A criminal charge or civil enforcement action against a company can be devastating. Charges may, for example, lead to debarment from federal programs — a corporate death sentence to health care companies and government contractors. But the U.S. Department of Justice (DOJ), the U.S. Securities Exchange Commission (SEC) and other enforcement agencies have long touted the benefits of cooperation for companies under investigation.
In deciding whether to charge a company, the DOJ’s “Principles of Federal Prosecution of Business Organizations” — the so-called the “Filip factors” — instruct prosecutors to consider, among other things, “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” (See USAM 9-28.300). Thus, when faced with allegations of wrongdoing, companies and their outside counsel generally will conduct their own investigation and report their findings to the government.
In the past, a presentation of the facts and evidence tended to be viewed as cooperation. Now, the government expects more. As noted by Criminal Division Assistant Attorney General Leslie Caldwell just a few months ago, the DOJ “expect[s] cooperating companies to identify culpable individuals — including senior executives if they were involved — and provide the facts about their wrongdoing.” See Assistant Attorney General Leslie R. Caldwell Delivers Remarks at New York University Law School’s Program on Corporate Compliance and Enforcement,” April 17, 2015, http://1.usa.gov/1UUMtGx.
Cooperation v. Confidentiality
Evidence of individuals’ bad acts comes in many forms; e-mails and interviews being the most common. While counsel often consider the potential discoverability of their reports and interview memoranda in a parallel private litigation, counsel should also consider the possibility that individuals accused of wrongdoing may later claim that they have been defamed. Interestingly, the courts have split as to whether statements to prosecutors during the course of cooperating with a government investigation can give rise to such a lawsuit.
Shell Oil Co. v. Writt
In a recent case, Shell Oil Co. v. Writt, 58 Tex. Sup. J. 956 (Tex. 2015), the Supreme Court of Texas held that such statements are “absolutely privileged” and are thus not actionable. In Shell , the DOJ had sent a target letter to Shell alleging FCPA violations relating to a deep-water oil and gas project off the coast of Nigeria. In its 2007 letter, the DOJ requested a meeting with Shell to discuss the investigation.
Not surprisingly, Shell complied with the request, and Shell and its attorneys took a well-worn trip to Washington, DC, to meet with the DOJ’s FCPA prosecutors. Shell agreed to conduct an investigation and report its findings to the DOJ, with the understanding that the report would remain confidential. Thereafter, outside counsel conducted an investigation pursuant to a plan approved by the DOJ. The investigation included reviewing documents and conducting interviews of employees identified by DOJ. One of these employees was Robert Writt.
In February 2009, Shell reported its findings to the DOJ, including information and analysis of Writt’s conduct. Shell reported that Writt was aware of “several red flags” and had provided “inconsistent information” about his knowledge of the alleged FCPA violations. Shell also terminated Writt due to violations of Shell’s corporate code of conduct. Shell later entered into a Deferred Prosecution Agreement with the DOJ.
Prior to Shell entering into its DPA, Writt sued Shell for defamation, alleging that Shell defamed him when it told the DOJ that he had participated in the alleged FCPA violations. Shell moved for summary judgment on the grounds that its report to the DOJ was absolutely privileged and thus could not support a defamation claim. The trial court agreed and granted summary judgment on Writt’s defamation claim. See id. *6
The Texas Court of Appeals reversed the trial court and ruled that Shell’s report to the DOJ was not absolutely privileged because at the time of the report, no proceeding was ongoing, actually contemplated or under serious consideration. See id. The appellate court ruled that Shell’s voluntary cooperation with the DOJ was insufficient to establish that Shell made its statements under serious threat of prosecution. Shell appealed.
The Texas Supreme Court held that Shell’s report to the DOJ was “absolutely privileged,” and reinstated the trial court’s judgment. In so ruling, the Texas Supreme Court first noted that “[t]he proper administration of justice requires full and free disclosure of information as to criminal activity.” Id. at *10-11. Thus, the law recognizes two privileges that can attach to communications with government officials in furtherance of an investigation: 1) an “absolute privilege”; and 2) a “conditional” or “qualified” privilege. Shell argued that its report to the DOJ was absolutely privileged, whereas Writt argued that Shell’s communications were merely conditionally privileged.
Citing the Restatement (Second) of Torts, the court noted that “[a] witness is absolutely privileged to publish defamatory matter concerning another in communications preliminary to a proposed judicial proceeding or as part of a judicial proceeding in which he is testifying.” Id. at *11-12. Further, where a witness is making the statement prior to an actual judicial proceeding, as was the case of Shell’s report to the DOJ, an absolute privilege applies when a proceeding is “actually contemplated in good faith and under serious consideration by the witness or a possible party to the proceeding.” Id. at *12.
The court held that Shell’s report to the DOJ was absolutely privilege because it was provided in serious contemplation of a criminal proceeding. The court agreed that after the DOJ contacted Shell, it was clear that the latter was the target of a criminal FCPA investigation. In response, Shell conducted an internal investigation, which took over 18 months and cost over $10 million. The scope of Shell’s investigation was further proof that its report to the DOJ was made in serious contemplation of a potential criminal proceeding.
The court further stated that, in light of the DOJ’s “leverage” over Shell as a result of the “somewhat draconian potential penalties” under the FCPA, Shell was, as a practical matter, compelled to conduct its investigation and report its findings to the DOJ. Id . at *23. The court particularly noted the significant increase in FCPA enforcement actions and penalties in the years leading up to Shell’s report, including the fact that, in 2007 when the DOJ first contacted Shell, FCPA enforcement actions had doubled from the previous year. The DOJ had also publicly announced record FCPA fines in the years following its target letter.
The court concluded that “when it provided the report, Shell acted with serious contemplation of the possibility that it might be prosecuted.” Id. at *25. Accordingly, Shell’s report was absolutely privilege and could not support a defamation claim.
Other Case Law Is Mixed
Despite the result in the Shell case, when other courts have considered whether such cooperation with the government is absolutely privileged, the results have been mixed. For example, in Hurlbut v. Gulf Atlantic Life Ins. Co., 749 S.W.2d 762 (Tex. 1987), noted in the Shell case, the Texas Supreme Court concluded that false statements by the defendant insurance company to state prosecutors in Texas were not absolutely privileged, but instead were merely conditionally privileged and hence could be the subject of a defamation suit because “the person making the defamatory statement kn[ew] the matter to be false or d[id] not act for the purpose of protecting the interest for which the privilege exists.”
Courts in New York, Connecticut, and Florida, have held that communications with prosecutors prior to the initiation of criminal charges are only subject to a “conditional” or “qualified” privilege. See Toker v. Pollak, 44 N.Y.2d 211 (N.Y. 1978); Gallo v. Barile, 284 Conn. 459 (Conn. 2006); Fridovich v. Fridovich, 598 So. 2d 65 (Fla. 1992). In contrast, at least one California court held that “[e]ven unsolicited communications from citizens to governmental agencies have been held protected by the absolute privilege.” O’Shea v. General Tel. Co., 193 Cal. App. 3d 1040 (Ca. App. Dist. 1987). And, of course, complicated choice-of-law issues will arise when attorneys from one jurisdiction conduct an investigation in another jurisdiction (or a foreign country) and then make a report to government attorneys in Washington, DC, or elsewhere.
The Shell case is a useful reminder of a risk sometimes overlooked by companies and their counsel. Of course, companies and their counsel always seek to provide accurate information when reporting the results of an investigation to the government. But what if the company or counsel get it wrong?
If a statement to the government is absolutely privileged, then the company and its counsel are effectively immune from suit. But if an incorrect statement is merely conditionally privileged, the privilege could be negated if the speaker acted with malice. What is really at issue in these cases, therefore, is whether a defamation or similar lawsuit can be quickly dismissed or whether intent — and the fact disputes usually raised by questions of intent — need to be the subject of discovery and trial.
Thus, when cooperating with the government, cautious companies and outside counsel should consider ways to mitigate litigation risks from current and former employees. For example, in the Shell case, the Texas Supreme Court was swayed by the fact that Shell was facing a serious risk of criminal prosecution when it received a target letter from the DOJ. Assuming that the investigation has already been disclosed in the company’s securities filings, counsel could consider designating any reports to the government as not only confidential and made in furtherance of plea or settlement negotiations, but also as being made in contemplation of a judicial proceeding. If there is an ongoing grand jury investigation, counsel may consider seeking an agreement that the report is being made in connection with that “proceeding” if the applicable state’s laws consider a grand jury investigation a judicial proceeding for these purposes. See, e.g., Hott v. Yarborough, 112 Tex. 179, 185 (Tex. 1922) (grand jury proceedings are judicial proceedings under Texas law); Lanchile Airlines v. Connecticut General Life Ins. Co., 731 F. Supp. 477, 479 (S.D. Fla. 1990) (noting that grand jury proceedings are judicial proceedings under Florida law).
In addition, counsel should be cautious in the way their reports are presented to the DOJ. For example, instead of reporting to DOJ that an employee made misrepresentations during an interview, counsel could instead: 1) state the facts disclosed in the employee’s interview, if possible without attribution; and 2) provide documents or other evidence to the contrary, allowing DOJ to draw its own conclusions.
Even if the risk of a later defamation action seems minor when a company is staring down the barrel of potential criminal charges, a later lawsuit — and the inevitable discovery associated with such a lawsuit — will be the last thing a company wants after enduring a long and difficult government investigation.
Jacqueline C. Wolff, a member of the Business Crimes Bulletin newsletter’s board of editors, is co-chair of the corporate investigations and white-collar defense group at Manatt, Phelps & Phillips. Arunabha Bhoumik is a member of the corporate investigations and white-collar defense group, and co-chair of Manatt’s false claims act group.