FSGO Series: Part 5

May 15, 2005
Document

The Amended Federal Sentencing Guidelines and the “Litigation Dilemma”
Kenneth W. Johnson
Ethics Resource Center 2005-05

Part 5 of a series. Points to some of the potential costs and consequences of good corporate citizenship, within the context of the FSGO.

Series Topics

  1. Introduction
  2. Explore the significance of the new requirements for risk assessment and program evaluation
  3. Lay out, in detail, the seven required elements of an effective program
  4. Explore how an organization might approach evaluating its ethics and compliance program
  5. Examine how the Commission addressed the issues of what is coming to be known as the "litigation dilemma"
  6. Integrate the FSGO provisions relating to small organizations
  7. Conclude with thoughts about how organizational leaders might take the notion of an effective program farther than the Commission's charter allowed it to go.

When the Federal Sentencing Guidelines for Organizations (FSGO) were first promulgated in 1991, the Sentencing Commission had as a goal, fostering “good corporate citizenship.”[1] With any practice of good citizenship, there are costs and consequences involved.

For the individual, good citizenship involves paying taxes and voting. But more, it requires a basic sense of compassion and civility, jury duty, staying informed on the issues, and voting with the community in mind.

Good corporate citizenship has costs and consequences as well. Certainly the costs of the compliance and ethics program itself are not insubstantial, but more or less certain. Some of the uncertain costs are captured in the notion of the “litigation dilemma”: the stream of consequences attributable to civil litigation, or the threat thereof, that may flow from having an effective compliance and ethics program.

The purpose of this article, the fourth in the series, is to point to some of the potential costs and consequences of good corporate citizenship, within the context of the FSGO. The potentially adverse consequences discussed here do not argue against designing, implementing, and evaluating an effective compliance and ethics program. They are submitted as matters that governing authorities and organizational leadership need to anticipate.

The implications of good corporate citizenship embraced in the “litigation dilemma” take three broad avenues.

  • Dilemma I: by undertaking the steps required by the FSGO, the organization may actually discover and document evidence of misconduct that will support plaintiffs’ attorneys in civil suits against the organization later.[2]
  • Dilemma II: the requirement that an offense be reported to the appropriate agency may result in civil suits that the organization might otherwise have avoided.
  • Dilemma III: while it is a good strategy to fully cooperate with government after an offense has been uncovered, the organization may find itself pressured to waive its protections against disclosure of confidential attorney-client communications, not just as to the government agency, but as to all potential litigants.

In short, meeting the requirements for having an effective compliance and ethics program may provide potential litigants with a “roadmap to litigation” against the organization.[3]

Dilemma I: Discovery and Documentation of Misconduct

Precisely because the purpose of the FSGO is to encourage due diligence in preventing and detecting criminal offenses, many of their minimum requirements necessarily result in materials and documentation that may serve potential civil claimants in litigation against the organization. Some examples include:

  • Conducting the now-mandatory compliance and ethics training[4] to develop awareness of issues and dialogue skills may result in participant notes discoverable at trial.[5]
  • Records of monitoring and auditing to detect criminal conduct[6] will certainly develop substantial evidence where an offense is involved, as will a mechanism for employees and agents to seek advice or report their concerns.[7]
  • The periodic processes of assessing risks[8] and evaluating the compliance and ethics program[9] may well document offenses, lapses in management attention to internal controls, or patterns or a culture of tolerance of improper activities.

Since the law generally favors full discoverability of all relevant matters during litigation, finding and preserving evidence of misconduct that must later be disclosed to plaintiffs may lead to successful litigation against the organization. This serves as a disincentive to diligently seeking out evidence of misconduct, even though it is better to prevent and detect misconduct in order to avoid greater troubles later or over time.

A related issue, if an organization contracts with or seeks reimbursement from the Federal government, is the False Claims Act of 1863 (FCA): a Civil War era statute that allows lawsuits by private parties on behalf of the government. These are called qui tam actions, and under the 1986 amendments to the FCA, a private party, often an employee, is entitled to share in a portion of the damages recovered on behalf of the government, which are “trebled,” if he or she raises the issue before the organization does. This leads to the unintended consequence of discouraging monitoring and auditing because the generation of documents in a routine investigation or audit might provide the basis for tripling the amount of damages if an employee uses the documents to file, what is called a qui tam action, before the organization is ready to voluntarily report the information.[10]

Dilemma II: Revealing Potential Causes of Action

It is so obviously the case that self-reporting an offense places the organization at the mercy of government agencies, and potentially alerts waiting litigants, that there is not much more to be said about this avenue, except to describe a paradigm case.

In a 1992 instance, the Coors Brewing Company, based in Colorado, voluntarily shared the results of a voluntary self-audit of its volatile organic compound emissions to government agencies, only to be rewarded with substantial civil penalties based primarily on its own report.[11] Though these civil penalties were subsequently reduced and led to enactment of a Colorado statute protecting self-auditing and self-reporting organizations, it serves as a cautionary tale nonetheless.

Self-reporting and the potential for prosecution and civil litigation have the incidental effect of discouraging individual employees from coming forward with their concerns. This consequence flows from self-reporting because an organization can no longer make an enforceable promise of confidentiality. Once a matter goes public, regulators, prosecutors, and litigators have various legal processes available by which they can compel the organization to disclose what it knew, when it knew it, how it came to know it. With very few exceptions, the organization cannot promise absolutely that it will be able to keep the information it received in confidence from public disclosure.

It can arrange to receive reports of concerns anonymously, but then, as the Sentencing Commission noted, it loses the ability to readily contact the source for more information. Anonymous reporting also makes it more difficult for the organization to advise the source of what it did as a result of his or her report, with the result that employees often believe that nothing was done.[12]

Role of the FSGO in Resolving Dilemmas I and II. While the Advisory Group recognized that the FSGO created the conditions for these dilemmas, it made no recommendations for changes in the FSGO to address either of them. In their view, the value of the FSGO exceeded their potentially adverse consequences. It recognized, moreover, that these first two avenues of the litigation dilemma—discovering materials and self-reporting potential causes of action—could not be addressed directly by the Commission in the FSGO in any event. It did recommend, however, that the Sentencing Commission “initiate and foster further dialogue toward a resolution of the “litigation dilemma” with appropriate policy makers, including Congress [. . ..][13]

The Sentencing Commission itself did not formally address these issues in either the guidelines or when it submitted them to Congress. Nor have events allowed it the time to act on the Advisory Group’s recommendation.  On January 12, 2005, the U.S. Supreme Court decisions in United States v. Booker and United States v. Fanfan forced the Commission to deal with questions about the very viability of the Guidelines themselves. In these cases, the Supreme Court found that the ability of a Federal Judge to enhance sentences under the Guidelines, using facts not found to be proven beyond a reasonable doubt by a jury, violated a defendant’s Sixth Amendment right to trial by jury. In a separate opinion, it found the Guidelines to be only advisory. As a result of these developments, the Commission’s attention has not been focused on the issues raised by the organizational guidelines. The FSGO are, nonetheless, generally followed in practice by the Federal courts.

Dilemma Three: Waiver of Attorney-Client Privilege as Cooperation

The third avenue, waiver of the attorney-client and work product protections, has too many nuances to be addressed completely in this article,[14] but organizations, just like individuals, can assert a right to keep certain communications with their attorney counsel confidential. A substantial issue, therefore, is whether an organization can be compelled to waive these protections in order to make the claim that it “cooperated” with the appropriate government agencies.[15]

Cooperation with the government, though not a required element of an effective compliance and ethics program like self-reporting, is nonetheless a critical component of a strategy when misconduct attributable to the organization happens. As the Ad Hoc Advisory Group noted:

[W]hile effective compliance programs may significantly reduce fines, the reduction that accrues from self-reporting, cooperation and acceptance of responsibility can be nearly twice as great. Further, if the U.S. Department of Justice concludes that the cooperation by an organizational defendant constitutes “substantial assistance,” it may file a motion with the court requesting a “downward departure.” This may result in the minimum fine prescribed by the organizational sentencing guidelines. In some cases, voluntary compliance and cooperation may result in a decision by the U.S. Department of Justice not to bring charges at all.[16]

The FSGO themselves take full cooperation very seriously, defining “full cooperation” to be:

both timely and thorough. To be timely, the cooperation must begin essentially at the same time as the organization is officially notified of a criminal investigation. To be thorough, the cooperation should include disclosure of all pertinent information known by the organization. A prime test of whether the organization has disclosed all pertinent information is whether the information is sufficient for law enforcement personnel to identify the nature and extent of the offense and the individual(s) responsible for the criminal conduct. (emphasis added)[17]

Regarding the substantial debate over whether full cooperation with government required waiving the organization’s attorney-client and work-product protections, the Sentencing Commission declared that:

Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score [. . .] unless such a waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.[18]

This attempt at Solomonic wisdom has satisfied few. The Department of Justice had argued for a statement affirming the Department’s “unique position” in assisting the court in finding whether or not the organization had fully cooperated.[19] The defense bar, on the other hand, had advocated, and continues to advocate, for a statement that waiver is not required for an organization to deemed to have fully cooperated. [20] The defense bar argues that the Sentencing Commission’s exception “swallows the rule” that waiver is not required.[21] The Commission itself noted, as it submitted its proposed amendments to Congress, that “The Commission expects that such waivers will be required on a limited basis.”[22]

The Ethics of “Good Corporate Citizenship”

Coming full circle, just as a good citizen is essentially law-abiding, this notion of good corporate citizenship was inherent in the purpose of the FSGO “to prevent and detect criminal conduct.”[23] Good corporate citizenship was, and is, reflected in the effective compliance and ethics program requirement that any offense detected by the organization be reported to the appropriate agency without unreasonable delay.[24]

While the FSGO are best known for providing for a substantial reduction of the “culpability score” of a convicted organization, and hence the ultimate fine, having an effective compliance and ethics program does not alter the general principle, as described in the text box opposite, that “the organization [should be required to] take all appropriate steps to provide compensation to victims and otherwise remedy the harm caused or threatened by the offense.”[25]

Much of the debate surrounding the “litigation dilemma,” therefore, neglects the issue of what the organization should do with the information it discovers through its ethics and compliance program after it has dealt with the threat of prosecution. While it is clearly a benefit to the organization to secure reduced fines on sentencing, the underlying public policy is for organizations to adopt ethics and compliance programs as an integral part of being good corporate citizens.[26] What may be making this debate go on is the emphasis on avoiding prosecution or plea bargaining a lighter sentence, without any representation that the organization will undo the harm it did to specific victims.

 The litigation dilemma is, to be sure, quite real. However, the increased exposure to lawsuits should not be the tail wagging the dog of being a truly good corporate citizen: one that actively tries to prevent and detect the violation of law by its employees and agents. As the sentencing process itself suggests, ultimately the issue is not so much the size of the offending organization’s fine, as it is whether justice to the victims and society has been served. This latter part of the equation needs to be more carefully considered as we debate the benefits, costs and consequences of ethics and compliance programs, for this “litigation dilemma” to be resolved as a matter of good public policy.



[1] Indeed, in 1995, the United States Sentencing Commission hosted its Second Symposium on Crime and Punishment in the United States, entitling its report: “Corporate Crime in America: Strengthening the “Good Citizen” Corporation.”

[2] The steps required to be taken under the FSGO to prevent and detect criminal offenses are also not privileged against discovery, so that an enforceable promise of confidentiality cannot generally be made by the organization to encourage employees and agents to report their concerns.

[3] U.S. SENTENCING COMM’N AD HOC ADVISORY GROUP, REPORT ON THE

ORGANIZATIONAL SENTENCING GUIDELINES pp. 102, 108, 109, 118 (2003). Available at http://www.ussc.gov/corp/advgrprpt/advgrprpt.htm [AD HOC GROUP REPORT].

[4] Id., §8B2.1(b)(4)

[5] See, e.g., Stender v. Lucky Stores, 803 F. Supp. 259 (N.D. Cal. 1992) (Employee took notes about observed misconduct in a seminar on improper conduct in the workplace. Court held notes discoverable in litigation against organization and basis for punitive damages.)

[6] MANUAL §8B2.1(b)(5)(A).

[7] Id., §8B2.1(b)(5)(C)

[8] Id., §8B2.1(c)

[9] Id., §8B2.1(b)(5)(B)

[10]  For more discussion of the False Claims Act, see John C. Ruhnka and Edward J. Gac. “The "'New'" False Claims Act” CPA Journal - April 1998. Available at: http://www.nysscpa.org/cpajournal/1998/0498/Features/F400498.htm.

[11] For more detail on the Coors matter and the Colorado law on voluntary disclosures that followed, see Alexander Volokh, “Carrots over Sticks: The case for environmental self-audits” Washington Monthly, June 1997. Available at http://volokh.com/sasha/audit.html.

[12] See AD HOC GROUP REPORT, pp. 6-7.  See also discussion on this topic in the third article in this series on the minimum required elements of an effective compliance and ethics program.

[13] See discussion in AD HOC GROUP REPORT, pp. 77-85 and U.S. Sentencing Commission. Proposed Amendments to Chapter 8, submitted to Congress on May 1, 2004, p. 111. Available at: http://www.ussc.gov/2004guid/RFMay04_Corp.pdf.

[14] For a current treatment of both protections and the even broader issues involved in waiver, see Berwin Cohen, Robert T. Duffy, and Larry R. Langdon, “Protecting a Public Company’s Confidences” in BRIEFLY: Perspectives on Legislation, Regulation, and Litigation (Vol. 9, No. 2; February 2005) [National Legal Center for the Public Interest, Washington, DC)

[15] See Mary Beth Buchanan, Effective Cooperation by Business Organizations and the Impact of Privilege Waivers, 39 Wake Forest L. Review 587-611 (2004) for a detailed discussion of waiver and cooperation. Available at: http://www.law.wfu.edu/prebuilt/Buchanan-final.pdf.

[16] AD HOC GROUP REPORT pp. 92-93.

[17] Id. §8C2.5, Commentary, application n.12. Application Note 12 was expanded by the Sentencing Commission to address the privilege waiver issue in amendments promulgated on May 1, 2004.

[18] Id

[19] The Department of Justice has also taken the position that other actions may constitute lack of cooperation.  “A corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” Deputy Attorney General Larry Thompson, U.S. Department of Justice, Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003) [commonly known as the Thompson Memorandum]. Available at: http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm.

[20] See Buchanan, pp. 608-09.

[21] See, e.g., Association of Corporate Counsel, “The New Federal Sentencing Guidelines for Organizations:

Great for Prosecutors, Tough on Organizations, Deadly for the Privilege” (March 2005). Available at: http://www.nacdl.org/public.nsf/mediasources/20050308a/$FILE/ACC_SentGuides.doc.

[22] Proposed Amendments to Chapter 8, p. 112. Available at: http://www.ussc.gov/2004guid/RFMay04_Corp.pdf.

[23] Id., §8B2.1(a)(1)

[24] Id., §8C2.5(f)(2)

[25] Buchanan, pp. 593-94.

[26] It is this part of ethics and compliance programs that the Ethics Resource Center has been interested in since 1978.

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