As I have noted in numerous prior posts, the question of whether or not a D&O insurance policy provides coverage for a subpoena is a recurring issue. A recent decision out of the Northern District of Illinois denied the relevant D&O insurers’ motion to dismiss a declaratory judgment action in which a policyholder sought coverage for its costs incurred of responding to a DOJ subpoena. The decision is interesting in a number of respects, including in particular the court’s willingness to consider all of the circumstances in concluding that the policy’s Wrongful Act requirement had been met. Northern District of Illinois Judge Manish S. Shah’s May 30, 2018 decision in the case can be found here.
Astellas Pharma U.S. is a pharmaceutical company and the U.S-based subsidiary of Astellas Pharma, Inc. In March 2016, Astellas received a subpoena in connection with the U.S. Department of Justice’s investigation of pharmaceutical companies’ charitable contributions to nonprofit organizations that in turn subsidize the purchase of drugs for certain Medicare beneficiaries. The U.S. Department of Health had previously announced that these charitable programs risked violating the anti-kickback statute. The DOJ subpoena required the production of documents in connection with the DOJ’s industry-wide investigation of pharmaceutical companies for alleged “Federal health care offenses.” The subpoena also advised that failure to comply with the subpoena could subject the company to liability in federal enforcement proceedings.
In its complaint in the subsequent declaratory judgement action, Astellas alleged, although not stated in the subpoena, the DOJ had alleged that the company’s contributions to independent charities’ patient assistance programs violated applicable law.
In October 2017, the company entered a “Limited Tolling Agreement on Statute of Limitations,” which stated that the “conduct being investigated includes, without limitation, the possible violation by Astellas of federal criminal statutes” in connection with the company’s payment to organizations providing patient assistance.
Astellas provided notice of the subpoena (and subsequently of the tolling agreement) to its D&O insurers. The company’s D&O insurance program consisted of a $5 million primary policy, subject to a $500,000 self-insured retention, a first excess layer of $5 million excess of the primary $5 million, and a $10 million layer excess of the underlying $10 million.
In its subsequent declaratory judgment complaint, the company alleged that its costs associated with responding to the subpoena in excess of the SIR exceed both the primary and first level excess and have reached the level of the second excess insurer. The primary insured denied coverage for the company’s costs associated with responding to the subpoena, contending that the subpoena does not represent a Claim within the meaning of the policy. The two excess carriers reserved their rights under their respective policies on the grounds that the underlying insurance below their layers had not yet been exhausted by payment of loss.
The company filed an action seeking a declaratory judgment that the insurers’ respective policies provided coverage for the costs the company incurred in responding to the subpoena. The defendants moved to dismiss the complaint, arguing that neither the subpoena nor the tolling agreement represented covered claims within the meaning of the policy. The excess insurers argued further that the court lacked subject matter jurisdiction over them because their policy obligations had not yet been triggered by exhaustion of the underlying limits through the payment of loss.
The Relevant Policy Provisions
The primary policy’s insuring provision provides in relevant part that “The Insurer shall pay on behalf of the Company the Loss arising from a Claim … against the Company for any Wrongful Act.”
The primary policy defines “Wrongful Act,” in relevant part, as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Company.”
The primary policy defines “Claim” in relevant part as any:
(1) written demand for monetary, non-monetary or injunctive relief made against an Insured;
(2) judicial, administrative, or regulatory proceeding, whether civil or criminal, for monetary, non-monetary or injunctive relief commenced against an Insured, including an appeal therefrom, which is commenced by: (i) service of a complaint or similar pleading; (ii) return of an indictment, information or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges;
(4) formal civil, criminal, administrative or regulator investigation of an Insured Person, which is commenced by the filing or issuance of a notice of charges, formal investigative order or similar document identifying such Insured Person as a person against whom a proceeding identified in (2) or (3) above may be commenced;
(5) a written request to toll or waive the applicable statute of limitations relating to a potential Claim against an Insured for a Wrongful Act[.]
The May 30, 2018 Decision
In his May 30, 2018 decision, Judge Shah denied the insurers’ motions to dismiss. In denying the motions, Judge Shah ruled that both the subpoena and the tolling agreement represented Claims within the meaning of the primary policy and that the court had subject matter jurisdiction over the claims against the excess insurers.
Judge Shah concluded that the subpoena satisfies subpart (1) of the definition of Claim because it is a written demand for plaintiffs to appear before government officials and to produce specific documents. This, Judge Shah said, “is a demand for non-monetary relief.” In reaching this conclusion, Judge Shah rejected the primary insurer’s argument that the subpoena did not represent a demand for non-monetary relief because the subpoena seeks only information and does not make a request of a court. In this regard, Judge Shah noted that the declaratory judgment complaint alleged that the DOJ had determined that the plaintiffs had violated federal health care laws, and, Judge Shah noted, “it is reasonable to infer that enforcement proceedings would swiftly follow any noncompliance” with the subpoena.
Significantly, Judge Shah noted that “I do not conclude that the subpoena merely requested, as opposed to demanded information.” Because courts may compel parties to produce documents in response to a subpoena “I also conclude that the subpoena demanded a form of non-monetary relief and that the subpoena was not distinct from the potential enforcement proceedings – it defined the scope of the judicial enforcement.”
Judge Shah also rejected the primary insurer’s argument that the subpoena did not trigger policy coverage because there is nothing to suggest that the subpoena was issued for a “Wrongful Act.” The insurer argued that the subpoena itself does not state or allege that plaintiffs made improper charitable contributions or committed another wrongful act.
In rejecting this argument, Judge Shah noted that the policy only requires that a Claim was made “for any Wrongful Act.” It is not necessary, Judge Shah said, “for the subpoena to include language that asserts that plaintiffs engaged in actual or alleged wrongful acts.” Because the company alleged in its declaratory judgment complaint that the DOJ had alleged that plaintiffs had engaged in federal health care violation, the allegations provide a basis to conclude that the subpoena was issued “for” a “Wrongful Act,” even if the subpoena itself did not contain the allegation.
Judge Shah also concluded that the tolling agreement satisfied part (5) of the definition of Claim, because the agreement states that the DOJ is “conducting a joint criminal and civil investigation” of the Company’s “possible violation of federal criminal statutes.” The agreement further advises that the company “may be charge with any of the foregoing offenses or violations and/or any other offenses.”
The primary insurer did not dispute that the tolling agreement represented a “written request to toll” the statute of limitations under subpart (5) of the definition of Claim; rather, the insurer argued that the agreement relates to “a potential Claim” as required under subpart (5), because the agreement does not refer to a “Wrongful Act.” The agreement refers only a “possible violation” indicating that no decision on the investigation had been made.
Judge Shah rejected this argument, first, on the grounds that the definition of “Wrongful Act” includes an “alleged … act” and the insurer “has not established that a “possible violation” does not fit within that definition; and second, on the ground that the “complaint alleges that the government told plaintiffs that it believed the payments to patient assistance programs violated federal law.”
Finally, Judge Shah rejected the excess insurers’ arguments that the court lacked subject matter jurisdiction over the claims against them because, the excess insurers alleged, the excess insurers’ payment obligations had been triggered and the claims against them are premature. Judge Shah noted that the declaratory judgment complaint alleged that the company’s associated with responding to the subpoenas are in amount to implicate the excess insurers’ policies. Further, he noted, “a substantial controvery is brewing between the parties,” and therefore the company need not await the excess insurers to breach their policies before bringing suit.
Readers of this blog know that the question of whether or not the costs associated with responding to a subpoena is a recurring issue. The outcome of disputes over this question frequently are fact-intensive, depending in part on the facts and circumstances surrounding the subpoena, and depending in part on the wording of the relevant provisions of the applicable policy, including in particular the policy’s definition of the term Claim.
As I noted in a prior post (here, quoting a third-party source), there is an “emerging consensus” among courts considering the issue that a subpoena represents, as Judge Shah concluded here, that a subpoena represents a “demand for non-monetary relief” with the meaning of the definition of claim in a D&O insurance policy. For example, as discussed here, Southern District of New York Judge Valerie Caproni held in the high-profile Patriarch Partners case that an SEC subpoena represented a “demand for non-monetary relief.”
However, the courts’ decisions are not uniform on this issue; as discussed in detail here, in October 2017, the Tenth Circuit affirmed the district court’s conclusion that the SEC subpoena MusclePharm had received did not represent a “demand for non-monetary relief.” In reaching the contrary conclusion, the appellate court cited the fact that the subpoena itself specifically stated that the subpoena “should not be construed as an indication that the Commission or its staff believes any violation of law has occurred.” In other words, case outcomes on this issue can depend very much on the fact and circumstances surrounding the subpoena.
In many cases where a court has concluded that a subpoena meets the definition of Claim, the insureds nonetheless find themselves cut off from coverage because, the insurer contends, the subpoena does not allege a “Wrongful Act.” What is very interesting about Judge Shah’s consideration of these issues is that he did not just look to the language used in the subpoena itself; he took into account the company’s allegations in the declaratory judgment complaint that the DOJ had told the company that the company’s donations to patient assistance programs violated the law.
The court’s willingness to look beyond the subpoena itself represents a significant circumvention of the stumbling block that typically arises in these kinds of cases; that is, the insurer’s contention that a subpoena represents nothing more than a request for information, and does not involve an actual or alleged Wrongful Act. To be sure, a party’s ability to overcome this objection is going to be very situation- specific and depend on their ability to allege that there are facts beyond the subpoena itself that meet the “Wrongful Act” requirement. The important thing is that facts and considerations beyond the subpoena are relevant to consider whether or not the “Wrongful Act” requirement has been met.
The fact that the parties had to fight about whether or not the company’s entry into the tolling agreement represents a Claim is a little disappointing; the whole idea behind the revision of the definition of Claim to include a request to toll the statute of limitations was to try to avoid these kinds of fights. To be sure, the real fight in this case was over the issue of whether or not a Wrongful Act was alleged. Again, the critical detail here is that Judge Shah was willing to look at all of the relevant circumstances in order to conclude that the “Wrongful Act” requirement had been met.
It should be noted that in light of the definitions of Claim now found in many contemporary D&O insurance policies, many of the issues involved in this dispute would not arise today. For example, many D&O insurance policies today specify that a subpoena represents a Claim. Of course, even where it can be established that a subpoena represents a Claim, the question will still remain whether or not the actions involve an actual or alleged Wrongful Act. The Wrongful Act question is going to be very fact-intensive; as noted above, in the MusclePharm case, the SEC’s subpoena contained an express disclaimer of legal violation.
One final note. It is significant to the outcome here that the company involved is a private company. If the company had been a public company, coverage likely would have been precluded on an entirely different ground. The subpoena involved in this case was directed to the corporate entity, not to any individuals. The costs incurred in responding to the subpoena were incurred by the entity. Under a public company D&O insurance policy, the entity has coverage only for Securities Claims. Whether or not the subpoena involved here is a Claim, it is definitely not a Securities Claim. So if the company here had been a public company and been insured under a public company D&O insurance policy, it would not have had any coverage here, even if the subpoena otherwise met the definition of Claim.
The entity coverage available under a private company D&O insurance policy is broader and is not limited just to Securities Claims. This difference created enough space for the company to try to argue that it met requirements of the policy’s other terms and conditions and is otherwise entitled to coverage under the policy.