This is Part 2 of an article that I wrote with my colleague Margaret Cassidy for the National Association of Criminal Defense Lawyers publication, The Champion. Here is a link to Part I. If you would like to read the entire article, here is a link to the PDF. Copyright by National Association of Criminal Defense Lawyers.
V. STRATEGIC CONSIDERATIONS IN PARALLEL INVESTIGATIONS FOR FEDERAL CONTRACTORS
A. Managing Employees and Business Partners
Government investigations often have consequences well beyond the initial focal point. The government may begin the investigation by targeting a company. But that investigation may soon shift to consider the role of a client’s employees and business partners. Defense counsel must keep in mind that as discussed above, the misconduct of a client’s officers, directors, employees, and agents may be imputed to the organization if the conduct occurred while performing duties for the organization or if the federal contractor knew, approved, or acquiesced in the misconduct.42
Because of these risks, company counsel should strongly consider obtaining separate counsel for employees and encourage business partners to obtain counsel. A joint defense or common interest agreement will allow company counsel to talk freely with counsel for individuals — or business partners — to learn what questions the agents or prosecutors asked during witness interviews.
A company must also manage the risk of an internal whistleblower who may decide to file an FCA lawsuit. A robust internal reporting process, such as a hotline, will help mitigate this concern. However, in managing reports to a hotline, the company must not retaliate against the reporting employee in any way.
B. Protecting the Attorney-Client Privilege and Attorney Work Product
Counsel must guard both the attorney-client privilege and its work product zealously. As a start, when making the mandated disclosure, counsel should be sure to convey to the government that the client is not waiving these protections. From there, counsel should not turn over memoranda of witness interviews nor disclose confidential communications with employees. Instead, counsel should draft a summary of findings when disclosing to the government. All witness interviews should include a robust Upjohn warning that advises employees that company counsel does not represent the employee individually and that the company may choose to waive the privilege over that interview. Generally, counsel should not label disclosures “voluntary” since that may reduce the protections down the road — these are “mandatory” disclosures.
A recent Fourth Circuit case illustrates some of the dangers of regulatory disclosures. In In re Fluor Intercontinental, Inc., the Fourth Circuit preserved the attorney-client privilege in a mandatory disclosure case.43 There, an employee sued his employer, a government contractor, for wrongful termination, following his firing after an internal investigation into conflict of interest issues. Fluor conducted the investigation and then provided a summary of the investigative findings to the Department of Defense as part of a mandatory disclosure. In the civil litigation, the employee moved to compel the production of documents related to Fluor’s internal investigation. The district court concluded that the disclosures were voluntary and constituted the legal conclusions of the company’s counsel. Therefore, the court held that the company waived the attorney-client privilege.
On appeal, Fluor argued that a government contractor does not waive when it discloses facts under the FAR’s mandatory reporting requirement. The appellate court held that there was no waiver because the disclosure had not revealed attorney-client communications. Here, “the statements” made in the disclosure “do no more than describe Fluor’s general conclusions about the propriety of [the employee’s] conduct.”44 The court of appeals drew the distinction between “disclosures based on the advice of an attorney, on the one hand, and the underlying attorney-client communication itself, on the other.”45 Only the latter result in a waiver, and the court refused to infer a waiver simply because lawyers had provided advice on the same topic as the disclosure.46
Perhaps even more important, the Fourth Circuit explained that “requiring Fluor to produce privileged materials is particularly injurious here, where Fluor acted pursuant to a regulatory scheme mandating disclosure of potential wrongdoing. Government contractors should not fear waiving attorney-client privilege in these circumstances.” 47
C. Weigh the Risks of Each Type of Investigation
Defense counsel should evaluate the risks of each investigation against the client’s goals to determine the best strategy. In many respects, this analysis is subject to how heavily the client’s revenue depends on government contracts.
When the client is a person, a criminal case always presents the biggest danger because one outcome is the loss of freedom. For a company, of course, freedom is not at stake, so defense counsel may be tempted to underestimate the seriousness of a criminal conviction for a company. For government contractors or recipients of federal funds, though, a criminal conviction usually leads to debarment. Whether debarment means the end of the company depends on whether government contracts form a significant part of its revenue stream. In addition, a conviction may have other collateral consequences for an organization, such as defaults on loans or lines of credit or termination of a subcontract if the client works for a prime contractor.
An FCA case may seem like a relatively low risk for a company since the only possible “bad” outcome is payment of a fine and damages. Since the statute provides for treble damages, though, what may seem like a relatively small amount could easily put the company out of business. As part of resolving an FCA case, the Department of Justice will engage in an “ability to pay” analysis to determine the amount to be paid as part of a settlement. DOJ’s evaluation of a client’s “ability to pay” is often quite different from the client’s evaluation. In addition, government contractors may be debarred if they are found liable (or admit liability) in an FCA case. And, again, this may result in business partners, like prime contractors or lenders, terminating agreements for cause. As a result, even a civil judgment could have disastrous consequences.
Finally, the administrative investigation does not result in money damages or a criminal conviction but leads most directly to suspension or debarment. The good news is that if the organization improved its internal compliance because of the wrongdoing, it may be able to establish that it is responsible and avoid suspension or debarment.48
Defense counsel must explain these risks to the client and listen closely to the client’s goals. Within each context, depending on the situation, larger companies may negotiate agreements with the government so that either a subsidiary or an office accepts the suspension or debarment, thus avoiding “end-the-company” dangers. Smaller government contractors likely do not have this same luxury.
In addition, defense counsel should anticipate that the various investigators — criminal prosecutors, civil lawyers within DOJ, and the contracting agency — will share information among each other. The criminal prosecutors will be limited by grand jury secrecy, but the agency and the civil prosecutors can serve document requests though their own procedures to obtain the documents. Voluntary witness interviews or proffer sessions could include both the civil and criminal side of DOJ as well. Any strategy by defense counsel should not depend on keeping information as secret from the other investigators.
D. The Value of Cooperation in Criminal Investigations
Voluntary, as opposed to mandated, disclosure and cooperation by a company in a criminal investigation can have enormous benefits. While a full description of this benefit is beyond the scope of this article, defense counsel should be familiar with the Department of Justice’s Principles of Federal Prosecution of Business Organizations.49 This publication makes clear that “[c]ooperation is a mitigating factor, by which a corporation — just like any other subject of a criminal investigation — can gain credit in a case that otherwise is appropriate for indictment and prosecution,” and it makes clear that it is easier to enter into a global resolution of the criminal and civil investigations.50 (Value of Cooperation).Further, DOJ acknowledges that there are times when “the goals of punishment, deterrence, and rehabilitation may be satisfied through civil or regulatory actions against the corporation” rather than through criminal charges.51
A cooperative relationship allows company counsel to advocate for why DOJ should evaluate the stated factors in support of a civil or regulatory action instead of a criminal charge: “the strength of the civil or regulatory authority’s interest; the civil or regulatory authority’s ability and willingness to take effective enforcement action; the probable sanction if the civil or regulatory authority’s enforcement action is upheld; the effect of a noncriminal disposition on criminal law enforcement interests; and the interests of any victims.”52
A noncooperative posture generally makes the process more difficult. This is not to say that cooperation is always the right strategy. Either way, defense counsel should conduct a detailed analysis of DOJ’s position on voluntary cooperation; examine previous settlements in which a company has cooperated with DOJ; and evaluate the organizational client’s appetite for risk, its mission, and values when deciding whether to cooperate.
Even if disclosure is not mandated, a federal contractor’s board of directors may determine that it is consistent with the organization’s values or its risk tolerance to disclose to the government. Counsel should have extensive and detailed discussions with a contractor’s board when determining if a voluntary disclosure is appropriate. These can be challenging discussions, as the board will unquestionably ask pointed questions about how the problem arose and company officers will feel defensive about their own conduct.
Finally, even if a contractor is not mandated to disclose and thus decides not to disclose, the government may still suspend or debar a contractor for failing to disclose or failing to cooperate because the government may consider failing to disclose and failing to cooperate as not being responsible.53
E. Defending the Administrative Case, Suspension, or Disbarment
When defending against suspension and debarment, it is important to understand and to advise the client that the government’s goal in suspension and debarment is different from the government’s goal when prosecuting a criminal or civil case. Suspension and debarment actions are not punitive and backward looking but instead are preventative and forward looking.
Once the government has determined that an entity or individual has engaged in conduct that is cause for suspension and/or debarment, to avoid suspension/debarment the government contractor must prove that it is responsible.54 The government contractor must demonstrate that it can be trusted to perform its contracts, comply with applicable law, and conduct its business with integrity in the future.55
One method to demonstrate to the government that the improper conduct will not occur again is by taking actions to assure that an offending individual may not exercise influence over government work (such as by terminating him) and thereby demonstrating that a future risk to the government may be negated.56
Another consideration in a debarment proceeding is whether the contractor has sufficient explanation for why the misconduct occurred and how it has engaged in adequate remediation. Both factors may demonstrate to the government why the conduct is unlikely to happen again.57 Courts have held that “[a]ffording the contractor [the] opportunity to overcome a blemished past assures that the agency will impose debarment only in order to protect the government’s proprietary interest and not for the purpose of punishment.”58 Essentially, contractors need to demonstrate that they have taken measures to “sufficiently protect the government’s interests in doing business only with [organizations] who conduct business with honesty and integrity.”59
When deciding whether to suspend or debar, the government also considers if the contractor had “reason to know” about the misconduct. Factors that may demonstrate to the government that either the contractor or its principals had “reason to know” and whether the contractor may be responsible despite the misdeeds include:
- Details on how the improper actions took place.
- The source of any funds that were used for the improper payments.
- What, if any, actions were taken to conceal the improper conduct?
- What process or methods were used to make the improper payments?
- Who knew of the wrongful acts while the misconduct was occurring?
- How and when did others learn of the misconduct? Did they learn while the activity was occurring?
- When they learned, could they have stopped the misconduct?60 If challenging the facts upon which the government is relying to support a suspension/debarment, the contractor must identify:
- Facts that contradict the government’s stated reasons for suspension/debarment.
- Any existing, proposed, or prior conclusions a government agency made that the contractor should be excluded from government work.
- Any criminal and civil proceedings related to the government’s reasons for suspension.61 In place of a debarment, a government agency may reach an administrative agreement with the contractor, if in the government’s best interest and if the entity:
- Generally admits its wrongful conduct and cooperates in the investigation.
- Agrees to restitution.
- Agrees to separate offending employees.
- Implements or improves its compliance program to include retaining auditors or attorney to oversee the program.
- Trains employees and encourages them to raise concerns.
- Permits agency access to contractor records.62
Once an organization determines it should make a disclosure, it should generally disclose to the OIG, the contracting officer, and to the suspension and debarment officials to engage in discussions before any suspension and/or debarment action begins. The information disclosed generally includes a description of the wrongdoing; an explanation of why the wrongdoing occurred; how the contractor investigated the wrongdoing; and the contractor’s plans to remediate the causes for the wrongdoing.63 These efforts ideally demonstrate the contractor’s responsibility in handling government transactions currently and in the future.
F. Keeping the Various Investigating Entities Up to Date
One of the trickiest parts of this process is when and how to notify three different investigative bodies about important developments, both positive and negative. This does not mean that counsel needs to inform all three investigators of every step taken by the other but does mean that important events should be shared among them.
For example, defense counsel should consider providing a copy of any mandated self-disclosure to the civil and criminal DOJ lawyer once counsel sends it to the agency. Since it is possible that the agency and DOJ are already in contact, providing a copy of it does not create any additional risk and gives the appearance of transparency and cooperation. Similarly, if the government indicts a client’s officer, director, or employee, then company counsel should provide a copy of the indictment to the agency overseeing the disclosure. Or, if the agency decides to suspend or debar a company, counsel should provide DOJ a copy of the notification.
Keeping the various investigative agencies updated may prove affirmatively beneficial to the organization. For example, if agency suspension and debarment officials determine that the organization should not be suspended or debarred, this is information worth sharing with prosecutors. Although it is not a complete defense to a criminal prosecution or to a civil False Claim allegation, this development certainly will cause prosecutors to pause and reflect on the merits of their case against the organization.
Providing these updates is uncomfortable, and the client may ask if it is really necessary. While it may not be required, this information sharing can be helpful for a company that seeks to cooperate with the government and obtain the maximum benefits of that cooperation. No prosecutor or agency official likes to be surprised, so keeping them updated on key events helps on that front.
G. Getting Help From Others
As psychologist Abraham Maslow said in 1966, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” It may appear at first glance that a criminal defense lawyer can handle an investigation involving a federal contractor. But that is not the case. To best represent a client in these matters, defense counsel needs to consider partnering with others, for example:
- Counsel with experience developing and improving FAR and Uniform Guidance required ethics and compliance programs who can assist in defending the administrative investigation and can develop the internal controls to demonstrate that the contractor will be “responsible,” obviating the need for the government to suspend or debar the contractor.
- Insurance coverage counsel can help the client evaluate whether its Errors and Omissions, Directors and Officers, or Employment Practices Liability policies may provide coverage for the internal investigation or the government investigation.
- If terminating employees, employment law counsel can advise on mitigating legal risks and can negotiate the right separation agreement.
- Federal government contract accountants may also be an indispensable member of the defense team if the situation involved improper accounting, pricing, or invoicing. Government contract accountants are often vital in developing internal controls for complying with regulatory requirements related to accounting procedures.
The nuances of navigating mandatory disclosure and defense obligations are better understood with a team of professionals ready to help the client emerge (relatively) unscathed from these parallel investigations.
* NACDL owns the copyright to this article, and we are publishing it with NACDL’s permission.
42. 2 C.F.R. 180.630; 48 C.F.R. 9-406.5; see also Novicki v. Cook, 946 F.2d 938 (D.C. Cir. 1991).
43. 803 F. App’x 697, 698 (4th Cir. 2020).
46. The Fourth Circuit cited United States v. O’Malley, 786 F.2d 786, 794 (7th Cir. 1986) (“[A] client does not waive his attorney-client privilege ‘merely by disclosing a subject which he had discussed with his attorney.’ In order to waive the privilege, the client must disclose the communication with the attorney itself.”).
47. 803 F. App’x. at 700.
48 C.F.R. 9.104-3.
50. Id. § 9-28.700
51. Id. § 9-28.1200 (Civil or Regulatory Alternatives).
53. See, e.g., 2 C.F.R. Part 180 App. G, App. H; 48 C.F.R. 3.1003(a)(2).
54. 48 C.F.R. Part 9.4; 2 C.F.R. Part 180, App. G, App. H.
56. See, e.g., Robinson v. Cheney, 876 F.2d 152, 160 (D.C. 1989).
57. See, e.g., id.
60. See, e.g., id.; see also Novicki v. Cook, 946 F.2d 938, 942 (D.C. 1991).
61. 2 C.F.R. Part 180, App. G; 48 C.F.R. Part 9.4.
63. See, e.g., 2 C.F.R. 180.730.