The Yates Memo has many landscape-changing implications for corporate investigations, including the need for enhanced Upjohn warnings and the potential suppression of joint-defense agreements between corporations and their constituents (officers, directors, employees, shareholders). This new terrain exists because in order to receive cooperation credit from the government, companies must investigate and disclose all facts about corporate wrongdoers. With the spotlight shining on corporate actors from the outset, there will be an inevitable increase in individuals seeking to have independent counsel represent them early in the investigatory process. Defense costs will surely escalate under the new Yates directive. This has several important implications for D&O liability insurance coverage.
Gregory (Greg) R. Jones focuses his practice on health care litigation, False Claims Act defense and class action defense. Greg has represented health care providers, hospitals and physician groups in lawsuits and arbitration matters involving a range of different disputes, including qui tam actions brought under the federal and state false claims acts, antitrust claims, unfair competition and other business torts. He has also represented companies in conjunction with investigations by various government agencies in a wide range of matters. In addition, Greg has experience representing claims in intellectual property matters. Read Gregory Jones' full bio.
The revised cooperation credit rules issued by the US Department of Justice (DOJ) in September 2015 under the Yates Memo require companies to focus on individuals from the outset of an investigation and to disclose all facts about corporate wrongdoers to the government. This new landscape potentially pits the interests of the company against the interests of the corporate constituent (i.e., an officer, director, employee or shareholder) from the get-go. It is also unclear what impact the Yates Memo has on the DOJ’s existing policy concerning joint defense agreements (JDAs), which has traditionally only mandated that a company be able to provide “some relevant facts” to the government. Do the new Yates cooperation credit rules sound the death knell for JDAs between companies and their constituents? Not quite. But JDAs likely will become less common and more complex.
Company-constituent JDAs have long been a valuable tool in corporate investigations and government enforcement litigation. They foster open channels of communication and allow parties to work on a common joint defense. Under a typical JDA, companies, constituents and their counsel can freely share confidential information without the fear of waiving work product or attorney-client privileges. From the company’s perspective, JDAs can play a vital role in corporate investigations because they more readily allow the company to ascertain what happened from their constituents. From the constituent’s perspective, JDAs allow them to learn about what other constituents have disclosed in the context of an investigation and the company’s perspective on potential liability. The keystone of a JDA is a common interest among its parties. Once a party has reason to believe its interests no longer align with the other parties to the JDA, it must withdraw. Nevertheless, any confidential information the withdrawing party received under the JDA must be kept confidential. Continue Reading Does Yates Sound The Death Knell For Joint Defense Agreements?
The importance of the Upjohn (or corporate Miranda) warning once again has taken center stage in several pending high-profile cases, including the criminal prosecutions of former Penn State University president Graham Spanier and Retrophin, Inc. CEO Martin Shkreli. In both cases, the entities’ ability to disclose information revealed during privileged communications with those defendants (and thereby earn the coveted cooperation credit or general goodwill with the government) was impacted by the quality of the Upjohn warnings given. Beyond these newsworthy examples, the significance of providing an adequate Upjohn warning when conducting employee interviews has been markedly amplified by the new guidelines issued by the US Department of Justice in September 2015 concerning individual accountability for corporate wrongdoing (the Yates Memo).
Under the Yates Memo, a company can only be eligible for cooperation credit if it discloses all relevant facts about individuals involved in corporate misconduct. In other words, the government now expects companies to affirmatively serve up their bad actors, and to do so with a full factual disclosure. As a practical matter, this will often entail revealing what a culpable corporate constituent (i.e., an officer, director, employee or shareholder) says during an investigatory interview. But a company can only do this if it retains the right to control the attorney-client privilege, which is the basic function of the Upjohn warning. Consequently, in a post-Yates world, a company’s ability to preserve its cooperation credit eligibility not only demands a mindful adherence to the customary Upjohn warning procedure when conducting corporate interviews, but also an enhanced version of the Upjohn warning, which could include:
- Developing a formal script for the Upjohn warning;
- Providing the witness with a written summary of the critical points of the warning;
- Requiring a written acknowledgement; and
- Specifying that the company may unilaterally disclose to the government the content of the interview.
The Yates Memo has many landscape-changing implications for corporate investigations, including the need for enhanced Upjohn warnings and the potential suppression of joint-defense agreements between corporations and their constituents (officers, directors, employees, shareholders). This new terrain exists because in order to receive cooperation credit from the government, companies must investigate and disclose all facts about corporate wrongdoers. With the spotlight shining on corporate actors from the outset, there will be an inevitable increase in individuals seeking to have independent counsel represent them early in the investigatory process. Defense costs will surely escalate under the new Yates directive. This has several important implications for D&O liability insurance coverage. A robust D&O insurance program is often critical to attracting top talent at the executive level. Concerns about personal liability can be an unnecessary distraction from the day-to-day tasks of running an organization. These concerns are likely to be amplified by the Yates Memo. As of September 2015, the US Department of Justice will only consider a company eligible for cooperation credit if it discloses all relevant facts about individuals involved in corporate misconduct. This is an “all or nothing” policy. If the company wants cooperation credit, it must tell the government everything it knows about culpable constituents. This policy emerged from the government’s perceived failure to prosecute high-level executives responsible for the financial crisis.
The Yates Memo’s greater focus on corporate individuals should cause companies to rethink their D&O liability insurance coverage on several levels:
- Is the Coverage Broad Enough? The standard definitions of “claim,” “loss” and “defense costs” may not cover legal expenses related to government investigations where a formal charge or notice of charge has not been issued. Obtaining “pre-claim inquiry” coverage fills this potential gap.
- Are there Sufficient Policy Limits/Layers of Coverage? Typically, D&O coverage is a “burning limits” policy, which means that defense costs paid by a D&O policy reduce the amount of coverage available under the policy’s limit. With more potential mouths to feed, policy limits will erode faster, thereby necessitating more coverage.
- Should Side A/DIC Coverage be Obtained? “Side A” insurance covers directors and officers for expenses incurred for nonindemnified and non-indemnifiable claims. One type of Side A coverage is a “Difference in Conditions” (DIC) policy. This type of coverage usually applies to officers and directors exclusively, contains fewer exclusions, cannot be rescinded and is not depleted by costs expended by the company as a co-insured. Many Yates-related scenarios may be non-indemnified and/or non-indemnifiable. Side A/DIC coverage may be used to fill this coverage gap.
- Is the Exclusion Trigger Clear? D&O policies regularly exclude intentional dishonesty, fraud, criminal conduct and other intentional violations of law. Government investigations are likely to involve allegations of excluded conduct. Pegging the exclusion trigger to a final, non-appealable court adjudication of guilt or a formal admission of guilt maximizes the protection for directors and officers by guaranteeing that they have coverage to mount a competent defense for the entire duration of the investigation.
On October 2, 2015, the Supreme Court of the United States denied a petition for writ of certiorari in a case that sought to resolve an apparent circuit split concerning one of the most frequently litigated issues under the False Claims Act (FCA)—the circumstances in which the disclosure of allegations in a government audit or investigation can trigger the public disclosure bar. Chattanooga-Hamilton County Hospital Authority v. U.S. ex rel. Whipple, No. 15-96. The petition emanated from a decision we reported on in March 2015 that was issued by the United States Court of Appeals for the Sixth Circuit. U.S. ex rel. Whipple v. Chattanooga-Hamilton County Hospital Authority, 782 F.3d 260 (6th Cir. 2015). In Whipple, the Sixth Circuit held that information in the possession of the government does not trigger the public disclosure bar because it is not in the “public domain.”
In the petition to the Supreme Court, the petitioner framed the issue for review as involving two separate circuit splits: (1) whether investigatory disclosures to a responsible public official trigger the public disclosure bar (yes in the Seventh Circuit; no in the First, Fourth, Sixth, Ninth, Eleventh and D.C. Circuits, which require the disclosures to be made “outside” the government); and (2) whether investigatory disclosures to “innocent employees” (i.e., defendant “insiders” with no involvement in the alleged fraud) trigger the public disclosure bar (yes in the Second Circuit; no in the Sixth and Ninth Circuits). Although the Supreme Court declined to grant cert, the fact remains that the circuits take a somewhat different approach concerning the impact of information revealed during a government investigation on the application of the pre–2011 version of the public disclosure bar, particularly in circumstances where the investigation/audit is closed from the public. Regardless of the specific approach, government disclosures remain fertile territory to attack claims brought under the FCA.
On Tuesday, August 11, 2015, in United States ex rel. Barko v. Haliburton et al., the U.S. Court of Appeals for the D.C. Circuit issued an opinion vacating another series of rulings by the United States District Court for the District of Columbia that had required defendant Kellogg Brown & Root, Inc. (KBR) to produce the privileged files underlying its internal investigation into allegations that the company defrauded the U.S. government. The District Court had concluded that KBR impliedly waived the privilege by putting the contents of its corporate investigation at issue in the litigation when it produced an in-house lawyer as a deposition witness on the topic of KBR’s investigation and referenced that testimony in connection with its motion for summary judgment. The District Court had also ruled that the attorney-client privilege did not extend to summary reports prepared by KBR’s non-lawyer investigators. In vacating the District Court’s ruling, the D.C. Circuit reached three key holdings.
First, the D.C. Circuit held that KBR did not put the privileged investigation files at issue in the case by merely referencing the testimony in a footnote in its summary judgment brief because “KBR neither directly stated that the [internal] investigation revealed no wrongdoing nor sought any specific relief because of the results of the investigation.” In reaching this holding, the D.C. Circuit reasoned that cursory statements made in footnotes of briefs should not be indulged as a matter of practice, and the mere inference of “no wrongdoing” that could be drawn from KBR’s footnoted assertion held little weight because as a summary judgment movant, all inferences were to be drawn against KBR.
Second, the D.C. Circuit held that simply designating an in-house lawyer in response to a deposition notice on the topic of the privileged nature of an internal investigation, while still preserving the privilege in response to specific questioning during the deposition, does not compel the production of privileged materials reviewed by the witness to prepare for the deposition under Federal Rule of Evidence 612. In reaching this holding, the D.C. Circuit observed that “[i]f all it took to defeat the privilege and protection attaching to an internal investigation was to notice a deposition regarding the investigations (and the privilege and protection attaching to them), we would expect to see such attempts to end-run these barriers to discovery in every lawsuit in which a prior internal investigation was conducted relating to the claims.” It was this potential “floodgates” consequence that drove the D.C. Circuit to conclude that “the District Court’s rulings would ring alarm bells in corporate general counsel offices throughout the country about what kinds of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection of an internal investigation.”
Finally, the D.C. Circuit held that the District Court wrongly concluded that some of the summary reports prepared by KBR’s investigators were not privileged because it was clear that portions of the documents summarized statements made to the investigator, who “effectively steps into the shoes the attorney,” by KBR employees. The D.C. Circuit clarified that the privilege attaches to a summary report prepared by an attorney (or its agent) where the purpose is “to put in usable form the information obtained from the client.” However, the court rejected KBR’s argument that such summary reports should be considered privileged for all purposes, as opposed to receiving qualified protection as work product. In doing so, the D.C. Circuit spurned the notion that “everything in an internal investigation is attorney-client privileged” and cautioned that “there is nothing gained by sloppily insisting on [asserting] both [attorney-client privilege and work product protection for the same content] or by failing to distinguish between them.”
There are several lessons to be gleaned from the D.C. Circuit’s second opinion in the KBR/Barko litigation. These include:
- The attorney-client privilege remains a powerful tool in protecting the confidentiality of internal corporate investigations.
- In-house counsel may continue to use non-lawyers to carry out internal investigations without jeopardizing the privilege, but the work product of such individuals is only protected on a qualified basis except to the extent that it reveals or summarizes a privileged communication with an employee.
- In the litigation context, plaintiffs cannot pierce the privilege by merely noticing a privileged investigation as a topic in a corporate deposition, and corporate defendants do not waive the privilege by designating an in-house lawyer as a corporate witness to testify about that topic, so long as the privilege is vigorously protected by counsel during the deposition.
- To avoid any assertions of implied privilege waiver, counsel must be mindful about how they publicly describe an internal investigation, including by avoiding overtly stating that the investigation “revealed no wrongdoing” and not seeking any litigation-related relief based on the results of the investigation.
Internal investigations serve a vital corporate function. In many situations, cloaking such investigations in the confidentiality of the attorney-client privilege is paramount. However, the applicability of the privilege to internal investigations is once again the subject of some uncertainty as a result of another series of rulings in United States ex rel. Barko v. Halliburton Company et al.
In June 2014, the U.S. Court of Appeals for the District of Columbia Circuit upheld the privileged status of Kellogg Brown & Root, Inc.’s (KBR’s) internal investigation files regardless of whether the investigation was conducted pursuant to a mandatory or voluntary compliance program. See In re Kellogg Brown & Root, Inc., 756 F.3d 754, 757-760 (D.C. Cir. 2014), cert. denied, 135 S.Ct. 1163 (U.S. 2015). The court held that the attorney-client privilege applies as long as “a significant purpose” of the investigation is to obtain or provide legal advice. 756 F.3d at 760. Continue Reading The Redrawing of Privilege Boundaries for Internal Investigations in the Barko/KBR Litigation