which are publicly traded on the NYSE.¹⁹ It thus may be less clear that such entities perform government functions or meet other aspects of the test that Judge Matz found persuasive in Lindsey Manufacturing. The Government filed its opposition brief in Carson on April 18, 2011, and the hearing is scheduled for May 9, 2011.²⁰ We will update you with any further developments from O'Shea and Carson as they become available.

Endnotes

<sup>1 Although two other courts denied motions to dismiss on similar grounds in the Order Denying Motion to Dismiss, United States v. Nguyen, 08-CR-522 (E.D. Pa. 2009), and Order Denying Motion to Dismiss, United States v. Esquenazi, 09-CR-21010 (S.D. Fla. 2010), neither court substantively opined on the issue.

2 The substantive arguments in the Lindsey Manufacturing Motion to Dismiss are very similar to the arguments made in Carson and O'Shea.

3 Defendants used a number of common canons of statutory construction to demonstrate the meaning of the word "instrumentality," including its: 1) ordinary meaning; 2) context within the definition of "foreign official" (i.e., preceded by "department" and "agency"); 3) use within other provisions of the FCPA; and 4) use in other statutes, such as the Foreign Sovereign Immunities Act and the Economic Espionage Act, etc. Defendants' Notice of Motion to Dismiss and Motion to Dismiss the First Superseding Indictment at 6-13, United States v. Noriega, 2:10-cr-01031-AHM (C.D. Cal. Feb 28, 2011).

4 Michael J. Koehler wrote a Declaration in support of the Carson Motion to Dismiss. The Koehler Declaration provided a very detailed analysis of all legislative history related to the FCPA, specifically surrounding: 1) the enactment of the FCPA in 1977; 2) the 1988 amendments to the FCPA; 3) the 1998 amendments to the FCPA; and 4) the post-1998 amendments to the FCPA. Defendants in Lindsey Manufacturing cited this declaration to support their arguments regarding legislative history. Mr. Koehler is an Associate Professor of Business Law at Butler University as well as the Administrator of an FCPA-related legal blog called the "FCPA Professor" (available at http://fcpaprofessor.blogspot.com). Declaration of Professor Michael J. Koehler in Support of Defendant's Motion to Dismiss Counts One Through Ten of the Indictment, United States v. Carson, 8:09-cr-00077-JVS (C.D. Cal. Feb. 21, 2011).

5 Defendants' Notice of Motion to Dismiss and Motion to Dismiss the First Superseding Indictment at 21-22, United States v. Noriega, 2:10-cr-01031-AHM (C.D. Cal. Feb. 28, 2011).

6 Id. at 22-23.

7 The Government also looked at a number of canons of construction, including: 1) the ordinary meaning of the term "instrumentality"; 2) that courts interpret statutes to give meaning to every word and not in a manner where portions of the statute would have no effect; 3) the Charming Betsy canon – that courts interpret statutes to comport with United States Treaty Obligations (i.e., here, the FCPA must be interpreted to comport with the OECD Convention and therefore, must criminalize bribes to officials of state-owned entities); and 4) courts interpret statutes such that the same term in similar statutes is given consistent meaning, etc. Opposition to Defendants' Motion to Dismiss the First Superseding Indictment at 11-25, United States v. Noriega, 2:10-cr-01031-AHM (C.D. Cal. Mar. 10, 2011).

8 The Government noted that 1) when Congress enacted the FCPA, Congress was clear that it intended the statute to have very broad reach; and 2) review of the multiple drafts of the FCPA for the definition of "foreign official" in fact demonstrates Congress' choice to institute a general definition instead of a specific list of terms within the final enacted version. Id. at 29-32.

9 The Government provided that 1) other courts had denied two similar motions to dismiss in Esquenazi and Nguyen; 2) other courts had previously accepted 35 guilty pleas by individuals who admitted to violating the FCPA by bribing officials of state-owned entities; and 3) courts provided jury instructions in two instances that explicitly included state-owned entities within their definition of government "instrumentality" under the FCPA. Id. at 26-29.

10 First, the Government contended that the rule of lenity 1) did not apply if there was merely "any" ambiguity but instead only applied to grievous ambiguity; and 2) "applied sparingly only after other interpretive rules have been unsuccessfully exhausted." Second, the Government contended that the void-for-vagueness argument was without merit because 1) any constitutional vagueness challenges not involving the First Amendment must include an examination of the facts of the case at hand, which Defendants had not done; and 2) regardless, the FCPA was not vague. Id. at 37-40.

11 Minutes in Chamber Order at 2, United States v. Noriega, 2:10-cr-01031-AHM (C.D. Cal. Apr. 20, 2011).

12 Id. at 5.

13 Id. at 9.

14 Id.

15 Id.

16 Id. at 10-11.

17 Id. at 14.

18 O'Shea may have a similar outcome to Lindsey Manufacturing because CFE is also the state-owned entity at issue.

19 The multiple corporations and countries include Jiangsu Nuclear Power Corporation (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (China), PetroChina (China), Dongfang Electric Corporation (China), China National Offshore Oil Corporation (China), Korea Hydro and Nuclear Power (Korea), Petronas (Malaysia), and National Petroleum Construction Company (United Arab Emirates). Defendants' Notice of Motion and Motion to Dismiss Counts One Through Ten of the Indictment at 5, n. 1, United States v. Carson, 8:09-cr-00077-JVS (C.D. Cal. Feb. 21, 2011). To support its opposition brief, the Government filed the Declaration of FBI Special Agent Brian Smith, which provides facts about the alleged state-owned entities. Declaration of Special Agent Brian Smith in Support of Government's Opposition to Defendants' Amended Motion to Dismiss Counts One Through Ten of the Indictment, United States v. Carson, 8:09-cr-00077-JVS (C.D. Cal. Apr. 18, 2011).

20 Stipulation to Continue from March 21, 2011 to May 9, 2011 at 3:00 pm regarding Motion to Dismiss Counts One through Ten of the Indictment, United States v. Carson, 8:09-cr-00077-JVS (C.D. Cal. Mar. 11, 2011).</sup>

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