On June 16, the U.S. Court of Appeals for the Second Circuit upheld the right of a company to terminate for cause executives who refuse to cooperate with an internal investigation and remain “silent” even with the specter of criminal prosecution looming.
The case, William W. Gilman, Edward J. McNenney Jr. v. Marsh & McLennan Cos. Inc., Docket No. 15-0603-cv, originally heard in the U.S. District Court for the Southern District of New York, was brought by former managing directors of Marsh & McLennan, William Gilman and Edward McNenney Jr., who sought to recover employment benefits they lost as a result of their termination for failing to consent to be interviewed in an internal investigation. At the time, Marsh was under investigation by then-New York Attorney General Eliot Spitzer regarding alleged bid-rigging between several insurance carriers, including Marsh. Gilman and McNenney had been identified by an AIG government cooperator as co-conspirators. When AIG filed a civil complaint against Marsh for alleged fraudulent business practices and antitrust violations, Marsh expanded its own ongoing internal investigation.
In the internal investigation, Marsh’s counsel asked Gilman and McNenney to sit for interviews and, according to the Order, “warned that failure to comply would result in termination.” Neither complied and both communicated refusals to cooperate, citing the looming criminal investigation being conducted by the New York Attorney General. Marsh terminated Gilman and McNenney one day later and took the position that the terminations were “for cause,” which led to the denial of their employment benefits including deferred compensation and severance. Gilman and McNenney subsequently filed a civil suit against Marsh seeking reinstatement of their employee benefits. The district court granted Marsh summary judgment in January 2015, concluding the company’s interview requests were reasonable, and that the former executives had been fired for cause.
On appeal, the Second Circuit recognized that “Marsh’s demands placed Gilman and McNenney in the tough position of choosing between employment and incrimination (assuming of course the truth of the allegations)” that did not immunize them from the “collateral consequences” of those acts, including leaving Marsh “with no practical option” other than to terminate their employment when they refused a reasonable interview request. Moreover, even though Marsh was actively cooperating with the New York Attorney General’s investigation, the court, citing United States v. Stein, 541 F.3d 130 (2d Cir. 2008), held that there was “no evidence that the AG ‘forced’ Marsh to demand interviews” or otherwise influenced how those interviews were requested or conducted and thus there was no state action. The Second Circuit also reinforced its earlier decision in D.L. Cromwell Investments, Inc. v. NASD Regulation, Inc., 279 F.3d 155 (2d Cir. 2002) noting that there is no state action where a private actor such as Marsh “had independent regulatory interests and motives for making [its] inquiries and for cooperation” with a government investigation.
The Yates Memorandum, released by the Department of Justice in September 2015, emphasizes a focus on prosecuting culpable individuals and creates an expectation that companies seeking cooperation credit should supply information from internal investigations as well as identify potentially culpable employees. Thus this decision may increase pressure on employees including corporate executives to cooperate. However, neither the Yates Memorandum nor the Gilmanopinion go as far as requiring termination of employees who choose not to sit for an interview—that remains a business decision of the company.
The Second Circuit’s opinion may also impact how companies and organizations handle internal investigations—and particularly the role of executives in those investigations. Given the implications on both companies and executives, there is heightened importance for the Board of Directors and/or Chief Legal Officer to be kept apprised of who is on the interview list during an investigation and whether or not a company may potentially lose its employees who opt to leave rather than be interviewed.