On September 9, 2015, Deputy Attorney General Sally Yates released a memo (Yates memo) outlining several changes the Department of Justice (DOJ) will implement “to ensure that individual accountability lies at the heart of [its] corporate enforcement strategy.” The DOJ’s emphasis on identifying the individuals who drove corporate misconduct promises to alter how the DOJ executes corporate investigations. Though touted in the press as an attack on Wall Street executives, the impact of this shift on the life sciences sector will be at least as great, if not greater, than the impact on the financial services sector. The new DOJ policy will:
- Substantially complicate the ability of companies to maintain privilege over internal investigations;
- Complicate the ability of companies to maintain joint-defense relationships with targeted executives; and
- Force boards of directors more frequently to consider establishing “special committees” to oversee government investigations in which senior managers are targeted.
In addition, life sciences companies will face additional challenges:
- Prosecutors pressured to charge individuals will likely rely more heavily than in the past on the Parkdoctrine, which does not require specific evidence of culpable mens rea; and
- Government efforts to obtain False Claims Act (FCA) damages from individuals could fundamentally alter the dynamics of FCA investigations, converting them into even more complex, quasi-criminal matters.
Taking “Cooperation” to a New Level Corporate cooperation during an investigation has traditionally been a mitigating factor to be taken into account by prosecutors both when deciding to bring charges and in the course of resolution negotiations. In particular, the DOJ’s Principles Of Federal Prosecution Of Business Organizations has long made clear that companies will get credit for identifying individuals who drove corporate misconduct. But the Yates memo takes this factor to a new level, stating that the “threshold requirement” for any cooperation credit is complete disclosure to the DOJ of “all relevant facts about individual misconduct,” with the end goal of “coughing up” any “high-level executives who perpetrated the misconduct.” In a policy address accompanying the release of the memo, Yates emphasized that ignorance will not serve as an excuse for failing to deliver information about responsible parties, and corporations seeking cooperation credit must affirmatively investigate individual conduct as necessary. Yates further warned that the DOJ would be “vigorously testing” corporate disclosures to ensure they are complete and do not “seek to minimize the role of any one person or group of individuals.” The Yates memo also changes the way the DOJ will operate internally when investigating corporations. The DOJ will now ask prosecutors to focus on individual wrongdoing from the early stages of any investigation. Although the DOJ has long emphasized the importance of parallel criminal and civil investigations, the Yates memo now directs criminal and civil attorneys to maintain routine communications with each other for the particular purpose of conferring on matters of individual liability. Once the DOJ’s investigation of a corporation reaches the resolution phase, prosecutors cannot finalize a settlement without a plan for resolving potential individual liability. Any such corporate settlement should not, absent extraordinary circumstances, release individuals from civil or criminal liability. Finally, when prosecutors consider whether to bring suit against an individual, they are encouraged to place weight on discretionary factors beyond that individual’s ability to pay. Implications of the Yates Memo The Yates memo raises important questions about the attorney-client privilege. First, the DOJ’s new “all or nothing” approach to cooperation credit creates inherent tension between withholding privileged information and providing a set of disclosures complete enough to earn cooperation credit. While Yates stated, in both her memo and her policy address, that the DOJ will be looking only for “all non-privileged evidence” implicating individuals, the reality is that when the DOJ “vigorously test[s]” corporate disclosures for completeness, companies will be hard-pressed to maintain the privilege. Second, the DOJ’s emphasis on individual culpability will complicate the ability of companies to maintain joint defense agreements with corporate officials. While the Yates memo does not itself prohibit cooperation, including privileged communications, between companies and their executives, under the new DOJ policy companies will be forced to make increasingly hard decisions about whether their interests and the interests of their executives are sufficiently aligned to maintain a privileged relationship. This dynamic will have important implications for corporate governance. If corporate executives will more routinely be at risk for prosecution, boards may increasingly face pressure to organize special committees to oversee investigations. Establishing such a committee may be necessary but has the potential greatly to strain board-management relationships. Specific Issues for Life Sciences Companies The Yates memo also has implications that are particularly salient for life sciences companies. First, prosecutors under pressure to convict corporate officials will seek avenues that maximize the chances of a successful conviction. In the context of alleged Food, Drug and Cosmetic Act (FDCA) violations, prosecutors are likely to increasingly resort to the Park doctrine, under which senior corporate officials can be held liable for their companies’ violations of the FDCA based simply on their status as “responsible corporate officers.” This vehicle is likely to be particularly attractive to prosecutors because, as the Yates memo points out, large corporations often feature “diffuse” responsibility and fragmented decisionmaking, and thus establishing individual liability can be particularly demanding. If the Yates memo spurs additional Park prosecutions, it will further inspire a movement that has been gaining momentum. Public officials have been calling for enhanced use of this doctrine for several years. In 2010, for example, then-Food and Drug Administration (FDA) Commissioner Hamburg announced that FDA was considering whether to “increase the appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible corporate officials accountable.” And in May 2015, Senators Orrin Hatch and Martin Heinrich, in a letter to Attorney General Lynch, requested that the DOJ wield the Park doctrine more frequently against supplement manufacturers “as part of a focused-deterrence and selective targeting strategy against current and would-be transgressors.” The DOJ appears to be responding. In December 2014, a co-owner of Main Street Family Pharmacy, which had produced contaminated drugs, pled guilty to a misdemeanor because he “was responsible for, and actively directed,” the pharmacy’s compounding activities. Neither the DOJ nor FDA press releases set forth any allegations that the co-owner had been personally involved in the misconduct. And in April 2015, two food industry executives received prison sentences after their products caused a salmonella outbreak. This case, United States v. DeCoster, is currently on appeal to the Eighth Circuit, and the executives are raising constitutional challenges to the government’s ability to impose prison sentences, as opposed to financial penalties, for FDCA violations in which corporate executives were unaware of the alleged misconduct. A second consequence of the Yates memo for life sciences companies relates to the FCA. The memo applies to civil investigations as well as to criminal ones, and the DOJ specifically notes that its “position on ‘full cooperation’ under the False Claims Act, 31 U..C. Section 3729(a)(2), will be that, at a minimum, all relevant facts about responsible individuals must be provided.” The FCA offers companies an opportunity to pay reduced damages if three elements are met: 1) the company must give investigating officials “all information known” about the violation(s) within 30 days of when such information was “first obtained”; 2) the company must “fully cooperate” with any government investigation into the violations; and 3) at the time the company provides the information, there can be no criminal prosecution, civil action or administrative action already commenced under the FCA, nor can the company have any “actual knowledge of the existence of an investigation into such violation.” The Yates memo greatly expands the nature and amount of information that must be provided to gain the advantages of this provision. More significantly, the Yates memo threatens to alter the DOJ’s historical policy of rarely seeking FCA damages from individuals. If the DOJ begins routinely to seek FCA damages from individuals, FCA cases may change dramatically. Such cases would become much more like criminal investigations, with companies and their counsel focused not only on their own liability, but also on the potential personal liability of their executives. As such, the defense of such cases may require a larger circle of counsel, with the attendant need to coordinate (or not) on everything from priorities for factual development to the substance of government communications. When companies seek to resolve FCA allegations through settlement, other issues—such as the equitable allocation of damages between the company and any responsible employees—will arise as well. Finally, the directive in the Yates memo that corporate cases not be resolved until a “clear plan” to resolve any pending individual cases has been outlined may protract corporate investigations, complicating the ability of companies to settle matters on their preferred timeline.