dojIn a September 9, 2015 memo from Deputy Attorney General Sally Yates, the U.S. Department of Justice described a new policy focused on individual accountability for corporate wrongdoing. The keystone of the policy embodied in the Yates memo is that for companies to receive any cooperation credit, they must completely disclosure “all relevant facts about individual misconduct.”  According to an interesting May 26, 2016 memo from the U.S. Chamber of Commerce’s Institute for Legal Reform entitled “DOJ’s New Threshold for Cooperation” (here), the agency’s new threshold for cooperation credit is “likely to have a number of unintended consequences.” Among other things, the report notes, the new policy risks alienating personnel whose cooperation is essential to the investigation, and indeed may motivate individuals to seek individual counsel. These and other potential unintended consequences may mean that the agency’s new policy may have a counterproductive impact on corporate cooperation.


The report’s analysis begins with that it calls the Yates memo’s “all or nothing approach.” The company being investigated cannot receive any credit unless it has provided all relevant information about the individuals involved in the potential misconduct. The report’s author suggests that the new policy “seeks to leverage a corporate entity’s knowledge and access to information to bring cases against their own employees.”


The company is under pressure to provide to the government a “complete dossier on individual employees, directors and officers engaged in culpable conduct in order to better the company’s position for settlement.” This requirement will not only encourage lengthy and costly investigations, but “will elevate the exposure individuals face in being interviewed” and “lead to earlier involvement of individual defense counsel,” whose fees may need to be indemnified.


Individual actors “may find their own legal interests to be at odds with those of the company’s.” This dynamic could lead to “an ‘every man for himself’ mindset within the company.” Junior employees may refuse to cooperate, at least without their own legal representation. Other may decide to secure their own attorneys, without going through corporate channels.


These impacts could add complexity, expense and delay to the company’s efforts to complete its investigation in order to receive cooperation credit. Perhaps even more importantly, these factors could have a “chilling effect” on the company’s ability to fully investigate and develop the full factual record needed to secure cooperation credit. The upshot could be that in the end this internal dynamic could “impede the corporation’s ability to perform what is intended by the Yates memo – to gather facts and report to the Department any individuals engaged in wrongdoing.” Rather than allowing the agency to leverage a corporation’s access to information, “the Yates Memo’s impact is likely to have the opposite effect.”


The new policy creates a number of complications with respect to data privacy laws and the attorney-client privilege. For example, European data privacy protections pose legal restraints that may limit a company’s ability to transfer emails or other protected data. A company may find itself “caught in tension between the Department’s expectation of full cooperation and separate legal obligations regarding data privacy.”


By the same token, and while the Department’s policy stops short of conditioning cooperation credit on waiver of attorney-client privilege, companies may be “forced to disclose their own investigative processes and resource allocation decisions.” Companies may be pressed to disclose factual details learned through privileged processes and memorialized in privileged documents.


As a result of these and other considerations, “the potential adverse effects of cooperation may no longer make corporate cooperation the foregone conclusion that it once was.” In the end, the Yates memo “may have the counterproductive effect of driving the two sides apart, not closer together.” In any event, with the memo, the Department has “complicated the mix for individuals, the corporate community – and ultimately for the Department itself.”


One point the report notes is worth emphasizing here.  Because of the obvious incentives for concerned individuals to consider their interest and perhaps seek their own separate legal counsel, “questions will necessarily arise regarding the applicability of Directors and Officers insurance coverage.” The indemnification costs for separate counsel obviously could mount quickly. As I have previously noted, the cooperation requirements embodied in the Yates memo may cause companies to try to evade their advancement and indemnification obligations. It is also possible that a company that is the subject of a DOJ investigation may also be financially unable to honor its advancement and indemnification obligations.


For that reason, as a result of the DOJ’s new directive companies’ D&O insurance protection could become more important than ever. To the extent the defense expense associated with individuals’ separate counsel is paid out of the D&O insurance, these costs could quickly erode the limits of liability available under the policy, a development that could be particularly problematic if there is parallel civil litigation pending. The mounting defense expenses could reduce the amount of insurance available to defend and resolve the parallel civil litigation. These considerations raise important questions about limits adequacy and could have important implications for the selection of insurance limits.


For an earlier post in which I discussed the Yates memo’s possible unintended consequences, refer here. A prior post in which I discussed the Yates memo’s implications for corporate directors can be found here.