Parallel Civil Litigation: The US Perspective

The two most common types of private actions in relation to internal investigations are class actions and derivative suits. Both types of claims commonly follow a company’s public disclosure of an internal or government investigation, an announcement of enforcement action, or media reports of corporate wrongdoing.

Class actions frequently arise in the securities and antitrust context where misconduct is alleged to have affected markets and large numbers of entities and individuals. Before a class action can proceed, a class must be certified by the court. To do so, the class must satisfy four requirements: (1) numerosity (the class is too numerous for joinder to be practical); (2) commonality (questions of law or fact are common among the entire class); (3) typicality (the class representative’s claim is typical to that of the entire class); and (4) adequacy (representatives of the class fairly and adequately protect the interests of the entire class). If these criteria are satisfied, the action must then fall within one of the following categories: (1) the prosecution of separate actions runs the risk of inconsistent judgments, or adjudication with respect to individual class members would effectively impair the ability of other class members to protect their interests; (2) injunctive or declaratory relief is sought and appropriate; or (3) common questions of fact or law predominate over any individualised ones, such that class treatment is the superior method for adjudication.

The party seeking certification bears the burden of proving that all the prerequisites are satisfied and that the class falls into one of the three categories. The court has discretion to certify a class and a determination by the court is final unless a party can demonstrate abuse of discretion. Although the issue of class certification is unique to this type of litigation, other than the issue of class certification, class action litigation proceeds in much the same way as other civil litigation brought by individual plaintiffs.

A derivative action, by contrast, is a lawsuit initiated by a shareholder on behalf of a corporation to enforce a cause of action. The shareholder typically initiates the claim against a director or an officer for breach of duty owed to the shareholders – such as the duty to manage, the duty of care or the duty of loyalty – and all damages recovered go to the corporation rather than the shareholder who initiated the suit.

A shareholder bringing a derivative action on behalf of the corporation must have standing and must have demanded in writing for the board of directors to take action on behalf of the corporation within 90 days. A shareholder with standing to bring a derivative suit on behalf of the corporation may file the claim before the 90-day period expires if the board rejects the written demand or if waiting the 90 days would result in irreparable harm to the corporation.

23.3.2 Employment actions

Another common form of civil litigation are actions brought by former employees arising from the underlying conduct being investigated. Employees may bring actions for wrongful termination, although companies engaged in internal investigations often sidestep these types of litigation by allowing the employee to resign rather than be terminated. Where investigations arise from an employee whistleblower, companies should be mindful of special statutory whistleblower protections to avoid claims for breach of the whistleblower’s rights.

Employees may also bring claims based on statements their employer makes regarding that employee’s conduct or character. These claims may be based on allegations of defamation, but also in malicious prosecution. For example, in Ramchandani v. CitiBank Nat’l Ass’n, the plaintiff brought suit against CitiBank National Association, CitiGroup Inc and Citicorp (collectively, Citi) alleging a malicious prosecution claim stemming from Citi’s dis­closure of information about him to the DOJ in an antitrust investigation. After Citi pleaded guilty to a federal antitrust charge that was grounded solely on the alleged misconduct by Rohan Ramchandani, who was employed as a currencies trader. Mr Ramchandani claimed that he was indicted because of Citi’s false statements as part of Citi’s plan to limit the negative consequences of the investigation. The plaintiff further contended that Citi’s outside counsel described him as ‘collateral damage’ from Citi’s guilty plea, because of Citi’s knowledge of Ramchandani’s lack of criminal capability. Although this action is still pending at the time of writing, the court has already denied Citi’s motion to dismiss, determining that such allegations constitute enough to satisfy four elements of a malicious prosecution claim: (1) the initiation of an action by the defendant against the plaintiff, (2) begun with malice, (3) and without probable cause to believe it can succeed (4) that terminates in favour of the plaintiff.

23.3.3 Commercial litigation

Commercial counterparties may claim that the conduct giving rise to a government investigation also breaches terms in an agreement, such as contractual representations by a company that it fully complies with particular laws or that it is not the subject of an active investigation or under threat of investigation.

Similarly, government investigations may also result in the public disclosure of conduct that gives rise to civil tort liability. For example, allegations of corporate misconduct could lead to claims brought by counterparties alleging that the misconduct constitutes fraud, tortious interference with commercial relations, or other unfair or deceptive business practices.

23.3.4 Indemnification, advancement and denial of coverage

Corporate directors and officers are frequently entitled to indemnification and advancement under a company’s by-laws and by state law. Company by-laws typically provide that the company will advance attorneys’ fees and costs to an individual director or officer named as a defendant in a lawsuit asserting claims arising out of his or her service to the company.

Directors and officers are not typically entitled to indemnification where bad faith is proven, including in situations involving admissions of criminal acts or regulatory misconduct. Generally, while actions are pending against an indemnified party, these agreements require the company to advance litigation costs subject to a potential undertaking to repay the amount after such claims are resolved. Nevertheless, disputes may arise between the company and the indemnified party regarding the right to advancement of litigation costs if, for example, the company believes that the party has engaged in bad faith or has unclean hands in availing themselves of that right, including the moving of assets to protect them from repayment during indemnification.

Similarly, in a dispute between an insured and an insurer, the insured may become involved in parallel insurance coverage litigation in addition to the pending investigations and civil litigation. For example, an insurer may seek to deny coverage by attempting to prove that the investigations or civil lawsuits were the result of intentional misconduct by an insured, which may be excluded from coverage. To sidestep such litigation, where coverage may be uncertain, an insured party may seek to negotiate a compromised amount with the insurer to cover its litigation costs.

23.3.5 Private party suits brought on behalf of the government

Some statutes that may be enforced civilly by the government also grant private parties the right to bring an action. Statutory claims that may form the basis of a parallel civil claim include allegations that the defendant engaged in unfair or deceptive business practices, anticompetitive business collusion, the submission of false claims to the government or the making of false statements in commercial advertising.

For example, both the government and private citizens may bring a civil action under the False Claims Act (FCA), which prohibits frauds committed against federal government programmes. A private party brings the action on behalf of the government, effectively stepping into its shoes, and is referred to as a relator or qui tam plaintiff. The government may then decide whether to intervene.

Generally, a relator commences an FCA suit by filing the complaint under seal and providing the government with a copy of the complaint and all material evidence and information the relator possesses. The government then conducts an independent investigation to determine whether to intervene or allow the relator to continue litigating on the government’s behalf. A federal action brought by a private person may only be dismissed if the court and Attorney General give written consent to the dismissal and their reasoning. However, if the government chooses to intervene within 60 days of receiving the complaint, it may elect to dismiss the action, notwithstanding the objections of the person initiating the action, if the person has been notified by the government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion. Further, the government may settle the action if the court determines, after a hearing, that the proposed settlement is fair, adequate and reasonable in all the circumstances.

The FCA empowers the DOJ to issue CIDs to conduct depositions, issue interrogatories and make document requests – all before the defendant is served with formal notice of the suit or the unsealing of the qui tam complaint.

The FCA shares elements with criminal statutes, and purported violations implicate potential violations of the criminal laws with the main difference being criminal intent. As a result, it is not uncommon for the DOJ to initiate criminal proceedings based on the same factual allegations underlying qui tam complaints, or for civil FCA actions to arise based on underlying DOJ criminal investigations.

23.4 Discovery differences in civil and criminal cases

In civil cases, both plaintiffs and defendants have access to a wide variety of discovery tools pursuant to the rules of civil procedure and may generally obtain any information that is relevant, provided that the burden of producing the discovery is proportionate to the likelihood that the discovery will be material. By contrast, discovery in a federal criminal case is far more prescriptive. For example, discovery tools available in civil cases such as interrogatories and requests for admission are not available in a criminal case, and witness depositions are only permitted in criminal cases in a narrow set of circumstances.

In fact, federal prosecutors in criminal cases are generally only required to disclose:

• certain specified documents, available upon the defendant’s request, such as the defendant’s oral and written statements, documents and tangible objects material to the government’s case-in-chief or to prepare the defence, and summaries of any expert witness testimony that the government intends to use;
• statements of testifying witnesses;
• evidence or information that tends to be favourable to the defence; and
• material that may be used to impeach a government witness.

Notably, these discovery obligations only extend to material or information within the criminal prosecutor’s possession or control, meaning there is no obligation to disclose material within the possession of another government agency pursuing an independent parallel civil investigation or litigation.

The limited nature of discovery in criminal cases demonstrates why some defendants may seek to obtain broader discovery in parallel civil proceedings than they would ordinarily receive, as well as why criminal prosecutors often seek to preclude criminal defendants from doing so by applying for a stay of civil proceedings. Likewise, plaintiffs in parallel civil proceedings may seek to obtain the government’s disclosures to a criminal defendant through civil discovery, as such material is the most effective and expeditious method to prove the misconduct that underlies civil claims of corporate misconduct.

Finally, in parallel proceedings with regulatory agencies (SEC, Federal Deposit Insurance Corporation, Environmental Protection Agency, etc.), or other non-criminal investigative agencies, the relationship between the criminal prosecutors and the other agency can become sufficiently close that the agency becomes part of the prosecution team for discovery purposes. For example, where the prosecutor and the agency conducted a joint investigation or shared resources related to investigating the case, or the agency played an active role in the prosecution, including interviewing witnesses, developing prosecutorial strategy or participating in targeting discussions, courts have found that the agency is part of the prosecution team. This has significant effects on criminal discovery, as it requires criminal prosecutors to disclose to a defendant material and information in the agency’s possession.

23.5 Evidentiary issues

23.5.1 Constitutional considerations

The Fifth Amendment of the US Constitution protects individuals from being compelled to give testimony that they reasonably believe could incriminate them. Under Fifth Amendment jurisprudence, the factfinder may not draw an adverse inference of guilt from the invocation of the privilege in criminal proceedings. However, in civil proceedings, the factfinder may draw an adverse inference against the person invoking the privilege. Thus, a party facing both criminal and civil proceedings often faces a difficult choice between asserting the privilege in response to a civil discovery request, triggering an adverse inference of guilt, or co-operating with a civil discovery request and waiving the Fifth Amendment privilege, allowing the government to use the civil testimony in the criminal case. Importantly, courts have ruled that corporations do not have a Fifth Amendment privilege, so if the corporation is also a named defendant in a civil proceeding, the adverse party may request testimony from a corporate witness, but individuals with sufficient knowledge to testify in such capacity may also have to invoke the Fifth Amendment privilege.

23.5.2 The attorney–client privilege and work-product protection

Federal Rule of Evidence 502 (FRE 502) addresses the basis for which disclosures during discovery may automatically waive discovery-associated privileges. It applies where a party produces documents subject to the work-product doctrine or the attorney–client privilege, and then wishes to regain the right to such privileges.

FRE 502(a) implies an automatic waiver where information is intentionally disclosed to a federal agent. Where disclosure is made in a federal proceeding or in another federal context, and waiver of the attorney–client privilege or the work-product is made, this waiver extends to undisclosed communications or information only if: (1) the waiver is intentional; (2) the disclosed and undisclosed information pertains to the same matter; and (3) fairness dictates the undisclosed and disclosed information should be considered jointly.

FRE 502(d), however, gives courts jurisdiction to protect a party’s privilege under the attorney–client privilege and the work-product doctrine. The rule provides that federal court non-waiver orders relating to federal proceedings bind other federal and state courts, and FRE 502(e) provides that a non-waiver agreement between parties to a federal proceeding binds only the parties, unless the agreement is approved by court order. Counsel may therefore, subject to court approval, seek to enter into a confidentiality agreement with the government to preserve the protections, protect against inadvertent disclosure, or permit the defendant to claw back documents that are inadvertently produced during the investigation. However, FRE 502 ‘does not alter the law regarding waiver of privilege resulting from having acquiesced in the use of otherwise privileged information. . . . and does not provide a basis for the court to enable the parties to agree to a selective waiver of the privilege’. As a result, parties involved in government investigations must be mindful that certain disclosures to the government may expose other information to third parties in subsequent civil litigation.

23.6 Applications for a stay of civil proceedings

When there are parallel proceedings, both the government and the defendant may wish to move for a stay of civil proceedings. To avoid interfering with the integrity of its own criminal prosecution, the DOJ commonly intervenes and requests a stay of the civil proceeding pending resolution of the parallel criminal prosecution. Defendants may also have reasons to seek a stay to avoid either losing the Fifth Amendment privilege against self-incrimination or damaging their prospects in the civil litigation by asserting Fifth Amendment rights. If the civil case advances ahead of the criminal prosecution, defendants may be forced to expose their defence strategy to criminal prosecutors, putting defendants at a significant disadvantage. For these reasons, courts often grant applications for a stay of civil proceedings with consent of the parties.

Courts may grant a stay of parallel civil proceedings, even in the absence of a criminal indictment or an outcome of the grand jury investigation. Although the Federal Rules of Civil Procedure do not expressly provide for a stay, and the US Supreme Court has repeatedly emphasised that a ‘defendant has no constitutional right to a stay simply because a parallel criminal proceeding is in the works’, a court may decide, in its discretion, to stay civil proceedings after balancing different interests and factors. The decision to grant a stay rests in the sound discretion of the trial court as part of its ‘inherent powers’. Even where an application is granted, the court may impose conditions and limitations on the stay, including as to scope and duration. For example, a court may allow discovery to proceed on certain topics, parties or claims. Courts may also enter a stay that expires after a fixed period or upon specific developments, or require the parties to periodically update the court on the status of other proceedings. In general, a party may apply to have a stay lifted at any time.

Different jurisdictions emphasise varying factors when balancing the interests, but, in general, five balancing factors typically bear on the decisional calculations:

• the interests of the civil plaintiff in proceeding expeditiously with the civil litigation, including the avoidance of any prejudice to the plaintiff should a delay occur;
• the hardship to the defendant should the cases proceed in tandem;
• the convenience of both the civil and criminal courts;
• the interests of third parties; and
• the public interests.

In addition to these, some jurisdictions would also consider:

• the good faith of the litigants;
• the status of the cases;
• and the strength of the nexus between the two cases.

In most cases, courts will grant a motion to stay if there is a close relationship between the criminal and civil action. Indeed, the strongest argument for a motion to stay civil proceedings is that a party facing criminal charges is required to defend a civil action involving the same operative facts. Without a stay of proceedings, the close relationship between the two cases might otherwise prejudice one or both of the parties.

Courts are particularly sensitive to undermining a criminal defendant’s Fifth Amendment privilege against self-incrimination and favour a stay where the privilege is threatened. However, the Fifth Amendment privilege can be waived if, for example, a defendant has already provided deposition testimony on substantive issues of the civil case before moving to stay. In such circumstances, a court may deny the motion on the ground that ‘any burden on that defendant’s Fifth Amendment privilege is negligible’.

Courts have granted an application for stay when some witnesses or the defendant are expected to assert their Fifth Amendment rights, finding that invocation of the privilege will render civil discovery largely one-sided. In essence, courts favour a stay where civil discovery would compel the government to produce ‘scores of documents and witness testimony [to the defendant] only to be precluded from gathering reciprocal discovery’.

Courts have found that a motion to stay is improper without a specific showing of prejudice or injustice that cannot be remedied by anything other than a stay of the civil proceeding. Courts also tend to disfavour a government request for a stay when the same branch of government that brought the civil lawsuit is also seeking one.

Defendants facing both civil and criminal proceedings should determine if a stay is strategically advantageous, and while it has been commonplace to regard these motions as routine and granted as a matter of course, in recent years the outcomes have not been so predictable. For instance, in SEC v. Saad, the court denied a government application for a stay of discovery in an SEC enforcement action that had been filed in tandem with a parallel criminal case. In Saad, the government argued that a stay was necessary to prevent the defendants from gaining ‘special advantage’ because of the broader discovery under the civil procedure rules. However, the court rejected that position, finding that it was difficult to credit where ‘the US Attorney’s Office, having closely coordinated with the SEC in bringing simultaneous civil and criminal actions against some hapless defendant, should then wish to be relieved of the consequences that will flow if the two actions proceed simultaneously’. Likewise, in SEC v. O’Neill, the court denied a stay of the SEC’s civil case, finding the government’s request was made for a ‘strategic and tactical consideration that has little to do with the public interest or the interests of the defendants’.

As another example, in the case against Ramesh ‘Sunny’ Balwani, the former president of Theranos, the court denied the DOJ’s request to stay discovery in the SEC case owing to the late and prejudicial timing of the request and the fact that Mr Balwani opposed the stay. The DOJ unsuccessfully argued that Balwani used subpoenas in the civil case to obtain information irrelevant to the SEC allegations but directly relevant to the criminal indictment. However, the court still allowed the DOJ to intervene, meaning that it could oppose subpoenas issued by Balwani to the extent that they were irrelevant to the civil case, but would have to do so case by case.

As a result, companies should not assume that courts grant government applications for stays as a matter of course, and they should assess whether opposing an application for a stay is in their strategic interests.

23.7 Insurance

The costs associated with defending civil litigation and investigative matters can be significant, and identifying any applicable insurance policies and providing timely notice of potential claims under those policies is therefore critical. A company or individual facing parallel investigations and litigation should take steps to ascertain the existence, nature and terms of any potentially applicable insurance policies as early as possible. Key initial questions should relate to:

• whether the allegations in the regulatory investigation or civil lawsuit give rise to a potential claim covered under the policy;
• the liability period covered by the policy;
• whether the alleged misconduct occurred during the coverage period;
• whether the insurer requires ‘panel counsel’ for certain matters; and
• the amount of the deductible and policy limit per occurrence and per policy.

Although the terms of the applicable policies should govern this, it is often prudent to notify any potentially implicated insurers of the existence of a potential claim against the policy as early as is practicable, as insurers will often decline to cover costs incurred before notification, and many policies require notification within a certain time before coverage may be declined.

It is not unusual to have parallel government investigations and civil litigation covered under the same insurance policy or tower of policies. In these circumstances, insured parties must consider how best to deploy their resources, especially if there is a risk that there is inadequate insurance to cover the full range of matters that can arise from a single internal investigation.

23.8 Conclusion

Companies must develop a clear, holistic strategy for navigating parallel investigation and litigation. Any proposed action by the company regarding particular litigation requires a considered approach and analysis of the impact that will have on the various litigations. Close coordination is also necessary between the company’s criminal and civil outside counsel to ensure consistency of approach and strategic alignment. Both the civil and criminal defence teams must be responsive to new developments and communicate them effectively to the broader team so that all stakeholders appreciate the risks posed by developments in both the criminal and civil matters.

Footnotes