A recent decision from the Second Circuit affirmed an employers’ right to terminate an employee who refused to participate in an internal investigation. The ruling provides employers with a method of recourse against employees who frustrate their investigative efforts and shields the employer from liability for terminated employees’ lost benefits.

In the case at issue, Gilman v. Marsh & McLennan Co., Inc., defendant Marsh & McLennan Co., Inc. − an insurance brokerage − was investigated by the New York State Attorney General’s Office for its participation in an alleged bid-rigging conspiracy among several insurance carriers. Marsh launched an internal investigation into the allegations, and, in an effort to avoid criminal prosecution at the company level, elected to cooperate with the Attorney General’s investigation and agreed to waive any claim of privilege attached to the information it learned through its internal investigation.

While Marsh’s investigation was ongoing, an employee of one of its alleged co-conspirators pleaded guilty to involvement in the bid-rigging scheme, and at his allocution implicated two of Marsh’s employees: William Gilman and Edward McNenney. In response, Marsh asked Gilman and McNenney to cooperate with its investigation and sit for interviews with its counsel. Marsh warned that if they did not cooperate, they would be terminated and would lose access to the bonuses, stock options, and other benefits that had accrued. Both men refused and were promptly terminated.

Gilman and McNenney jointly brought suit against Marsh in the Southern District of New York seeking recovery of the employee benefits that were forfeited upon their termination. The district court dismissed their case, holding that Marsh was entitled to terminate them for refusing to cooperate. Gilman and McNenney appealed to the Second Circuit, which affirmed the district court’s decision.

The Second Circuit held that under Delaware law − which governed McNenney’s and Gilman’s employment contracts with Marsh − an employee’s refusal to “obey a direct, unequivocal, reasonable order of the employer” provided cause to terminate the employee (apparently even without a written provision expressly requiring such cooperation). Thus, the operative question was whether Marsh’s request that Gilman and McNenney cooperate with its investigation was reasonable. The Second Circuit held that it was. Marsh was “presumptively entitled to seek information from its own employees about suspicions of on-the job criminal conduct,” especially under these circumstances, where both Gilman and McNenney had been implicated by statements made in court and under oath. In light of Gilman and McNenney’s refusal to provide any exculpatory explanation of the allegations, Marsh lacked any recourse but to terminate their employment.

The Second Circuit also found unconvincing Gilman and McNenney’s argument that Marsh’s internal investigation was essentially a state action because Marsh was cooperating with the Attorney General, and any incriminating statements they made would be turned over to the Attorney General. Thus, they argued, forcing their cooperation with the investigation violated their Fifth Amendment right against self-incrimination. The Second Circuit rejected the argument, holding that for an internal investigation to be a state action, there must be evidence that the government in some way “pressured” or “coerced” Marsh to request the interviews, or otherwise “intervened in Marsh’s decision making.” No such evidence was presented. Contrariwise, Marsh had “good institutional reasons” for pursuing the interviews: chiefly, that its stock price was sinking and investors demanded answers to the allegations.

Nor was it of any consequence that Marsh intended to offer up its findings to the Attorney General in order to avoid criminal prosecution at the company level. The Court of Appeals was not blind to the fact that Marsh’s findings would result in Gilman’s and McNenney’s “sacrifice to an angry prosecutor.” However, it found that Marsh’s investigation of Gilman and McNenney was not driven solely by Marsh’s attempt to appease prosecutors; “the interests of prudent directors alone would justify or compel” Marsh to investigate them.

The ability to terminate employees that do not cooperate with internal investigations may prove useful to companies that are seeking to cooperate with a government investigation, particularly in light of the Department of Justice’s announcement in September of last year that company’s seeking lessened penalties in exchange for cooperation “must provide to the [DOJ] all relevant facts about individuals involved in corporate misconduct.” (See some of our coverage of the Yates Memo here.) While this decision is helpful in the employment litigation context, companies typically have terminated non-cooperating employees for several laudable reasons, including to signal to prosecutors that they employed their best efforts to discover all information regarding the misconduct.