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United States v. SDI Future Health

June 1, 2009

UNITED STATES OF AMERICA, PLAINTIFF-APPELLANT,
v.
SDI FUTURE HEALTH, INC.; TODD STUART KAPLAN; JACK BRUNK, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the District of Nevada Philip M. Pro, District Judge, Presiding D.C. No. CR-05-00078-PMP.

The opinion of the court was delivered by: O'scannlain, Circuit Judge

FOR PUBLICATION

Argued and Submitted May 13, 2008 -- San Francisco, California.

Filed January 27, 2009; Amended June 1, 2009

Before: Diarmuid F. O'Scannlain, Michael Daly Hawkins, and M. Margaret McKeown, Circuit Judges.

The petition for rehearing and the petition for rehearing en banc are DENIED. No further petitions for rehearing or rehearing en banc may be filed.

OPINION

We must decide whether corporate executives may challenge a police search of company premises not reserved for the executives' exclusive use.

I.

A.

After a nearly two-year investigation spearheaded by the Internal Revenue Service ("IRS") with the participation of four other federal and Nevada state agencies, investigators concluded that SDI Future Health, Inc. ("SDI"), a California corporation, had engaged in wide-ranging Medicare fraud. In addition, they believed that both SDI and Todd Stuart Kaplan, its president and part-owner, had committed extensive tax fraud. On January 28, 2002, based on the information obtained during the investigation, IRS Special Agent Julie Raftery applied for a warrant to search SDI's premises.

The warrant relied on an affidavit sworn by Raftery, which contained information she had learned from three former employees and two business associates of SDI.*fn1 The affidavit alleged that SDI, Kaplan and Jack Brunk, also an officer and part-owner of SDI, participated in a conspiracy with physicians and cardiac diagnostic companies to defraud the Medicare program, the Federal Employees Health Benefit Program, and private healthcare insurance carriers by seeking payment for services that SDI never rendered. According to the affidavit, they sometimes billed twice for such services and made kickback payments to physicians who participated in the scheme. It alleged specifically that SDI employees who were placed in participating doctors' offices would induce patients to participate in a sleep study. While cardiac diagnostic companies affiliated with SDI would purport to complete a report of the results of each sleep study, officers of SDI would instead affix a signature stamp bearing the signatures of staff physicians on reports that other SDI employees had actually completed. Referring physicians were instructed to bill for time spent reviewing the reports, a task the physicians never actually performed. Frequently, SDI would then recommend that a patient participate in further studies, usually in cases where the patient's health insurer would pay for them.

The affidavit also revealed incidents of alleged tax fraud. It noted that Kaplan and his wife reported negative gross income and, consequently, paid no taxes in the years 1996, 1998 and 1999, and reported relatively low income in 1997 and 2000. During the same period, however, the couple purchased several expensive automobiles and watercraft and supported a home mortgage. This discrepancy, according to the affidavit, provided the probable cause to support the investigators' belief that Kaplan and his wife substantially under-reported their gross income during those years. The government also alleged that SDI had violated federal tax laws by under-reporting its sales revenue and its income at least for the years 1996-2000.

The government submitted a proposed warrant with its affidavit. Appendix A of the warrant stated that the premises to be searched were SDI's corporate headquarters, principal business offices, and computers. Appendix B provided 24 categories of items to be seized and gave specific instructions concerning retrieving and handling of electronic data and other technical equipment.*fn2

A magistrate judge took approximately two hours to review the government's affidavit and proposed warrant. He ultimately concluded that probable cause existed for the search and agreed to issue the proposed search warrant, on the condition that both the affidavit and the search warrant be amended to include protections for patients' medical information. The government made the requested revisions, and the magistrate judge issued the warrant.

The day before the execution of the search warrant, Special Agent Raftery met with the forty-two agents who would make up the search team. She distributed copies of the affidavit and gave them time to read it. She then conducted a "verbal briefing," explaining the probable cause for the search warrant and "the items that [the search team was] searching for and the items to be seized." All members of the search team were to have the cellular phone number of Special Agent Raftery during the search.

The team executed the search early the following morning, on January 31, 2002. Upon arriving at the scene, Special Agent Raftery met with one of SDI's executive officers and delivered a copy of the search warrant, but not a copy of the affidavit because it had been sealed by the district court. The affidavit was, however, available to the members of the search team. Kaplan also received a copy of the warrant, and he consented to allow investigators to search an off-site storage warehouse used by SDI.

B.

About three years after the search, a federal grand jury in the District of Nevada returned an indictment charging SDI, Kaplan and Brunk with one count of conspiracy, in violation of 18 U.S.C. § 371-specifically conspiracy to commit health care fraud, in violation of 18 U.S.C. § 1347, and to provide illegal kickback payments, in violation of 42 U.S.C. § 1320a-7b(b); 124 counts of health care fraud, in violation of 18 U.S.C. § 1347; one count of illegal kickbacks, in violation of 42 U.S.C. § 1320a-7b(b); one count of conspiracy to commit money laundering, in violation of 18 U.S.C. §§ 1956(a)(1)(A)(i) and 1956(h); and three counts of attempting to evade or defeat taxes, in violation of 26 U.S.C. § 7201. Additionally, Kaplan and Brunk were each individually indicted for three and four counts, respectively, of attempting to evade or defeat taxes, in violation of 26 U.S.C. § 7201. The indictment also alleged three counts of forfeiture for the proceeds of health care fraud and money laundering, under 18 U.S.C. §§ 24, 982(a)(7), 982(a)(1), and 1347.

On December 2, 2005, SDI, Kaplan and Brunk (collectively "the defendants") filed a motion to suppress evidence obtained from the search warrant, arguing that the warrant was vague and overbroad in violation of the Fourth Amendment. On June 26, 2006, a magistrate judge entered a Findings and Recommendation, in which he recommended that the motion to suppress be granted in part.

On April 4, 2007, the district court adopted the magistrate judge's factual findings, but entered an order granting the defendants' motion to suppress in full rather than in part. The district court first held that Kaplan and Brunk had standing to challenge the search of SDI's business premises, because they "had significant ownership interests in SDI," "exercised a high level of authority over the operations of the company including the authority to set and control policy regarding access to SDI's business records and computer systems," "maintained offices at SDI's corporate headquarters and were present during the execution of the Search Warrant," and because SDI "maintained a level of security and confidentially [sic] practices regarding its premises and records that one would reasonably expect of a health care provider."

The district court concluded that items 7, 9-13, and 24 of the search warrant were overbroad and lacked sufficient particularity because "[t]he search warrant did not limit these general categories of business documents and financial records to the seizure of records relating to the criminal activity described in the affidavit," and because they lacked "any time restriction." Similarly, the district court noted that items 2, 4, 8, and 19, of the search warrant were "borderline in acceptability," but nevertheless violated the Fourth Amendment because "some additional description could and should have been provided regarding these categories." Lastly, the district court concluded that the "good faith exception" did not apply in this case based on its conclusion that the affidavit was not incorporated into the warrant. Without the affidavit, the court concluded, the agents' reliance on the warrant alone was not objectively reasonable, since it "did not contain any description of the alleged criminal activity relating to the listed categories of documents."

On May 3, 2007, the United States timely sought an inter-locutory appeal of the district court's order.

II.

The government first argues that Kaplan and Brunk lack standing to challenge the search and seizure of materials from SDI's premises.*fn3 According to the government, their mere ownership and management of SDI, and the steps SDI took to preserve the security of its business files, are inadequate to support the conclusion that Kaplan and Brunk personally had an expectation of privacy in the searched areas and seized materials. While "[i]t has long been settled that one has standing to object to a search of his office, as well as of his home," Mancusi v. DeForte, 392 U.S. 364, 369 (1968), this case presents the novel issue of the extent to which a business employee may have standing to challenge a search of business premises generally.

A.

[1] The Fourth Amendment ensures that "[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized." U.S. Const. amend. IV. A person has standing to sue for a violation of this particular "right of the people" only if there has been a violation "as to him," personally. Mancusi, 392 U.S. at 367. In other words, Fourth Amendment standing, unlike Article III standing, "is a matter of substantive [F]ourth [A]mendment law; to say that a party lacks [F]ourth [A]mendment standing is to say that his reasonable expectation of privacy has not been infringed." United States v. Taketa, 923 F.2d 665, 669 (9th Cir. 1991). This follows from the Supreme Court's famous observation that the Fourth Amendment "protects people, not places," Katz v. United States, 389 U.S. 347, 351 (1967).

[2] To show the government has violated his Fourth Amendment rights, an individual must have "a legitimate expectation of privacy in the invaded place," United States v. Crawford, 323 F.3d 700, 706 (9th Cir. 2003) (internal quotation marks and citations omitted). Defendants must demonstrate "a subjective expectation of privacy in the area searched, and their expectation must be one that society would recognize as objectively reasonable." United States v. Sarkisian, 197 F.3d 966, 986 (9th Cir. 1999).

[3] As a logical extension of this approach, "[p]roperty used for commercial purposes is treated differently for Fourth Amendment purposes from residential property." Minnesota v. Carter, 525 U.S. 83, 90 (1998) (plurality opinion); see also New York v. Burger, 482 U.S. 691, 700 (1987) ("An expectation of privacy in commercial premises . . . is different from, and indeed less than, a similar expectation in an individual's home.").*fn4 Of course, individuals may still have a "reasonable expectation of privacy against intrusions by police" into their offices. O'Connor v. Ortega, 480 U.S. 709, 716 (1987) ("Within the workplace context, . . . an expectation [of privacy] in one's place of work is based upon societal expectations that have deep roots in the history of the Amendment." (internal quotation marks and citations omitted)). But, unlike the nearly absolute protection of a residence, the "great variety of work environments" requires analysis of reasonable expectations "on a case-by-case basis." Id. at 718.

[4] Our precedents provide numerous guideposts, however. For starters, it is crucial to Fourth Amendment standing that the place searched be "given over to [the defendant's] exclusive use." Schowengerdt v. General Dynamics Corp., 823 F.2d 1328, 1335 (9th Cir. 1987). We have thus held that mere access to, and even use of, the office of a co-worker "does not lead us to find an objectively reasonable expectation of privacy." Taketa, 923 F.2d at 671. By the same token, we have rejected managerial authority alone as sufficient for Fourth Amendment standing. In United States v. Cella, we held the corporate officer of a hospital, whom we described as the "de facto controlling force in [its] management," did not have standing to challenge the seizure of records from the hospital print shop. 568 F.2d 1266, 1270, 1283 (9th Cir. 1977). Even though the defendant "had access to and control of the print shop operations, his rights did not include any expectation of privacy over documents which were kept at the print shop premises but over which [he] did not show an independent possessory or proprietary interest." Id. at 1283.

[5] It thus appears that an employee of a corporation, whether worker or manager, does not, simply by virtue of his status as such, acquire Fourth Amendment standing with respect to company premises. Similarly, and notwithstanding the reference to "an independent . . . proprietary interest" in Cella, to be merely a shareholder of a corporation, without more, is also not enough.*fn5 As always, a reasonable ...


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