When companies cooperate with investigations by government agencies, there are inherent risks with disclosing information, including the potential for unintentional waiver of the privileges protecting communications between companies and their attorneys and the work product that attorneys create. A recent subpoena by the Office of the Attorney General of the State of New York (“OAG”) demanding the production of all documents and communications relating to civil and criminal investigations of Mallinckrodt LLC by the Department of Justice (“DOJ”) and the Drug Enforcement Agency (“DEA”) demonstrates this risk. Mallinckrodt has refused to provide materials prepared for the investigation and its communications with the DOJ and the DEA, arguing that they are protected from disclosure by what is known as the settlement privilege.
The settlement privilege protects communications between parties during their negotiations for a resolution. The purpose of the privilege is to promote frank conversations between the parties without the fear that either side could use the substance of the discussions in subsequent litigation. State law defines the settlement privilege and its strength and scope varies by state, ranging from merely barring the use of such materials in court to completely protecting them from disclosure.
In the case at issue, the DEA and DOJ conducted an investigation that went on for almost five years, ending in July 2017, into whether Mallinckrodt violated certain provisions of the Controlled Substances Act. The federal authorities alleged that Mallinckrodt failed to implement an effective system to detect and report suspicious orders of controlled substances, and violated record keeping requirements at its manufacturing facility in New York. Mallinckrodt resolved the investigation by agreeing to pay a $35 million civil penalty and entering into a settlement agreement with the DEA.
Several months later, the OAG began its own investigation into Mallinckrodt’s conduct and issued a subpoena to Mallinckrodt and its subsidiary SpecGX LLC (collectively, “Mallinckrodt”) seeking, among other things, documents and communications concerning the DEA/DOJ investigations that resulted in the settlement agreement. Among other things, the OAG sought emails, letters and PowerPoint presentations exchanged between the federal authorities and Mallinckrodt that “would reveal the factual and legal positions asserted by Mallinckrodt in response to the DEA/DOJ investigation.”
Mallinckrodt may have resorted to asserting the settlement privilege rather than the attorney-client privilege or work product protection due to the broad nature of the request and the fact that many of the documents responsive to the request would have been shared with the DOJ and DEA, effectively waiving the privilege.
After Mallinckrodt asserted the settlement privilege, the OAG filed its petition seeking to compel compliance with the subpoena, arguing that the materials sought are directly relevant to the state’s investigation and that the company’s interpretation of the settlement privilege is overbroad. In the OAG’s view, although settlement offers may be inadmissible as proof of liability, exchanges of parties’ legal and factual positions are both discoverable and admissible under New York law. The OAG also pointed to a case from the Southern District of New York, in which the federal district court held that position statements exchanged between investigative agencies and their targets are discoverable because such statements are not really “offers of settlement.” The court reasoned that such documents advocate whether the government agency should bring an enforcement action and are not really negotiations about settlements.
The court’s determination about whether the settlement privilege applies to Mallinckrodt’s documents and communications will likely turn on its interpretation of New York’s statute protecting settlement communications, specifically whether the statute protects against the communications being discovered as well as admitted in a subsequent proceeding.
This situation underscores the double bind that companies often face when they engage with government agencies during investigations. On the one hand, the government agencies expect companies to fully cooperate by disclosing the results of their investigations and, at times, pursuing investigation leads that the government requests of them. On the other hand, by disclosing those facts to the government, companies run the risk that their disclosures will be subject to subsequent discovery in follow-on civil or criminal litigation. Last year, for example, two companies faced claims (see here and here) by former employees who were criminally charged that those companies essentially operated as arms of the government. In one of those cases, the former employee argued that the government should have reviewed the company’s internal investigation files for exculpatory materials to satisfy its obligations under Brady v. Maryland.
This trend of follow-on litigants pursuing the materials companies disclose during government investigations is likely to continue.