Source: http://globalinvestigationsreview.com/insight/the-practitioner%E2%80%99s-guide-to-global-investigations/1079381/parallel-civil-litigation-the-us-perspective
Timestamp: 2017-08-18 06:53:10
Document Index: 113087593

Matched Legal Cases: ['§ 552', '§ 200', '§ 1332', '§ 78', '§ 77', '§ 1', '§ 626', '§ 722', '§ 145']

Parallel Civil Litigation: The US Perspective – Global Investigations Review – GIR
Laura R Hall and Justin L Ormand
30.2 Stay of proceedings
When a company under investigation is also involved in ongoing civil proceedings (before a court or an arbitral tribunal) that relate to the conduct under investigation, a party or the government may seek to stay those proceedings pending the outcome of the investigation. While this is often desirable to avoid tension between a civil litigation and an investigation, it is difficult to achieve. A court’s decision to grant a stay is, as a general matter, entirely discretionary.1
While courts in the US are sensitive to the potential prejudice to an individual or entity under investigation that is forced to proceed with civil litigation about the same conduct, and in particular the potential that an individual’s constitutional right against self-incrimination may be compromised,2 courts are nevertheless hesitant to stay civil cases simply because an investigation is pending. If a stay is granted, a court may impose conditions and limitations, including limitations on length. A stay of civil proceedings will freeze the proceedings until the stay expires or the court issues a further order. A party can apply to have a stay lifted at any time.
Note that in criminal investigations or proceedings, the government may seek a stay to protect the criminal process, including limiting a company’s ability to use civil litigation to obtain broader discovery than is available in a criminal case. For instance, in a parallel civil case, putative or actual defendants in the related criminal proceedings can seek the deposition testimony in the civil case of key witnesses that the government intends to rely on in the criminal case, providing a significant advantage to defendants that would not otherwise exist in the absence of the civil case.
30.3 Class actions
In the US, class actions are a centrepiece of complex civil litigation, in particular securities and antitrust litigation, as the misconduct alleged often impacts large markets and large numbers of entities and individuals. More often than not, a complex criminal or regulatory investigation will generate class action litigation.
In the US, class actions may be brought on behalf of similarly situated claimants. There are many scenarios in which class actions may be certified, but class actions typically involve cases where there are a significant number of claimants and common legal issues predominate over any individualised issues, so that the litigation can fairly be prosecuted on a representative basis. A class action is litigated similarly to an individual action, except that the plaintiff must file a motion asking the court to certify the class, and there may be litigation about which plaintiff will be lead plaintiff in the action.3 The defendant may oppose class certification on many grounds, including that too many individualised issues exist. Motions for class certification are moving to the later stage of cases, and, unless the motion for class certification is denied, the case will proceed on a class basis, with a representative plaintiff leading.
30.3.2 Class actions following release of reports, findings, etc.
In the US, class actions against a company arise frequently following the release of internal investigation reports, regulatory findings or entry into a deferred prosecution agreement, as these documents can provide a roadmap for a civil plaintiff’s claims and are frequently cited in class action complaints as support for the plaintiff’s allegations. When such documents become available publicly, the risk is quite high that one or more civil class actions will follow. If a class action survives a motion to dismiss based on threshold legal infirmities or pleading deficiencies and proceeds to discovery, a class action plaintiff will frequently demand that the company produce all materials that have been provided to the government, in addition to other disclosure requests under broad US discovery requirements.
The release of such internal investigation reports, regulatory findings or a deferred prosecution or plea agreement may also cause potential class action plaintiffs to seek documents a company has provided to the government in connection with an investigation directly from the government through a Freedom of Information Act (FOIA) request.4 Indeed, a FOIA claim could be pursued even before internal investigation reports, regulatory findings or a deferred prosecution agreement become public, provided a claimant has a basis to make a request.
As a general matter, FOIA allows members of the public to access records from any federal agency. Most states have equivalent laws.5 FOIA is subject to a number of exemptions, which should be considered any time a FOIA request is directed to company information in the government’s possession. These exemptions, while narrowly construed, include certain exemptions for records or information compiled for law enforcement purposes as well as exemptions for documents relating to reports prepared by, on behalf of or for the use of agencies that regulate financial institutions. It is therefore rare for FOIA requests to be granted during an investigation. Production of documents to government entities typically is accompanied by a request for FOIA exemption.6 In practice, prosecuting an FOIA claim can be a slow and cumbersome process.
30.3.3 Process
Federal class actions are governed by Rule 23 of the Federal Rules of Civil Procedure. Before a judgment in a class action can issue, a class must be certified. Because of the high standard for class certification and the evidentiary support required, class certification motions are typically filed at the conclusion of the discovery phase. Class certification is often hotly contested. To achieve certification, the proponent of class status must show that the class is so numerous that joinder of all members is impracticable, there are common questions of law or fact, the claims of the proposed representative of the class are typical of the claims of the class as a whole and the proposed representative will adequately represent the interests of the class.7
Once these criteria are satisfied, the action must fit into one of three categories: (1) suits where separate actions might cause a risk of inconsistent judgments or where assets available to pay claims are limited; (2) suits seeking injunctive relief where any monetary remedy would be only incidental to the injunctive relief; and (3) suits seeking money damages.8 Most cases fall within the third category. For these cases, in addition to the criteria set forth above, the proponent of class status must show that the common questions of fact or law predominate, and that class treatment is the superior method for adjudication.9
Other than the certification phase, the case proceeds as would an ordinary civil litigation. Typically, this will involve a motion to dismiss at the pleadings stage in to end the case based on legal infirmities or at least narrow the claims and issues in dispute. If any claims survive, the parties will proceed to discovery, which involves the exchange of typically voluminous documents and the deposition testimony of witnesses under oath. Witnesses who may be implicated in misconduct may refuse to testify on the grounds that doing so would infringe their constitutional right against self-incrimination.10
Discovery is typically followed by motions for summary judgment based on a lack of material facts in dispute.11 If the motion for summary judgment fails, the case proceeds to trial. Settlement of federal class actions must be approved by the court, and must be on notice to all potential class members, who are given the opportunity to opt out of the settlement. If a class was not certified prior to settlement, a streamlined class certification motion is filed in connection with seeking approval of the settlement. Settlement agreements often provide a settling defendant the right to back out if too many class members opt out of the class.
30.3.4 Class Action Fairness Act of 2005
The Class Action Fairness Act of 2005 (CAFA) greatly expanded the federal courts’ jurisdiction over class actions by relaxing the requirements for federal subject matter jurisdiction.12 This allows defendants to remove class actions from state courts to federal courts, and avoid multiple state court class actions by removing the actions to federal court and seeking consolidation. As federal courts generally have more experience administering class actions than state courts, this outcome is often seen as desirable.
30.3.5 Securities class actions: PSLRA & SLUSA
There are two statutory schemes applicable in securities class actions aimed at curtailing frivolous securities lawsuits: the Private Securities Litigation Reform Act of 1995 (PSLRA)13 and the Securities Litigation Uniform Standards Act of 1998 (SLUSA).14
30.3.6 Other considerations: class action waivers in arbitration agreements
In recent years, the United States Supreme Court has held that class action waivers in arbitration agreements are enforceable under the Federal Arbitration Act (FAA).15 Thus, companies should consider subjecting claims by counterparties or customers to arbitration and should include class action waivers in the arbitration agreement. Arbitration agreements typically provide that proceedings will be confidential, and in the absence of access to the class action device, a claimant with meritless claims or claims with low monetary value may be less inclined to pursue them.
30.4 Derivative actions
30.4.1 Law and procedure
In general, under state law, members or shareholders of a company can bring a derivative claim alleging harm to a company and seeking relief on its behalf.16 Before bringing a claim, a plaintiff must generally show that it has made a demand on the company to bring the claim in its own name and the company has refused to do so, or that making such a demand would be futile.17 The plaintiff must name the company as a nominal defendant in the suit, and the company will thereby have the right to participate. Recovery in a derivative action flows to the company.
30.4.2 Practical considerations: indemnification of officers and directors
Typically derivative claims are brought by minority shareholders against majority shareholders or corporate officers and directors. Corporate officers and directors are often entitled to indemnification by the company for such suits pursuant to a company’s by-laws, subject to any requirements or restrictions that may be imposed by state law,18 and this is therefore an important consideration at the outset of any derivative suit. Ordinarily, officers and directors cannot claim indemnification for bad faith conduct, so where a company’s board of directors determines that bad faith conduct has occurred – which determination is highly likely if criminal acts or regulatory misconduct are admitted by officers and directors, such as through a guilty plea – the question of indemnification becomes complicated and often requires careful parsing of whether the amounts claimed are subject to indemnification notwithstanding admission of unlawful acts. The outcome will depend both on the statutory scheme in the state whose laws govern the relationship between the director or officer and the company, as well as the breadth of corporate reimbursement provisions of the relevant insurance policy.
30.5 Other private litigation
30.5.1 Opt-out claims
30.5.2 Purchaser claims
Purchasers of securities of a company under investigation may, once the investigation comes to light, claim that they were defrauded into purchasing securities by material misstatements made by the company while it knew the investigation was pending. Such claims can be brought on an individual or class basis, subject to the limitations of the PSLRA and SLUSA discussed in Section 30.3.5.
30.5.3 Negative impact on contract enforcement rights
The common law doctrine of illegality prevents a party to a contract tainted by conduct that is illegal, or contrary to public policy, from enforcing its contractual rights and remedies in certain circumstances (some contracts may also be rendered unenforceable by statute). The law in this area is highly dependent on facts and circumstances, and courts weigh a variety of factors in determining whether to enforce the provisions of an illegal contract.19
30.5.4 Specific provisions in commercial contracts
indemnities (for the benefit of counterparties) in respect of loss suffered as a result of a certain breaches of the contract by the company.20
A company may face parallel litigation brought by its contractual counterparties in reliance on such provisions. A company may also be able to invoke such provisions against its counterparties, although where a company is under investigation, it may be barred from taking the position in civil proceedings that its counterparty has engaged in illegal activity if the company is also exposed for its counterparty’s conduct, as the company would be in pari delicto or, in other words, equally guilty such that the court will refuse to intercede in a dispute between them.21
30.5.5 Mergers, acquisitions and investments
Mergers, acquisitions and investments can present particular risks for companies. Illegal behaviour in the target company (or its subsidiaries, or other related companies and persons) may have various negative consequences for an acquiring entity, which can include financial consequences (for example, the target may have been overvalued); legal consequences (both civil and criminal) for the target, the acquiring entity and relevant individuals (including officers of both entities),22 along with associated legal costs; and other practical consequences (for example, reputational damage, which may have a consequent effect on business).23
As a result, acquiring entities will often take precautions to minimise these risks. Typically, these include conducting proportionate pre- and post-acquisition due diligence of the target and its business, including without limitation review of all of the target’s business dealings and third-party contracts; implementing compliance programmes; and including appropriate protections in the relevant contractual documentation.
In relation to the latter, warranties, representations and indemnities24 designed to provide such protection are frequently included in share purchase agreements. The scope of protection will depend on the particular provisions negotiated, but they can be widely drafted, such that they encompass the conduct of, for example:
those who perform services for or on behalf of the target and its subsidiaries;
Accordingly, the fact of an investigation (or related proceedings), or conduct which is the subject of an investigation, may give the acquiring entity contractual rights it can seek to enforce (including through litigation or arbitration). The acquiring entity should, therefore, review all of the target’s business dealings and third-party contracts for potential exposure, which may include consideration of the target’s inside and outside legal advice relating to such dealings and contracts.25 Again, however, care may need to be taken in doing so for the reasons given at Section 30.5.4.
30.5.6 Employment law, defamation and whistleblowing
Investigations can have employment law consequences for a company. Employees may seek to bring claims against their employers arising out of the subject matter of an investigation, or how the investigation is handled; conversely, an employer may wish to take action against an employee implicated in the conduct under investigation (see Chapter 13 on employee rights). Employees may also pursue claims for defamation based on statements a company may make about their conduct either internally or to the government.26
In addition, to the extent that allegations have been made by whistleblowers, companies under investigation or conducting investigations should be careful to respect whistleblower rights to avoid claims for breach of the protections afforded to whistleblowers (see Chapter 19 on whistleblowers).
30.6 Evidentiary issues
30.6.1 Reliance by the court on statements of facts in authority findings
30.6.2 Reliance by the authority on findings of a court
Conversely, facts discovered during the course of civil litigation may draw the attention of the government, and the government may rely on the findings in a civil case as grounds for opening an investigation or taking some other enforcement action. Accordingly, these risks may be relevant considerations for a company when considering and implementing its litigation strategy in civil proceedings. In addition, conflicted representation and privilege issues may arise if the interests of the company and its employees are not aligned. For example, company counsel may represent a key employee witness at deposition in a civil case, but in the context of a subsequent criminal investigation may be conflicted from continuing the representation should the employee’s interests diverge from the company’s interests,27 such as where the company wishes to disclose misconduct to the government but the employee wishes to invoke his or her Fifth Amendment privilege against self-incrimination.
30.6.3 Collateral use of disclosed documents
In the US, the scope of discovery in civil cases is very broad, and parties in federal civil litigation must typically disclose all potentially relevant non-privileged evidence.28 Confidentiality of a relevant document is not a justification for refusing to disclose it, though confidential documents are often protected from public disclosure by protective orders.
30.7 Practical considerations
30.7.1 Coordination with internal investigations team
a clear, holistic strategy is developed for managing the investigations and parallel civil proceedings, and anticipating areas of potential risk (e.g., civil claims which may arise, but have not yet been commenced);
an authority seeks disclosure of privileged documents from the company in circumstances where the company may wish to assert privilege over those documents in subsequent civil proceedings (see Section 30.7.2);
witnesses, whose testimony may be important for the company’s case in civil proceedings, are under investigation, or have been classified as suspects, by the authorities, and have concerns about self-incrimination (see Chapter 8 on witness interviews). Depending on the circumstances, employment proceedings may also be ongoing in respect of such individuals;
pleading possible defences (such as illegality) in civil proceedings, which may strengthen the company’s case in those proceedings but would undermine the position it has taken in relation to an investigation (see Section 30.5.4); or
as part of deferred prosecution agreement negotiations there is a risk that matters an authority seeks to include in an agreed statement of facts could be relied on against the company in parallel civil proceedings (see Sections 30.6.1 and 30.8).
30.7.2 Privilege waiver and disclosure obligations
During an investigation, documents entitled to privilege or work-product protection may be shown or provided to relevant authorities, often to demonstrate co-operation. These include not only privileged communications between attorney and client but also documents, such as witness interview notes, generated by outside counsel. Depending on the applicable privilege law, which can vary widely from state to state and even among the federal circuit courts of appeal, sharing such information will not necessarily constitute a general privilege waiver for the purposes of subsequent civil proceedings (particularly if it is made clear that this is done on a limited basis), although it may lead to adverse consequences, as the company will lose a degree of control over the information in the documents. In cases involving multiple jurisdictions, it is critical for a company to obtain advice on all potentially applicable privilege laws prior to showing potentially privileged documents to the government, as the effect of showing or providing a potentially privileged document to the authorities may vary depending on which law governs questions of privilege.
30.8 Concurrent settlements
Difficult issues can arise for companies when attempting to negotiate settlement of global investigations, which can involve a variety of regulatory and prosecuting authorities across a range of different jurisdictions (see Chapter 22 on negotiating global settlements). Parallel existing (or potential) civil litigation or arbitration adds a further layer of complexity to the analysis.
During settlement negotiations with the authorities, companies should be aware of the risk that a settlement, as well as any associated press coverage or documents (such as a statement of facts in a deferred prosecution agreement), may raise awareness of potential civil claims, and in the class action context will likely be relied on to support claims (see Section 30.3). Accordingly, and to the extent possible, companies should avoid admitting liability as part of any negotiated settlement with the government; and, if an admission of liability is required, they should ensure that it is narrowly circumscribed (see Chapter 22 on negotiating global settlements).
See Twenty First Century Corp. v. LaBianca, 801 F. Supp. 1007, 1010 (E.D.N.Y. 1992) (citing Kashi v. Gratsos, 790 F.2d 1050, 1057 (2d Cir. 1986)). Courts balance a number of factors in determining whether to grant a stay, including ‘(1) the private interest of the plaintiffs in proceeding expeditiously with the civil litigation as balanced against the prejudice to the plaintiffs if delayed; (2) the private interests of and burden on the defendant; (3) the convenience to the courts; (4) the interest of persons not parties to the civil litigation; and (5) the public interest.’ Id. (internal quotations and citation omitted).
Corporations do not enjoy the constitutional privilege against self-incrimination.
Fed. R. Civ. P. 23(c).
FOIA, which is codified at 5 U.S.C. § 552, is a law that allows members of the public to seek access to information in the possession of the government.
'State law’ in this chapter refers to New York law unless otherwise noted. This chapter does not purport to address the potential variances in the laws of all 50 US states.
See 17 C.F.R. § 200.83 for a description of confidential treatment procedures under FOIA.
Fed. R. Civ. P. 56(a) (‘The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’).
28 U.S.C. §§ 1332(d) et seq.
15 U.S.C. §§ 78u-4, 78u-5 et seq.
15 U.S.C. §§ 77p, 78bb et seq.
See DirecTV v. Imburgia, 136 S. Ct. 463 (2015); AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). The FAA is codified at 9 U.S.C. §§ 1 et seq.
See, e.g., N.Y. Bus. Corp. L. § 626 (authorising shareholder derivative suits).
When such a demand is made, companies sometimes form a ‘special litigation committee’ or ‘demand review committee’ consisting of disinterested and independent directors to determine whether pursuing the claim proposed by the shareholder is in the company’s best interests. A special litigation committee’s determination that such a claim should not be brought can provide a strong defence to defendants in a shareholder derivative action.
See, e.g., N.Y. Bus. Corp. L. § 722 (authorising indemnification of corporate officers and directors); 8 Del. C. § 145 (same).
See, e.g., Denburg v. Parker Chapin Flattau & Kimpl, 82 N.Y.2d 375, 385 (1993).
See Kirschner v. KPMG LLC, 15 N.Y.3d 446 (2010).
The Department of Justice (DOJ) recently issued an opinion addressing factors that may be relevant in determining whether and how the DOJ would seek to impose post-acquisition successor liability on an acquirer for pre-acquisition Foreign Corrupt Practices Act (FCPA) violations by its target. See US Department of Justice, Foreign Corrupt Practices Act Review, No. 14-02 (7 November 2014). The DOJ ‘encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process.’ Id. at 3-4.
However, see footnote 21 above in relation to indemnities against criminal liability.
An acquiring company should be conscious, however, of the potential for a privilege waiver by the target company if such legal advice is shared outside the context of litigation. The law on this subject varies from state to state, but in New York, for example, pre-closing communications between counsel for a target company and its acquiror are not privileged unless they relate to pending or anticipated litigation. See Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016).
See, e.g., Mott v. Anheuser-Busch, Inc., 910 F. Supp. 868, 874-78 (N.D.N.Y. 1995) (granting summary judgment in favour of employer on employee defamation claim stemming from employer’s investigation and subsequent reporting of employee’s illegal conduct, and finding that the investigation was conducted in a ‘thorough and responsible manner’ because it was initiated immediately following reports of wrongdoing, included interviews with all relevant parties and an extensive review of books and records, and was undertaken by a team including both inside and outside counsel).
See, e.g., N.Y. Unified Court System, Rules of Professional Conduct, Rule 1.7(a)(1) (a lawyer cannot concurrently represent two clients with differing interests).