One of the most pressing priorities confronting global companies, including those in the life sciences industry, is the management of regulatory risk in cross-border transactions. Among the laws creating significant exposure are the Foreign Corrupt Practices Act (US antibribery laws and international analogs), the International Federation of Pharmaceutical Manufacturer Associations’ Code of Pharmaceutical Marketing Practices, and the International Traffic in Arms Regulations which covers transfers of restricted technology hardware and information. For life science companies operating in one of the world’s most heavily regulated industries, adherence to multiple regulatory systems is challenging enough, but these compliance challenges are exacerbated by policy shifts by key governmental players.
In December 2006, Paul McNulty, the US Department of Justice’s (DOJ) Deputy Attorney General, concluded a fierce policy debate that had spilled over from the DOJ into the halls of Congress. By issuance of a memorandum on “Principles of Federal Prosecution of Business Organizations”, referred to as the “McNulty Memorandum”, the DOJ’s second-highest ranking official announced what may be a significant change in policy for federal criminal prosecutors nationwide. But will the changes mitigate the anxiety of corporate executives surrounding the issue of whether their confidential internal communications are likely to remain confidential?
Whether to Waive the Privilege to Avoid Prosecution
In January 2003, the DOJ circulated what became known as the “Thompson Memorandum” on “Principles of Federal Prosecution of Business Organizations”. On 21 October 2005, Acting Deputy Attorney General Robert McCallum issued guidance on this subject entitled “Waiver of Corporate Attorney-Client and Work Product Protections”. The McNulty Memorandum also supercedes this. DOJ policy articulated in this document identified “co-operation” as a factor to be weighed in the decision on whether to charge a corporation with criminal wrongdoing. Elements of “co-operation” were identified as including the corporation’s waiver of the attorney-client privilege and work product protection with respect to internal investigations and communications with officers and employees. The Thompson Memorandum qualified this by stating that these concessions were not an “absolute requirement” to attain “co-operative” status but still something to “consider” in “evaluating the corporation’s co-operation”.
Industry Resistance to Erosion of Confidentiality of Communications
Since the collapse of Enron, a multitude of individual corporate officers and corporate defendants, including life sciences companies, have either been convicted, pleaded guilty or entered into deferred prosecution agreements. As a result, opposition to the principles of the Thompson Memorandum has arisen among the defense bar and the corporate community. The concerns of these constituencies ultimately reached the halls of Congress. The primary concern for many was that the DOJ policy was unfairly coercing corporate decision-makers to forego constitutionally protected rights in order to alleviate the impacts of full-blown criminal prosecution.
Commentators have noted that the unintended side effect of an aggressive culture of waiver is that corporate officials and employees are less likely to confide fully in their internal and external legal advisers. This conclusion is not unreasonable as corporate officials lose confidence that these potentially incriminating communications will not remain confidential in the event of a criminal investigation. This chilling effect could make it less likely that a corporation’s internal compliance controls function efficiently when most needed.
Effective internal compliance controls rely heavily on the responsible corporate officials’ ability to gather accurate and complete information about employee conduct so that appropriate, timely, responsive measures can be taken. With the DOJ engaging in an unprecedented sweep of corporate prosecutions, the cold fear of individual exposure could begin to choke off the flow of internal information needed to facilitate the very corporate reforms identified in the McNulty Memorandum as the Government’s core law enforcement objectives. The McNulty Memorandum acknowledges this through its reference to the US Supreme Court’s words in Upjohn v United States, 449 US 383, 389 (1976). There, the Supreme Court observed that the purpose of the attorney-client privilege “is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law . . .”
This tension is inescapable. The McNulty Memorandum makes it clear that prosecutors will continue to hold businesses criminally liable not just for employee misconduct that is specifically directed by corporate officials for the benefit of the corporation (e.g., increased sales, propped up stock price) but also for employee conduct that may not ever benefit the corporation. This is the case even if employees’ methods violated corporate policy and primarily geared towards their own personal benefit.
Predictions on the ultimate result of the DOJ’s clarification of its policy on corporate co-operation are premature since what actually takes place in future DOJ criminal investigations is far more important than the content of bureaucratic pronouncements disseminated to the DOJ’s field offices.
What will be the practical impact? The McNulty Memorandum states that prosecutors should employ a balancing test to determine if the waiver of the privilege will serve a “legitimate” investigative purpose. The memorandum cites four factors that should be considered:
- The likelihood and degree to which the privileged information will benefit the Government’s investigation
- Whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require a waiver
- The completeness of the voluntary disclosure already provided
- The collateral consequences to a corporation of the waiver Critical questions remain, including: Which of the factors weigh most heavily? How should counsel measure the “benefit” to the Government’s investigation? What should corporations provide to investigators voluntarily and when should they provide it?
Some experienced defense counsel believe that the McNulty Memorandum will be no barrier to aggressive prosecutors seeking authorisation to accept corporate waivers of the attorney-client privilege. In their view, only a waning of the DOJ’s avid desire to prosecute corporations will have any impact on the frequency of these waivers. This might be too pessimistic a view given that the McNulty Memorandum also explicitly freed senior corporate counsel from the anxiety that the decision to advance legal fees to “employees or agents under investigation and indictment” would be viewed as per se failure to co-operate with the Government.
Regardless, senior corporate counsel must ensure that company policies and procedures for conducting internal investigations and proactive compliance audits, and responding to governmental investigations, all take into account the DOJ’s latest guidance on what responsive actions are most likely to be to the company’s benefit and, conversely, to its detriment. As was always the case, these critical defense decisions should be thoroughly vetted with experienced counsel before committing to any course of action.