Disclosing the results of a company’s internal investigation to government investigators is always fraught with potential problems. The most obvious is the danger of waiving attorney-client privilege and work product protections that would otherwise shield the internal investigation from discovery in parallel litigation. But another less-heralded danger is the risk of defamation claims by employees identified through the investigation as having participated in illegal activity. The risk associated with such claims was on display in a recent ruling by a Texas court of appeals, which held that Shell Oil Company was entitled to only a conditional privilege, and not “immunity,” for statements it made in a written report to the Department of Justice (DOJ) regarding alleged violations of the FCPA.
On Nov. 4, 2010, DOJ announced more than $236 million in civil and criminal penalties from the settlement of alleged FCPA violations in Nigeria. The settlements followed a lengthy investigation of Panalpina Group, a Swiss logistic company, and several of its oil and gas clients, including Shell. According to the Texas court of appeals’ decision, DOJ first requested a meeting to discuss Shell’s business with Panalpina in July 2007. Following that meeting, Shell agreed to conduct an internal investigation, which eventually culminated in a written report that was submitted to DOJ in February 2009.
Following the 2010 settlements, a former employee sued Shell for defamation, claiming that Shell’s written report falsely stated that he recommended reimbursement to contractors for payments that he knew were bribes. The trial court granted summary judgment in favor of Shell, finding that Shell had an absolute privilege (i.e., immunity) for the statements it made to DOJ. The Texas court of appeals reversed that finding on June 24, 2013, holding that Shell’s written report was covered by only a conditional privilege. Consequently, Shell is not immune from suit if the former employee can show that Shell’s actions were motivated by malice.
The key legal issue in the case was whether Shell’s statements were made in the context of an ongoing or proposed judicial or quasi-judicial proceeding. If so, then the statements would be absolutely privileged. But the appeals court rejected Shell’s argument that DOJ’s solicitation and the resulting internal investigation were evidence of a proposed judicial proceeding. Likewise, the court rejected Shell’s argument that the 2010 settlement was evidence of a proposed judicial proceeding. In the absence of direct evidence that DOJ was contemplating a judicial proceeding in February 2009, the court rejected Shell’s absolute privilege claim.
The case is also noteworthy for the policy arguments made in the majority and dissenting opinions. The dissent takes on the key policy issue — the potential chilling effect of the court’s ruling: “If absolute privilege is not available, a cooperating party runs the risk of defamation actions by anyone identified as having involvement in a potentially prohibited transaction. This risk creates a disincentive for companies to conduct their own investigations, to make frank assessments of fault, and to communicate findings to DOJ.” The majority focused on a rival policy argument, however, suggesting that absolute immunity would “discourage, rather than encourage, truth-telling” because companies have a “strong motive to deflect blame.” The majority concluded that a conditional privilege was sufficient protection to encourage companies to cooperate with law enforcement.
The court’s ruling no doubt raises additional concerns for companies considering the already difficult decision whether to disclose the results of an internal investigation. As the dissent notes: “A company like Shell is, in the face of a DOJ inquiry, in a quandary: it can provide inculpatory statements regarding actions taken on its behalf by its employees, recognizing that it is exposed to a defamation claim. Or it can face criminal prosecution or penalization for a failure to comply and cooperate adequately with the DOJ’s investigation.” But this may be less of a dilemma than the dissent imagines. A company’s concerns about potential defamation claims ordinarily will pale in comparison to the high-stakes risks associated with a criminal investigation by DOJ. Thus, the feared chilling effect is likely overstated.
Although the Texas court’s decision increases the potential costs of cooperating with a government investigation, it probably will not alter the level of cooperation in most cases. In all likelihood, companies will continue to assess the appropriate level of cooperation necessary to avoid or minimize their exposure in a criminal investigation, and will simply accept the possibility of defamation claims as an unfortunate cost of doing business.