Category: Complaint Handling

Compliance, Workplace Investigations, and Deflategate

The National Football League kicks off its season tonight with star quarterback Tom Brady starting under center for the defending Super Bowl Champions, the New England Patriots. It was tumultuous off-season because of a botched workplace investigation and bungled discipline. There are lessons to be learned for compliance professionals.

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First. I’m a long time New England Patriots fan who has watched the team struggle through its early years, its current success and its failures. My view is tainted by my fandom.

Second. The Patriots cheated and improperly inflated game balls during the Colts game last season. There should be punishment.

Other than the star power and wealth of the many people subject to the investigation, it is a routine workplace investigation. The league took steps to determine who did what and who knew what. The NFL hired a supposedly disinterested third-party to conduct an independent investigation. The result was the Wells Report.

The first problem with the investigation was the extended period of time it took to document the investigation. It took five months. That was too long given the small number of individuals involved and narrow time frame during which the bad acts took place.

John Jastremski, an assistant equipment manager, and Jim McNally, the officials’ locker room attendant, were suspended for their role in deflating footballs before the AFC Championship Game. The Wells Report makes a strong finding that these two were actively involved in manipulating the balls improperly.

The league punished the Patriots as an organization, levying a $1 million fine and taking away their first round pick in the 2016 NFL draft and their fourth round pick in the 2017 NFL draft.

The only point in major contention was levying a four-game suspension against Tom Brady. The discipline was because:

With respect to your particular involvement, the report established that there is substantial and credible evidence to conclude you were at least generally aware of the actions of the Patriots’ employees involved in the deflation of the footballs and that it was unlikely that their actions were done without your knowledge. Moreover, the report documents your failure to cooperate fully and candidly with the investigation, including by refusing to produce any relevant electronic evidence (emails, texts, etc.), despite being offered extraordinary safeguards by the investigators to protect unrelated personal information, and by providing testimony that the report concludes was not plausible and contradicted by other evidence.

Although the Patriots agreed to the organizational punishment, Mr. Brady was not willing to agree to the suspension. The Wells Report did not find that Mr. Brady had any direct knowledge of the ball tampering, that he condoned it or that he ordered it.

The legal wrangling highlights that league actions are limited by and subject to the collective bargaining agreement with the players. Union rules are in effect. That sets the process and requirements apart from a workplace of at-will employees.

In the legal appeal, the court found that there was inadequate notice of punishment. Brady had no notice that he could receive a four-game suspension for general awareness of ball deflation by others or non-cooperation with the investigation. Brady also had no notice that his discipline would be the equivalent of the discipline imposed upon a player who used performance enhancing drugs. Adequate notice of punishment is a requirement of union shop rules.

In November 2014, the Minnesota Vikings and Carolina Panthers were caught on film using sideline heaters to warm the footballs during the game in violation of league policies, but no penalties were issued in that case.

In 2010 Brett Favre interfered with an NFL investigation of sexual harassment. He was fined $50,000, but not subject to a suspension.

In 2009, the Jets were caught tampering with game balls used for kicking. The equipment manager was suspended, but there was no punishment levied against the kicker.

In the player policy, equipment violations are noted as being subject to a fine.

The NFL is always going to have a tougher time disciplining players. Not because of their wealth or notoriety, but because of the union rules in place.  The other problem is that the NFL has a patchwork of polices and procedures around disciplining players.

Commissioner Goodell labeled Mr. Brady’s behavior as “conduct detrimental” and equated it to steroid use. That is supposedly how he came up with the four game suspension. However, there is a specific policy adopted by the league and the players on steroid use. Under the union rules, Commissioner Goodell can’t up-punish based on an unrelated policy.

The NFL and the players union need to straighten out the disciplinary policies and punishments. The union rules require the players have adequate notice of the likely punishment.

Of course, the Patriots should be punished and they were. Even without the Brady suspension, the monetary fine and loss of draft picks are among the biggest punishments ever imposed by the NFL.

Now it’s time to play the game. Are you ready for some football?!?

Patriots football stadium

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GM Shows That Lying Can Be Worse Than The Problem

GM and compliance

General Motors had a problem with its cars and didn’t fix it. Then the company apparently tried to cover up the mistake and lied about the mistake. As a result, GM lost the story and ended up with a headline of GM Lied and People Died.

The problem seems to come from a mistake made by an engineer in designing the ignition switch design. He approved the design even though it failed to meet GM’s standard on torque requirements. The result is that the key could inadvertently move out of position, affecting power brakes, power steering and air bags.

That engineer authorized a switch redesign after problems surfaced. However, he did not assign a new part number, making it impossible to track any changes to the part. As the defect became apparent, GM compounded the engineer’s problem by failing to fix the problem.

So far 13 deaths and 32 crashes have been linked to the defect. GM has repaired more than 113,000 cars out of a total 2.6 million worldwide under the switch recall.

Because of the lies and cover-up, GM loses the ability to tell a more nuanced story about the defect.

Car and Driver tested the effects of the key defect and the results do make it sound like the car turns into a death trap. For brakes, with a full failure, the effort to stop the car increased from 51 pounds to 220 pounds. That’s a big push but achievable by most people. The magazine’s tests resulted in 3 more feet of stopping distance.  That increase is after a complete shutdown. The brakes will still have some boost after the engine shuts off.

Steering effort increases from a range of 3.3 pounds to 8.0 pounds up to 15.1 pounds to 29.2 pounds.  That increase in manageable for most people.

For years, people were driving cars without power steering and power brakes. Of course, the sudden loss of power can lead to panic and increase the risk of an accident. As it likely did in the 32 linked crashes.

The airbags deployment is also a more nuanced position. The airbags can deploy when the key is not in the “on” position. Cars are loaded with sensors that trigger the decision to deploy the airbags. A misfired airbag can be dangerous. So in many models, the airbags do not deploy when a person is out of position in the vehicle. This is particularly true when a passenger is not restrained by a seatbelt.

At least seven of the thirteen victims were not wearing their seatbelts. That increases the chances that the airbags would not deploy, even if the key was in the “On” position.

At least four of the drivers were under the influence of drugs or alcohol at the time of the accidents. That will decrease their ability to properly react to the defective shutdown after the key moves.

But GM lost the ability to control the narrative. The company manufactured a vehicle with a known defect and then failed to fixed the defect after it was discovered. The dominant narrative that the cars turned into uncontrollable deathtraps doesn’t hold up. But GM is stuck addressing its internal problems with the media and regulators.

The lies made the problem many times worse for the company.

References:

Roger Clemens and Lying to the Feds

Roger Clemens taught us another important lesson in dealing with an investigation. Never lie to the feds.

Mark McGwire essentially proclaimed his guilt when he refused to answer questions about steroid use during his playing career at a congressional hearing. He may have lost in the arena of public opinion, but he will not have to continue in the courtroom arena.

Mr. Clemens said the following, under oath, at a Congressional hearing:

  • “I have not used steroids of human growth hormone.”
  • “I am just making it as perfectly clear as I can, I haven’t done steroids or growth hormone.”
  • “I never used steroids. Never performance-enhancing steroids.”

Instead of having to prove that Roger Clemens illegally took steroids, they just need to prove that he took steroids.

Martha Stewart was never convicted of insider trading. She was convicted of perjury lying to federal investigators. She lied about the circumstances of her trades.They did not have enough evidence to prove insider trading. But they did have enough lies to convict her of perjury.

Roger will now need to worry about trading his Yankees pinstripes for jail stripes. It’s probably going to be tough to get that Baseball Hall of Fame vote while being under federal indictment. Clemens is eligible to be placed on the ballot in 2012. He may need to be more worried about being eligible for parole.

Sources:

Image of Roger Clemens is by Keith Allison

Warning the Witness

At the Compliance Week 2010 conference, David Seide was nice enough to give me a copy of his new book: Warning the Witness: A Guide to Internal Investigations and the Attorney-Client Privilege. David co-wrote the book with Gary Collins, Managing Director & Director of Compliance at GE Energy Financial Services.

Since the DOJ, SEC and other agencies focusing on financial crimes, it is important to understand how an employee investigation is affected by the attorney-client privilege. This book lays out the legal background.

Internal investigations get tricky when you are using outside counsel or in-house counsel that the employee is used to getting legal advice from. They have some expectation that the lawyer is their lawyer and the information is confidential. We saw those problems with attorney-client privilege and internal investigations in some recent cases.

The tricky part is that since the lawyers work for the company, the company holds the right to waive the attorney-client privilege.  Even beyond the privilege there is a duty of confidentiality that could further limit the necessary disclosure of information during an investigation.

Collins and Seide do a great job of laying out the legal background and then turning the legal issues into recommended best practices. The book also has extensive appendixes containing the relevant model rules of professional conduct and Department of Justice memoranda.

If you want more detail on the contents, I have included the table of contents at the end of this post.

They have a great model corporate miranda that sets the stage for an employee interview. It’s key to make sure that the employee understands it, even though is not common practice to have them sign it.

The book is a great addition to your bookshelf if you are involved in employee investigations.  It’s available from the American Bar Association web store.

Table of Contents

  • Chapter I
    • Introduction
  • Chapter II
    • The Attorney-Client Privilege
    • Introduction
    • Relevant Principles Underlying the Attorney-Client Privilege
    • What Is the Privilege?
    • Elements
    • Formation of the Attorney-Client Relationship
    • Application to the Corporate Context
    • Duty of Confidentiality to Prospective Clients
    • Elements
    • Application to the Corporate Context
  • Chapter III
    • Upjohn and Its Impact on the Attorney-Client Privilege
    • The Corporate Attorney-Client Privilege Prior to Upjohn
    • The Upjohn Decision
  • Chapter IV
    • Formalizing Witness Warnings
    • Codification through the ABA Model Rules
    • ABA Rule 1.13(f)
    • ABA Rule 4.3 21
    • The Relevance of the Model Rules to Upjohn Warnings
    • Adoption of the Model Rules by Various Jurisdictions
    • Illustrative Post-Upjohn Cases
  • Chapter V
    • Current Witness Warning Practices
  • Chapter VI
    • Recommended Best Practices
    • Suggested Witness Warning
    • Recommended Procedures to Follow
    • Counsel Interviewing Constituents
    • Other Issues for Consideration Constituents Approaching Counsel
    • Supplementing Oral Warnings
    • “Do I need a lawyer?”
    • “What is my status? Is there a conflict of interest?”
    • Separate Counsel for Constituents
    • “What if I refuse to cooperate in this investigation?”
    • Third-Party Uses of Information
    • Confidentiality of Communications Between Counsel and the Constituent
    • Joint Representation of the Corporation and the Individual

Portugal and Ethics Hotlines

Under guidelines published by the Portuguese Data Protection Authority on the 1st October 2009, a whistleblower cannot make a report anonymously. I have to admit that I can’t read Portuguese, so reading Deliberação Nº 765 /2009 does not help me much in interpreting the limitations. (Google translate helps.)

Most EU member states allow anonymous reporting as a last resort. Portugal went a step further and outlawed anonymous reporting completely.

The Portugal guidelines also limit hotline use to reports of corruption, banking and financial crime and internal accounting controls. It’s not allowed for breaches of general codes of conduct. To go a step further, whistleblowers may only report against individuals in managerial positions.

If you are a public company with operations in Portugal and required to have whistleblower hotline under Sarbanes-Oxley, you need to look at these limitations. They seem to be in direct conflict.

Thanks to Bill Piwonka of EthicsPoint for letting me know about this. EthicsPoint supplies my company’s hotline.

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Hiring Lawyers for Employees Under Investigation

Your company comes under investigation and specific employees are implicated. What is the right way to get lawyers for those employees? Assuming the company is picking up the cost of the lawyers, the company usually wants to have some input on the selection.

A recent New Jersey case highlighted some of the issues involved for the company and the lawyers involved. In the Matter of the State Grand Jury Investigation (A-80-08) highlighted the ethical issues.

The court laid  it out simply that the Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless six conditions are satisfied:

  1. The client gives informed consent.
  2. There is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship.
  3. There is no current attorney-client relationship between the lawyer and the third-party payer.
  4. Information relating to the representation of the client is protected.
  5. The third-party payer must pay the invoices in its regular course of business.
  6. Once the third-party payer commits to pay, they need to get court approval to stop.

In this case Laidlaw International, Inc. was under investigation, with a focus on three employees.  The company hired four lawyers, one for each named employee involved and a fourth for all non-target current and former employees. The retainer agreements provided that the company would be responsible for the lawyer fees, but the lawyers’ professional obligation was to the individual employees only. The lawyers were not required to make disclosures to the company, and payment of the legal fees was not conditioned on the lawyers’ cooperation with the company.

That arrangement is fairly standard. But the state attorney objected and want to disqualify the company-paid lawyers for the employees. “The attorney maintains a sense of loyalty to the party paying him,” said Deputy Attorney General Frank Muroski told the Court at oral arguments. “The lawyer must suspect that the fee payer expects to have its interests protected.”

The court denied that there is an per se conflict. But there should be safeguards in place as outlined in the six conditions.

One key practice tip for the lawyers is that there must be a careful and conscientious redaction of all detail from any billings submitted to the third-party payer.

Sources:

An Effective Workplace Investigation

Crime scene

The California Supreme Court in Cotran v. Rollins Hudig Hall International, Inc. found that for an employer to have “good cause” to terminate an employee, the employer does not have to prove that allegations of misconduct are true, just that the employer fairly formed a reasonable belief that they were true.  So an employer must show not just that it honestly believed the charges, but also that it was reasonable to believe them.

“We give operative meaning to the term “good cause” in the context of implied employment contracts by defining it … as fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual. A reasoned conclusion, in short, supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond.”

An “adequate investigation” is good, but an effective investigation is better. The EEOC published some guidelines on what they think are the elements of an effective investigative process for a sexual harassment claim.

First, figure out if you need an investigation. If the alleged perpetrator does not deny the accusation, then there is little need for an investigation. You can go right to corrective action.

The investigation needs be started and completed promptly.

The investigator should not be subject to the supervisory authority of the accused. After all, its really hard to conduct an objective investigation of the person who determines your paychecks and promotion.

Follow the same note-taking procedure for all of your witnesses, including the Complainant and the accused employee.

Interview the Complainant first and get a complete story. This is your baseline of data to which others statements will be measured. Other interviews and documents will either confirm or dispute this data.

Then interview the alleged perpetrator and third parties who could reasonably be expected to have relevant information.

Do not reach a determination until all of the interviews are finalized and any credibility issues are resolved.

Even if the evidence is inconclusive and a determination cannot be made, preventive action should be made. There are always lessons to be learned from a bad situation or complaint.

References:

Ruehle Decision on Internal Investigations Overturned

The Ninth Circuit stepped into a conflict between former Broadcom CFO William Ruehle and lawyers at Irell & Manella. The disagreement concerned a type of misunderstanding on whether lawyers during an internal company probe are representing a singular executive or the company itself.

At issue was whether Irell clearly explained to Ruehle that it was representing the company and anything he told them could be shared with third parties. They ended up realeing information to the government. Irell lawyers maintained they told Ruehle. Ruehle said he couldn’t remember receiving such notice.

The lower court said the law firm breached its duty of loyalty to Ruehle by revealing his statements to the government and banned the government from using those statements in its trial.

Most famously, the judge also referred the lawyers to the California state bar for disciplinary action. [See my previous post: Attorney-Client Privilege and Internal Investigations]

In this opinion penned by Judge Richard C. Tallman, the court rejected Carney’s analysis and ruled that the “overwhelming evidence” shows that Ruehle’s statements to the Irell lawyers were not made in confidence. Ruehle should have understood that lawyers investigating the stock-option issue would likely share any information he provided with the company’s auditors.

Again, its important realize that once you start including non-lawyers in your communication, you have likely waived the attorney client privilege. The Ninth Circuit focused on the point that Ruehle knew his comments were to be shared with the accountants. You can’t have an expectation that information shared with accountants will have the protection of attorney-client privilege.

if you are a corporate officer subject to an investigation, you need to be aware that statements made during an internal investigation may end up in the government’s file. You can’t always count on the attorney client privilege to protect these statements.

References:

Associational Retaliation Claims

retaliation

Most companies have some form of non-retaliation policy for employees who make a good faith report of a problem. But what if the company retaliates against someone else instead? That was the situation presented in a recent court case: Thompson v. North American Stainless. A woman and her fiancee worked at the same company. She complained and they fired him.

Factual Background:

The plaintiff, Eric Thompson, claimed he was fired in retaliation for his fiancee’s discrimination charge. Thompson met the woman, Miriam Regalado, at work. In 2002, Regalado filed a charge with the EEOC alleging that she was discriminated against because of her gender. At the time of Thompson’s termination, he and Regalado were engaged to be married, and their relationship was common knowledge at North American Stainless.

The Problem

Title VII of the Civil Rights Act says an employer may not fire, demote, harass or otherwise “retaliate” against an individual for filing a charge of discrimination. Most companies have a policy that takes the same position for reporting other violations of company policy or illegal acts.

Clearly if the company had fired Regalado, the fiancee, they would have broken the law. But is it still “retaliation” if you fire a close friend or relative? (That’s associational retaliation.)

The Result

No, at least under Title VII of the Civil Rights Act. The Court relied on the plain language of the statute limiting the class of persons authorized to sue for retaliation to those who opposed an unlawful employment practice; made a charge; or testified, assisted, or participated in any manner in an investigation, proceeding, or hearing. The statute does not authorize a retaliation claim by a plaintiff who did not himself engage in protected activity.

But . . .

The Court did note that Thompson’s fiancee, who filed the original discrimination charge, could have filed a retaliation complaint herself alleging that the termination of Thompson in response to her protected activity was an adverse employment action against her. There is no background on why she didn’t do that.

Companies should be careful of these potential associational retaliation claims when dealing with its complaint process

Resources:

Corporate Miranda for Internal Company Investigations

agent_reads_the_miranda_rights_As in-house counsel are often the ones starting an internal investigation, they need to be mindful of the same issues that appear when outside counsel are conducting an internal investigation. I wrote about the referral for discipline in the Ruehle case and the malpractice claim in Pendergast-Holt investigation in Attorney-Client Privilege and Internal Investigations.

It is even more important to clarify that the in-house counsel represents the organization. Employees are often used to dealing with in-house counsel as colleagues and give little regard to who they actually represent. After all, it is natural for employees regularly interacting with with in-house counsel to view them as their lawyer. Under the ABA’s model rules, Rule 1.13 (f) requires:

In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.

It is important to keep notes that you made the disclosure. Part of the issue in the Ruehle case and the Pendergast-Holt investigation is over what was said to the individual employees regarding representation. Treat the clarification statement as a “Corporate Miranda.”

Does the employee then have the right to remain silent? The Miranda rights under the Fifth Amendment are a limitation on the government, not a private company. The employee can remain silent, but you can terminate the employee for not cooperating. Of course it is good practice to let the employee know ahead of time what the consequences are for not cooperating.

Do they have the right to attorney? Again, the Miranda rights under the Fifth Amendment are not a limitation on a private company. There is a practical question about how you want to treat employees and whether the responses will be better if the employee talks with a lawyer before answering. It is probably better to give the employee a reasonable amount of time to get their own lawyer.

One aspect of the Miranda warning does come into play. What the employee says can be used against them.

What if they can’t afford an attorney? Back to the statement that the Miranda rights under the Fifth Amendment are not a limitation on a private company.

But corporate law does come into play for attorney costs. Under Delaware corporate law, a Delaware corporation must indemnify an officer or director who is successful on the merits or otherwise in the defense of a qualifying claim. (see §145 (c) of the Delaware General Corporation Law) In addition to the required indemnification, a Delaware corporation may indemnify individual employees for expenses incurred “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” (see §§145 (a) & 145 (b) of the Delaware General Corporation Law) Then there are often contractual arrangement with senior management for indemnification and a D&O insurance policy that may trigger the payment of defense costs. Other types of entities and other states’ laws that may have different treatment of defense costs and indemnification.

It is important to set up guidelines and protocols for investigations. Has your organization put together its own Corporate Miranda?

See also:

Image is from Wikimedia Commons:CBP Border Patrol agent reads the Miranda rights