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A Pandemic-Era Primer on the Fraud Injunction Statute – DOJ’s Tool for Fighting COVID-19 Fraud

A Pandemic-Era Primer on the Fraud Injunction Statute – DOJ’s Tool for Fighting COVID-19 Fraud Background Decorative Image

The Department of Justice (“DOJ”) has made clear that it is pursuing civil enforcement actions and criminal prosecution of individuals and entities exploiting the COVID-19 pandemic for their own gain, as seen in the U.S. Attorney General directing all U.S. Attorneys to prioritize these investigations and prosecutions.1 Its civil enforcement efforts target a broad range of COVID-19 schemes, ranging from fraud under the Paycheck Protection Program (“PPP”) to hawking fake testing and treatment scams. To support its efforts, DOJ is using the fraud injunction statute, 18 U.S.C. § 1345, which empowers the government to act in two important ways to combat fraud. First, the government can use Section 1345 to request a temporary or permanent injunction in a civil action to stop current or potential violations of certain fraud-related federal laws, including the broadly defined mail and wire fraud laws. Second, the government can freeze an alleged fraudster’s assets before trial and even before indictment, including assets unrelated to the alleged fraud. Initial federal docket activity shows that DOJ has notched some early victories using Section 1345’s capabilities to combat COVID-19 fraud.

A Brief History of Section 1345

Section 1345 became law as part of the Comprehensive Crime Control Act of 1984,2 allowing the government to seek injunctions for violations of certain fraud-related statutes. DOJ’s Handbook on the 1984 Act explained that the purpose of the fraud-injunction provision was “to provide prosecutors with an effective tool to prevent the continuation of a fraudulent scheme during the pendency of the investigation.”3 Congress recognized that fraud investigations can take many months or years and therefore sought to protect victims of schemes while investigations were underway.

Congress amended Section 1345 in 1988 to authorize injunctions under additional federal fraud statutes.4 A significant change occurred in 1990, when Congress expanded Section 1345 to allow the government to seek to freeze an alleged fraudster’s assets before trial.5 Then, in 1996, Congress amended the statute to include health care offenses among the violations that can be enjoined by Section 1345.6 Since the 1996 amendment, Section 1345 has remained substantively unchanged.

Section 1345 Injunctions to Stop Fraudulent Activities

As its moniker indicates, Section 1345 allows DOJ to request a temporary or permanent injunction in a civil action to stop current or potential fraudulent schemes. These schemes could be any federal fraud described in Chapter 63 of the U.S. Code, including mail fraud, wire fraud, bank fraud, health care fraud, securities and commodities fraud, as well as certain criminal activity outside of Chapter 63, including false claims under 18 U.S.C. § 287, conspiracy to commit fraud under 18 U.S.C. § 371, banking law violations as defined in 18 U.S.C. § 3322(d), and health care offenses, as defined in 18 U.S.C. § 24.7 Injunction proceedings under Section 1345 follow the statute’s dual civil and criminal structure, which requires that the Federal Rules of Civil Procedure be followed, unless an indictment has been returned, which would then require discovery to proceed pursuant to the Federal Rules of Criminal Procedure.8 This distinction is an important consideration for prosecutors seeking Section 1345 injunctions. On the one hand, managing discovery under the Federal Rules of Civil Procedure would allow the defendant’s counsel to seek materials that would not normally be discoverable under the criminal rules, such as investigative notes and reports of interviews, even before their client has been charged. On the other hand, once an indictment has been returned, managing discovery under the Federal Rules of Criminal Procedure requires a court to protect the defendant’s rights while also preventing the defendant from receiving information such as investigative notes that may be available in civil proceedings. Additionally, prosecutors may hesitate in bringing Section 1345 injunctions at all in light of the interplay between the potential civil and criminal proceedings. While the injunctions provide an effective tool in stopping alleged fraudsters from further harming the public, prosecutors may not want to tip their hand while the investigation is still underway before the alleged fraudster has been indicted.

The federal district courts hearing Section 1345 cases across the country have taken varied approaches on what standard the government must meet to be granted an injunction. Courts are split on which factors to consider. Some courts have stated that, because Section 1345 is a statute-based injunction, the government does not have to show the traditional, common law requirements of an injunction such as irreparable hardship, the inadequacy of other remedies at law, or the balance of the parties’ interests. This position is consistent with DOJ’s Handbook on the 1984 Act, which states, “When an injunction is sought pursuant to statute and for the public good, it is not necessary to demonstrate that there is an inadequate remedy at law.”9 DOJ suggested that “it should be sufficient for the government to show: (1) that the person or entity sought to be enjoined is engaged in, or is about to engage in, conduct that would violate [federal fraud statutes]; and (2) that equitable relief is warranted to prevent continuing and substantial injury to the United States or to the public.” DOJ also advised prosecutors to identify the class of persons who might be injured by the scheme and to describe the scheme with particularity.

Other courts have applied the traditional injunction test to requests under Section 1345, requiring the government to demonstrate the balance of factors in favor of an injunction.10 Some courts have implemented an additional burden-shifting approach that can benefit the defendant: once the government sets forth its substantive proof for an injunction, the defendant is allowed to explain why the fraudulent action will not recur, making an injunction unnecessary.11

Though the law is evolving as more COVID-19 fraud cases are brought, the two most common standards adopted by courts at this point are: (1) requiring the government to show that “probable cause” exists that the person to be subject to the injunction is engaging or is about to engage in a fraudulent scheme, or (2) requiring the government to prove the basis for the injunction by a “preponderance of the evidence.”12 This mix of civil and criminal standards derives from the hybrid nature of the statute.

Section 1345 Injunctions to Freeze Assets

Along with bringing an injunction to halt fraudulent activities, Section 1345 also provides the government the ability to request an injunction that freezes a person’s assets if that person is allegedly engaged in fraudulent schemes. Section 1345 states that DOJ can request an injunction or restraining order preventing a person from withdrawing, transferring, or disposing of property resulting from a banking law violation or federal health care offense, as well as other property of equivalent value.13 These restraints apply before trial to conserve the alleged fraudster’s assets.

Section 1345’s ability to freeze assets is limited to banking law violations and federal health care offenses according to its plain language. However, in practice, these injunctions or restraining orders may be much broader than the language of Section 1345, with courts having expanded the scope of the statute to freeze assets tied to essentially any federal fraud offense.14

A particularly notable aspect of Section 1345 is its use in freezing assets “of equivalent value” to those that came as a result of, or are traceable to, the fraud-related activity. This allows the government to seek to freeze assets that are unrelated to, or untainted by, the activities of the alleged crime. The ability to freeze untainted assets comes with limitations, though. For example, the government is limited from freezing untainted assets that complicate a defendant’s constitutional right to retain counsel,15 and it is possible other such limitations could arise if the statute is used in circumstances that impact a defendant’s constitutional rights.

DOJ’s Use of Section 1345 in COVID-19 Fraud Cases

A review of U.S. district court dockets reveals that DOJ has been pursuing Section 1345 injunctions in a variety of cases in the wire fraud context, including cases in which:

  • Defendants were creating and operating websites that appear to offer health and safety products in high demand due to the COVID-19 pandemic, but then not shipping any of the purchased products to the consumers.16
  • A defendant, who was not registered to develop or manufacture a vaccine for COVID-19, was creating and operating websites that purportedly allowed consumers to pre-order a vaccine for COVID-19.17
  • Defendants were promoting and marketing silver products as effective protection against, and treatment for, COVID-19.18
  • A defendant was operating a website claiming to provide free World Health Organization COVID-19 vaccine kits, which did not exist, if consumers paid for shipping.19

In these cases, DOJ has used Section 1345 injunctions to restrain defendants from continuing their allegedly fraudulent schemes. While it appears that DOJ has focused on traditional consumer protection areas, such as shutting down fake sales websites and stopping fraudulent advertising of ineffective COVID-19 treatments, DOJ’s efforts may expand to other alleged COVID-19 fraud schemes. These efforts may include fraudulent billing for medical services and schemes related to fraud under the PPP. Although the cases are still ongoing, DOJ has generally been successful in receiving Section 1345 injunctions, illustrating that courts concerned about COVID-19 fraud are likely to grant injunctions.

What This Means for You

Individuals and entities engaged in commerce related to COVID-19, as well as entities that have received funding from the government under the PPP, or other loan and relief programs, should be aware of Section 1345 and its application. As DOJ’s COVID-19 fraud enforcement efforts develop, DOJ will likely move beyond the obvious fraudsters behind the internet scams. DOJ’s initial track record of receiving Section 1345 injunctions in obvious fraud cases is building caselaw that may help DOJ succeed in future cases where the acts are not as clearly fraudulent. If more sophisticated and legitimate businesses find themselves in the crosshairs of DOJ, whether it be related to allegedly fraudulent medical services billing, a PPP loan application, or something else entirely, Section 1345 and its ability to restrain the use of assets and property before trial can be detrimental to the continued operation of an entity’s business or an individual’s livelihood. Learning about Section 1345 and preparing to respond to a request for an injunction filed pursuant to its authority should be a part of anyone’s COVID-19 legal playbook.

1 Press Release, Department of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud

2 Pub L. No. 98-473, tit. II, § 1205(a), 98 Stat. 1976 (1984).

3 U.S. Department of Justice, Handbook on the Comprehensive Crime Control Act of 1984 and Other Criminal Statutes Enacted by the 98th Congress, at 152 (1984) (“DOJ Handbook”).

4 Pub. L. No. 100-690, tit. VII, § 7077, 102 Stat. 4406 (1988).

5 Pub. L. No. 101-647, tit. XXV, § 2521(b)(2), 104 Stat. 4865 (1990).

6 Pub. L. No. 104-191, tit. II, § 247, 110 Stat. 2018 (1996).

7 18 U.S.C. § 1345(a)(1).

8 18 U.S.C. § 1345(b) (“A proceeding under this section is governed by the Federal Rules of Civil Procedure, except that, if an indictment has been returned against the respondent, discovery is governed by the Federal Rules of Criminal Procedure.”).

9 DOJ Handbook at 153.

10 Compare, e.g., United States v. Livdahl, 356 F. Supp. 2d 1289, 1290-91 (S.D. Fla. 2005) (finding that, for a Section 1345 injunction, “no specific finding of irreparable harm is necessary, no showing of the inadequacy of other remedies at law is necessary, and no balancing of the interests of the parties is required prior to the issuance of a preliminary injunction”), with, e.g., United States v. Williams, 476 F. Supp. 2d 1368, 1377 (M.D. Fla. 2007) (finding that, for a Section 1345 injunction, “the United States must still demonstrate that the balance of the … equitable factors counsel in favor of granting the requested injunction”).

11 See, e.g., United States v. Am. Therapeutic Corp., 797 F. Supp. 2d 1289, 1292 (S.D. Fla. 2011) (“Once the government establishes the existence of the statutory violation, the burden shifts to the defendants to show that there is no reasonable expectation that the wrong will be repeated.”).

12 Compare, e.g., United States v. William Savran & Assocs., Inc., 755 F. Supp. 1165, 1177 (E.D.N.Y. 1991) (“To support an application for a preliminary injunction under 18 U.S.C. § 1345, the government must demonstrate that ‘probable cause’ exists to believe that the defendant is currently engaged or about to engage in a fraudulent scheme.”), with, e.g., United States v. Sriram, 147 F. Supp. 2d 914, 938 (N.D. Ill. 2001) (“[T]o establish a likelihood of success as required by Section 1345, the government must show by a preponderance of the evidence that a predicate fraud offense has been or is being committed.”).

13 18 U.S.C. § 1345(a)(2).

14 See, e.g., United States v. Payment Processing Ctr., LLC, 435 F. Supp. 2d 462, 464 (E.D. Pa. 2006) (holding that “[Section] 1345 authorizes broad injunctive relief, including property restraints, for any violation of chapter 63 of the United States Code, such as mail and wire fraud, regardless whether the offense constitutes a banking law violation or health care fraud”).

15 Luis v. United States, 136 S. Ct. 1083, 1096 (2016) (opinion of Breyer, J.) (“[W]e conclude that the defendant in this case has a Sixth Amendment right to use her own ‘innocent’ property to pay a reasonable fee for the assistance of counsel.”).

16 See Compl., ECF No. 1, United States v. Dinh, No. 8:20-cv-1794-CEH-AAS (M.D. Fla. Aug. 3, 2020).

17 See Compl., ECF No. 1, United States v. Flint, No. 3:20-cv-489-CHB (W.D. Ky. July 10, 2020).

18 See Compl., ECF No. 1, United States v. My Doctor Suggests LLC, No. 2:20-cv-279-DBB (D. Utah Apr. 27, 2020).

19 See Compl., ECF No. 1, United States v. Doe, No. 1:20-cv-306-RP (W.D. Tex. Mar. 21, 2020).

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.