Privilege Risk, Whistleblower Pilot Undermine Internal Probes

In-house investigations counsel have been dissecting the Department of Justice’s new corporate whistleblower awards pilot program. The three-year initiative, effective Aug. 1, demonstrates the DOJ’s continued commitment to combating corporate crime. But it complicates one of the most critical tools in the fight against corporate malfeasance—the internal investigation.

The program’s focus on domestic corruption and health-care fraud involving private insurers puts in-house counsel on notice at multinational life sciences companies, especially those charged with monitoring and investigating complaints submitted via a company hotline.

Good corporate citizens, as well as the broader public, should benefit from the DOJ’s commendable effort to incentivize individual whistleblowers to come forward. Yet the accompanying temporary amendment to the Criminal Division’s corporate enforcement and voluntary self-disclosure policy threatens to undermine how investigations are conducted.

Temporary Amendment

The proverbial race to the courthouse has morphed into a sprint to DOJ.

Under the amendment, a company seeking to qualify for a presumption of declination has at most 120 days to self-report misconduct following receipt of an internal whistleblower complaint that was also submitted to the DOJ. Whistleblowers aren’t required to file internally, but taking the additional step may increase their award.

The painfully short window may close prematurely, as the presumption is nullified as soon as the DOJ contacts the alleged corporate offender. That compressed and uncertain timeline will make it extraordinarily difficult for a multinational corporation operating in a highly regulated industry to conduct a sufficiently thorough internal investigation for all but the most straightforward claims.

Outside of obvious, egregious misconduct, the DOJ risks inviting silence—or worse—from less sophisticated corporate entities. The pilot could lead to disclosures of half-baked findings that squander a prosecutor’s limited resources.

Privilege Dispute

The above challenges pale in comparison to the threat posed by a privilege dispute playing out in the US Court of Appeals for the Sixth Circuit. FirstEnergy Corp.’s petition for a writ of mandamus seeks to overturn an Ohio federal district court’s misguided decision holding that two internal investigations weren’t protected by the work product doctrine or attorney-client privilege.

In the wake of a political corruption scandal implicating the company, FirstEnergy Corp. and the board of directors retained separate outside counsel (Jones Day and Squire Patton Boggs) to conduct internal investigations and advise going forward on anticipated DOJ investigations and follow-on civil litigation.

News of the scandal led to a drop in the company’s stock price and subsequent shareholder litigation. The investor class that initiated the underlying action, joined by two criminal defendants, demanded that the Jones Day and Squire Patton Boggs investigation materials be turned over in discovery.

To support the attorney-client privilege and work product doctrine protections, and counter the plaintiffs’ assertion that the investigations were initiated to address business concerns, a board member submitted a declaration into the record explaining the reasons for the investigations.

Yet the appointed special master relied on a technicality in striking the declaration that was filed “under penalty of perjury,” but not declared “as true.” Rejecting FirstEnergy’s “common sense” argument that the internal investigation was carried out “in anticipation of litigation,” the special master pointed to Securities and Exchange Commission reporting requirements and the business’s public relations concerns—failing to recognize that an investigation’s purpose need not be strictly legal.

The district court affirmed, inexplicably faulting the company for failing to “present evidence of the motivations behind the internal investigation,” and FirstEnergy Corp. filed a writ of mandamus.

In-House Lessons

Triage, Triage, Triage. The 120-day reporting window has created a near impossible standard, and those charged with monitoring, reviewing, and investigating future corporate integrity line submissions will need to be ruthlessly efficient. The DOJ’s “call us before we call you” approach necessitates immediate identification of high-risk complaints and a surge mentality when it comes to the allocation of resources.

In-house counsel will have to continue to conduct timely investigations of all incoming complaints, while attempting to identify quickly and allocate resources to those most likely to require a self-disclosure analysis.

This task will be daunting, based on the relatively limited information often available when a report is first submitted, and the time required to conduct initial information gathering and schedule follow-up discussions with reporters.

Educate, Educate, Educate. Company management and directors aren’t accustomed to being presented with self-disclosure questions on such tight timelines with potentially limited investigation findings.

In-house counsel must help those stakeholders understand the DOJ’s newly created time pressures and that they may need to render a decision based on incomplete information.

Communicate, Communicate, Communicate. Under established compliance programs, hotlines often function as the primary conduit for incoming whistleblower contacts. Nonetheless, there are inevitably delays as complaints are processed, assigned, and make their way across the globe.

Given the DOJ’s new exacting deadlines, the investigations team will need to prioritize outreach to relevant stakeholders who are best positioned to relay reports and identify complainants most likely to bring matters to the DOJ.

Create a Record, Then Bolster It. FirstEnergy may have been able to avoid the court’s manufactured dispute altogether if it had more promptly submitted a valid, detailed board declaration thoroughly outlining the reasoning behind the retention of the firms.

Declaration aside, from a privilege standpoint, in-house counsel seeking to protect what may be construed as dual-purpose communications should articulate and document that business and HR-related concerns aren’t the “predominant purpose”—or sole significant purpose in some districts—behind them.

Ideally, contemporaneous documentation would make clear the privileged nature of the communications in question by focusing on the provision of legal advice. Vague references to litigation and government cooperation may be insufficient.

Under the work product doctrine, in-house counsel should be prepared to offer “specific, non-conclusory evidence” demonstrating that litigation—and not business concerns like an auditor’s demands— was the “driving force” behind the investigation.

Takeaway

Companies must hope common sense prevails in the Sixth Circuit. Regardless of the ultimate outcome, the district court’s ruling coupled with the DOJ’s recent policy pronouncement put in-house counsel on notice. Internal investigations are facing headwinds, and they need to act now to minimize the fallout.

The cases are In re: FirstEnergy Corp, 6th Cir., No. 24-03654; In re FirstEnergy Corp. Securities Litigation, S.D. Ohio, No. 20-cv-3785.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Adam Yoffie is executive director, head of compliance and ethics investigations at Bristol Myers Squibb, and was previously a trial attorney in the DOJ Criminal Fraud Section’s Health Care Fraud Unit Strike Force.

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