dojIt has now been over a year since the U.S. Department of Justice released the so-called Yates Memo, in which the agency stated its policy focused on individual accountability for corporate wrongdoing. As attorneys from the McDermott, Will & Emery firm noted in an October 11, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog (here), since the Yates Memo went into effect, observers have been watching for “telltale signs of whether the Yates Memo is really changing the way federal enforcement does business.” According to the blog post, two recent False Claims Act settlements that required corporate executives to make substantial monetary contributions to resolve civil enforcement actions filed against them may suggest that the anticipated Yates Memo-related change has arrived.


The NAHC Settlement

The first of the two settlements to which the law firm memo referred is involved North American Health Care, Inc. and two of its senior executives. The government had alleged that NAHC and two individuals had violated the False Claims Act by submitting or causing the submission of claims to government health care programs for unnecessary rehabilitation services.


On September 19, 2016, the DoJ announced a settlement agreement in which NAHC agreed to pay $28.5 million, its chairman of the board agreed to pay $1 million, and its senior vice president agreed to pay $500,000. The DoJ’s September 19, 2016 press release about the settlement can be found here.


As the law firm memo notes, the settlement conspicuously releases only the company and the two individuals that were parties to the settlement. The settlement expressly excluded any release of other individuals and imposed ongoing cooperation requirements, specifically requiring the two individuals to “cooperate fully and truthfully with the United States’ investigation of individuals and entities not released in this Agreement.”


Observers may also want to note that the settlement agreement, as the DoJ noted in its press release,” the claims resolved by the settlements are allegations only and there has been no determination of liability.”


The Former Tuomey CEO Settlement

The second of the two recent settlements involves Tuomey Healthcare System’s former Chief Executive Officer. The settlement with the former CEO arose as part of the government’s long-running battle with the healthcare company. The government alleged that company had entered into contracts with doctors to obtain referrals to the hospital system in violation of the so-called Stark Law.  In 2013, following a jury trial, a judgment in the amount of $237 million was entered against the company; the judgment was upheld by the Fourth Circuit. On October 16, 2015, the Department of Justice announced that it had reached a $72.5 million settlement with the company in connection with the judgment.


Finally, on September 27, 2016, the DOJ announced that it had reached a $1 million settlement with Tuomey’s former CEO, Ralph J. Cox III. The DOJ’s press release about the settlement can be found here. The settlement included the former CEO’s agreement to a four-year period of exclusion from participating in federal health care programs. The CEO is also required to fully cooperate with the government’s investigation of other individuals and entities.


Again, observers will also want to note that the DOJ’s press release expressly states that “the claims resolved by the settlement with Cox are allegations only, and there has been no determination of his individual liability.”


There is a particularly noteworthy feature of the DOJ’s settlement with the former Toumey CEO, and that is that as a part of the settlement, the former CEO was required to release any indemnification claims he may have against the company. This aspect of the settlement contrasts with the NAHC settlement, contained not provision concerning or preventing NAHC from indemnifying the two individual parties to that settlement.


As the law firm memo notes, since the Yates memo was announced last year, “it has sometimes been a guessing game to determine whether one particular case against individuals is the result of a more vigorous post-Yates environment.” But in its announcement of both of these two settlements, the DOJ “highlights the inclusion of individuals in the resolution and draws a clear connection to the Yates Memo’s premise.”


Moreover, the law firm memo notes, the second of these two settlements coincided with a September 27, 2016 speech by Deputy Associate Attorney General Bill Baer, in which he extensively discussed the application of the Yates Memo to civil actions.


The law firm memo suggests that with these settlements and the DOJ official’s speech “suggests that we are seeing the impact of Yates on civil resolutions.” While there have been civil settlements in the past involving high-level corporate officials, these settlements “clearly stand out as cases where non-owner, higher-level individuals are singled out and subject to substantial monetary penalties.”



From my perspective, there are a number of interesting things about these settlements and the points raised in the law firm memo.


The first is that these settlements involved civil enforcement actions, not criminal prosecutions. The DOJ official’s speech noted above underscored the point that the agency intends to implement the Yates Memo’s guidelines on individual liability in connection with civil actions. At the time the Yates Memo was released and in subsequent consideration of its possible effect, my primary concern has been in connection with potential criminal liability.


The fact that the principles embodies in the Yates Memo will be extended to civil enforcement actions as well is an added concern for corporate executives. At a minimum, the clear implication is that in connection with government-led civil enforcement actions, corporate executives could find themselves specifically targeted for civil liability. This possibility has some important risk management and loss mitigation implications, as discussed below.


The second interesting thing about the DOJ’s settlement with these individuals is that in neither case were the individuals involved required to make specific liability admissions as a condition of settlement. From my perspective, this is very significant. From the beginning, one of my concerns with the Yates Memo and its focus on individual liability has been that individual’s caught up in one of these kinds of regulatory actions would be compelled as a condition of settlement to make admissions that potentially could eliminate whatever remaining possibility there might have been for the individuals to seek coverage under their company’s D&O insurance policies.


To be sure, coverage for settlement amounts could be severely restricted by the definition of Loss typically found in D&O insurance policies for “fines, penalties, and amounts deemed uninsurable under applicable law.” But to the extent that coverage for amounts the individuals are required to pay are not precluded by the definition of Loss, the individual  may be able to preserve their arguments for coverage in the absence of the requirement to make specific admissions of liability as a condition of settlement with the DOJ.


Third, it is noteworthy that in connection with his settlement with the DOJ, the former Tuomey CEO was required to agree to relinquish any right to indemnification. This kind of requirement is by no means unprecedented; there have been settlements in the past in which corporate officials have been required as a condition of settlement to waive their rights to indemnification or insurance. Interestingly, the former Tuomey CEO’s settlement appears to have been silent about insurance. But if an executive  waives his or her right to indemnification from the company, that likely would preclude the possibility for coverage under the D&O insurance policy’s corporate reimbursement coverage (to the extent coverage was not otherwise precluded by other policy terms and conditions, including the definition of Loss, as noted above).


Significantly, while the former Tuomey CEO was required to relinquish his right to indemnification as a condition of settlement, the executives involved in the NAHC settlement were not.


The possibility that corporate executives may face an increased risk of civil regulatory liability has important risk management implications. As discussed in a separate October 6, 2016 memorandum from the McDermott, Will & Emery law firm (here), there are practical steps that companies can take to try to reduce this exposure, including, for instance, making sure that there are sufficient resources committed to the legal compliance activities; implementing a top-down evaluation of whether the board and senior management are operating and coordinating in the best interests of the company; and ensuring that the company truly maintains a culture of compliance with the law.


The possibility that individual executives might have to be prepared to defend themselves and protect their own interests, separate and apart from those of the company, has practical implications for the company when it is determining how much insurance it wants to put in place.


As I have noted before, the Yates Memo and its focus on individual responsibility, and in particular its requirement that the corporation must provide the government with all information about possibly responsible individuals in order to receive any cooperation credit, could and likely will encourage individual executives to seek their own legal counsel and to do so early in the investigative process.


With multiple sets of lawyers separately incurring legal fees, all of which may operate to erode the D&O insurance programs limits of liability, the policy proceeds could quickly be eroded. This concern has important implications for companies when they are deciding limits adequacy questions when they are putting their insurance in place.


Special thanks to a loyal reader for sending me a copy of the law firm memo.