Parallel Civil Litigation: The US Perspective

35.1 Introduction

In the United States, when there are pending criminal and regulatory investigations, there are often also parallel civil proceedings brought by private individuals that pertain to the same or similar alleged conduct implicated by the investigations.

Parallel civil proceedings may precede the investigation, follow on from announced investigative findings or, as is frequently the case, arise during the course of the investigation as a result of public disclosures by a company about the existence or results of an investigation. These actions take a variety of forms, but class actions – in which a lead plaintiff seeks to prosecute claims on behalf of a large number of similarly situated plaintiffs – are the most prevalent in the United States. Class actions can introduce a range of complexities and pitfalls, including the prospect of increased alleged damages stemming from the aggregated impact to an entire class of purportedly aggrieved class members. Parallel private actions can also spur additional regulatory scrutiny in circumstances where, for example, a civil suit challenges conduct that was unknown to, or not the focus of, the relevant authorities.

Managing proceedings in this posture can present challenges. Parallel civil proceedings are governed by the procedural rules of the courts in which they are pending and the individual rules of the judges presiding over the cases. Because, among other things, civil proceedings can often proceed more quickly than slower-moving investigations, tensions can arise with the investigative process, particularly with respect to the discovery process in civil litigation.

This chapter addresses the core challenges that arise when a company must manage parallel civil litigation in the United States at the same time as related investigations, and provides insight for companies and practitioners navigating the complicated issues that may arise under these circumstances.

First is a discussion about the most commonly invoked procedural manoeuvre by parties subject to parallel government or regulatory investigations and civil litigation: seeking to stay the private civil action. Next, the chapter summarises the forms of civil litigation that most often arise in the United States in this context and addresses considerations that may apply when dealing with each of them in the context of the competing private litigation and government-led investigative proceedings. Finally, the chapter provides additional insights and key takeaways for practitioners with respect to evidentiary issues, privilege concerns and business considerations, including potential insurance-related issues.

35.2 Stay of proceedings

Parties subject to parallel government investigations and civil proceedings frequently attempt to stay civil proceedings that relate to the same conduct under investigation. Pursuing a stay has appeal insofar as it allows a company under investigation to focus on the investigation, where the stakes are often higher, without the added distractions and complications from the parallel civil case. Of course, the plaintiff in the litigation sought to be stayed will typically oppose a stay in an attempt to gain additional leverage through the parallel proceedings.

Although a complete stay of parallel civil proceedings pending resolution of a government or regulatory investigation is often desirable, it can be difficult to obtain in practice. A court’s decision concerning whether to grant a stay and the scope and timing of the stay is typically discretionary and a function of the individual judge’s view as to how best to administer his or her own docket.[2]

35.2.1 Standard for issuing a stay

The precise standard that a court will apply when assessing whether to grant a stay varies by jurisdiction. In general, although courts in the United States are often sensitive to the potential prejudice to an entity or an individual named as a defendant, or the subject of a criminal proceeding, from being forced to proceed with parallel civil litigation about the same conduct, courts can nevertheless be hesitant to stay civil cases in their entirety just because an investigation is pending. This is particularly the case when it is difficult to ascertain the precise scope and status of a government or regulatory investigation, as a court may be reluctant to stay a civil litigation that raises serious claims in deference to an investigation that may not be proceeding in a timely fashion.

Courts within the jurisdiction of the US Court of Appeals for the Second Circuit, which covers New York, have described a stay as an ‘extraordinary remedy’.[3] The Second Circuit applies a standard[4] that is similar to other jurisdictions, which considers the following factors:

  • the extent of the overlap between the issues in the criminal case and those in the civil case;
  • the status of the criminal case, including whether the defendant has been indicted;
  • the private interests of the plaintiff in the civil case proceeding expeditiously, weighed against the prejudice to the plaintiff caused by any delay associated with a stay;
  • the private interests of and the burden to the defendant;
  • the interests of the court; and
  • the public interest.[5]

If a party’s application for a stay is granted, the court may impose conditions and limitations on the stay, including as to scope and timing. For example, a court may allow discovery to proceed on certain topics or from certain parties. A court may also stay certain (or all) claims against certain parties, but allow other claims to proceed. A court could also enter a stay that expires after a fixed period, upon specific developments, or that includes deadlines for the parties to periodically update the court on the status of the parallel investigation or proceeding. In general, a party can apply to have a stay lifted at any time.[6]

Even when not a party, the government may seek to obtain a stay to protect the criminal process by, among other things, limiting a company’s ability to use civil litigation to obtain broader discovery than is available in a criminal case. For instance, in a parallel civil case, putative or actual defendants in related criminal proceedings can seek the deposition testimony of key witnesses on which the government intends to rely in the criminal case, providing a significant advantage to defendants that would not otherwise exist in the absence of the civil case. Courts have discretion to impose full or partial stays of the civil proceedings in these circumstances.[7]

35.2.2Seeking a stay to protect exercise of privilege against self-incrimination

Courts in the United States are likely to be particularly sensitive to requests to stay a parallel civil proceeding when an individual’s constitutional right against self-incrimination is at risk of being compromised.[8]

The Fifth Amendment to the US Constitution protects natural persons from being ‘compelled in any criminal case to be a witness against himself’.[9] The Fifth Amendment can also be invoked in civil cases when a witness’s answers might incriminate her or him in concurrent or subsequent criminal proceedings. The privilege against self-incrimination is implicated in civil proceedings either when (1) pleadings, discovery or testimony in a civil proceeding could be used as an admission in a criminal proceeding,[10] or (2) admissions in a civil proceeding could be deemed a waiver of the Fifth Amendment privilege in a manner that could be introduced as evidence in a criminal proceeding.[11]

Although the Fifth Amendment precludes adverse inferences in a criminal case, it does not forbid adverse inferences against parties to civil actions if a party declines to testify in response to probative evidence offered against it.[12] Likewise, an assertion of the Fifth Amendment by present or former employees can lead to an adverse inference of improper or wrongful conduct by a corporation in civil litigation.[13]

Because statements made by a party in a civil proceeding may be used against that party in a subsequent criminal proceeding, attorneys for individuals facing the possibility of parallel civil and criminal proceedings must remain cognisant of the fact that statements or testimony in a civil proceeding could be used against their clients in future criminal prosecutions. Note that although corporations may not invoke privilege against self-incrimination, courts have recognised that there may be circumstances in which it is impossible for a corporation to participate in civil discovery without implicating the Fifth Amendment rights of its corporate officers.[14]

35.3 Potential types of parallel civil litigation

35.3.1Class actions

35.3.1.1 Overview

In the United States, class actions are a common form of representative litigation through which a single plaintiff (or small group of plaintiffs) seeks to bring claims on behalf of a larger group of purportedly similarly situated persons. 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. In these circumstances, complex criminal and regulatory investigations often generate putative class actions.

35.3.1.2 Public records as a basis for class action filings

Class actions commonly arise in the United States following the public disclosure of reports of internal investigations, findings of regulators or the entry by a company or its executives into a plea or deferred prosecution agreement with the government. These documents can provide a road map for civil plaintiffs and can potentially be relied on as evidence in support of civil claims. When a class action survives a motion to dismiss and proceeds to discovery, it is common for a plaintiff to serve discovery requests that ask for (1) the company and any individual defendants to produce all materials that previously have been produced to the government, and (2) the government to produce documents that it collected in connection with its investigation.[15]

A class action plaintiff can also seek access to records produced to a federal agency, such as the Securities and Exchange Commission (SEC), outside the litigation process through a Freedom of Information Act (FOIA) request.[16] Most states have similar, but not identical, public access laws for state regulatory agencies.[17]

Notably, a number of exemptions to public disclosure apply to FOIA, including exemptions for records or information compiled for law enforcement purposes and documents relating to reports prepared by, on behalf of, or for the use of agencies that regulate financial institutions.[18] Although these FOIA exemptions are supposed to be narrowly construed in favour of disclosure, in practice, it is rare for FOIA requests to be granted during the pendency of an investigation. When a company or an individual is producing documents to the government, they should request confidential treatment under FOIA and request that the government provide notice if it receives a request for information from a third party; however, it is important to know that designation of information as confidential under FOIA does not necessarily render the information unavailable for purposes of discovery in civil litigation.[19]

35.3.1.3 Class action standards and procedural considerations

Federal class actions are governed by Rule 23 of the Federal Rules of Civil Procedure, which permits class certification when the purported class representative demonstrates that (1) the class is so numerous that joinder of all members is impracticable (i.e., numerosity), (2) there are common questions of law or fact among the entire class (i.e., commonality), (3) the claims of the proposed class representative are typical of the claims of the entire class (i.e., typicality), and (4) the proposed class representative will fairly and adequately represent the interests of the class (i.e., adequacy).[20] If these criteria are satisfied, the action must then fall within one of the following categories: (1) where the prosecution of separate actions runs the risk of inconsistent judgments that would result in incompatible standards of conduct for the defendants, or adjudication with respect to individual class members would effectively impair the ability of other class members to protect their interests; (2) where injunctive or declaratory relief is sought and appropriate (and any monetary relief incidental); or (3) where common questions of fact or law predominate over any individualised ones, such that class treatment is the superior method for adjudication.[21]

Motions for class certification are often hotly contested. As a result of the evidentiary support that is required to support a class certification motion, these motions are most frequently, but not always, filed after completion of the discovery phase of the litigation. Once a judge agrees that the high evidentiary burden under the Rule 23 standard for class certification has been met and certifies a class, the stakes of the litigation, namely the potential benefits to plaintiffs (and their counsel) and the potential risks to defendants, are significantly increased because the class representative can now recover damages for the whole certified class and not just himself or herself.

Other than the issue of class certification, class action litigation proceeds in much the same way as other civil litigation brought by individual plaintiffs. Motions to dismiss at the pleading stage (i.e., before any class has been certified) that seek to have all claims in the case dismissed, or to narrow the claims at issue, are relatively common. Any claims surviving motions to dismiss then proceed to discovery, which generally requires, among other things, the exchange of documents by the parties and the taking and defending of depositions of witnesses under oath. Class action litigation can also involve the use of expert witnesses, with attendant expert disclosure and discovery obligations. The discovery phase of litigation can be burdensome, invasive and costly. As a result, it can frequently be worthwhile for defendants to evaluate whether a settlement may be possible for any claims that survive a motion to dismiss so as to avoid some or all of the burden and expense of discovery.

The discovery phase is typically followed by motions for summary judgment, where one or both sides seek judgment on any claims in which they contend there are no material facts in dispute.[22] Summary judgment motions are somewhat more common in cases that will be tried in front of a jury than those that will be tried in front of a judge, as some judges find it easier to proceed directly to trial rather than to spend time evaluating the often lengthy written summary judgment submissions and related exhibits. If the court denies summary judgment, the only remaining options are settlement or trial.

Given the cost and risks associated with litigating a class action trial for both sides, complex class action trials in the United States are relatively rare. Unlike civil litigation brought by an individual plaintiff, settlements of class action lawsuits must be approved by the court. All potential class members must also be given notice of any pending settlement and be afforded the opportunity to object or opt out of the proposed settlement. Should settlement occur prior to class certification, approval of the settlement is sought in conjunction with a streamlined class certification motion. In the event that a certain number of would-be class members opt out of the class, settlement agreements frequently afford defendants the right to rescind the settlement.

35.3.1.4 Class action statutory reforms

Numerous statutory reforms have had a meaningful impact on the filing and litigation of class action lawsuits in the United States.

The Class Action Fairness Act of 2005 (CAFA), for instance, has affected class action litigation in several notable respects. First, CAFA greatly expanded federal courts’ jurisdiction over class actions by lowering the requirements for federal subject matter and diversity jurisdiction.[23] This change allows defendants to remove class actions from state courts to federal courts and consolidate multiple state proceedings into a single federal court class action. Lowering barriers to removal is generally viewed by defendants as helpful, as federal courts tend to have greater experience in overseeing class actions than their state counterparts, and thus there is more predictability in terms of how a case may proceed. Second, as a means of reducing perceived abuses, CAFA introduced a requirement that courts implement a heightened level of scrutiny to class action settlements.[24] Third, CAFA requires that designated federal and state officials for each state in which a class member resides be given notice of all settlements to afford them the opportunity to intervene as necessary to protect citizen class members.

In the context of securities litigation, two additional pieces of legislation were enacted to curtail frivolous class actions: (1) Private Securities Litigation Reform Act of 1995 (PSLRA);[25] and (2) Securities Litigation Uniform Standards Act of 1998 (SLUSA).[26] With respect to all securities litigation, including class actions, the PSLRA increased the evidentiary threshold necessary for a plaintiff to plead securities fraud by requiring that plaintiffs (1) plead false statements with particularity, (2) present evidence that the defendants knew that the alleged statements were false when made, and (3) allege loss causation. The PSLRA also stays discovery pending a court’s resolution of a motion to dismiss, challenging whether these requirements have been met. With respect to class action lawsuits specifically, the PSLRA granted judges greater authority to designate lead plaintiffs to act as class representatives.

SLUSA was enacted to combat efforts by plaintiffs to circumvent requirements of the PSLRA by filing a lawsuit in state court asserting state law claims, such as common law fraud. After the PSLRA was enacted, many plaintiffs sought to file class actions in state court to avoid the heightened evidentiary requirements of the PSLRA. As a result, SLUSA prohibits claims, whether filed in state or federal court, that allege fraud under state law in connection with the purchase or sale of securities from being pursued as a class action.[27]

35.3.1.5 Arbitration agreements in class actions

In recent years, the US Supreme Court has held that class action waivers in arbitration clauses found in employment and consumer agreements – which typically state that an employee agrees not to pursue resolution of disputes through a class action, but rather on an individual basis – are enforceable under the Federal Arbitration Act.[28] These types of arbitration agreements typically provide companies with a number of benefits, including that proceedings will remain confidential, and claimants (and their counsel) with less meritorious claims may be less inclined to pursue those claims on an individual basis. Companies should consider including class action waivers in their employment and consumer agreements and subjecting claims by employees and consumers to arbitration.

35.3.1.6 Class action opt-outs

An increasing trend in class action lawsuits is the prevalence of parallel ‘opt-out’ litigation, whereby an individual or entity that would otherwise be a member of the class opts out of the class action or otherwise brings a similar claim directly. The goal of opt-out plaintiffs is to try to negotiate a more favourable settlement than he or she would achieve if part of the class.

Opt-out plaintiffs are generally able to capitalise on the work done by class action counsel in an effort to reduce or share costs. They may also pursue their own discovery in an attempt to, for example, establish why their individual claims are stronger or more valuable than those belonging to the class more generally. For instance, in a stock drop case alleging material misrepresentations by company directors or officers, a large investor proceeding as an opt-out may seek to show that it relied on statements made by directors or officers to that investor directly, in addition to statements made to the investing public at large. There are a variety of other factors that may make an opt-out case more or less risky for a defendant, including the forum in which the case is proceeding, the legal claims asserted, or the identity and experience of the plaintiff’s counsel.

If a class action settles, the opt-out plaintiff generally has the option to accept the class settlement, proceed to litigate his or her own case individually (or in collaboration with other opt-out plaintiffs) or negotiate a separate settlement. An opt-out plaintiff’s ability to negotiate a separate settlement is often dependent on that plaintiff being able to credibly threaten to proceed to trial individually; otherwise, a defendant has little incentive to offer more than it offered to the rest of the class.

35.3.2Derivative actions

35.3.2.1 Overview

In general, derivative lawsuits permit shareholders of a company to bring an action against a company’s officers and directors, or controlling shareholders, seeking relief on the company’s behalf.[29] Derivative suits often allege that the company officers and directors breached the fiduciary duties they owed to the company and caused the company harm.

35.3.2.2 Derivative standards and procedural considerations

Shareholder derivative lawsuits are filed pursuant to state law. Derivative suits filed in federal court are governed by state substantive law and the Federal Rules of Civil Procedure. Derivative lawsuits in the United States are most commonly filed in Delaware in light of the large number of companies that are incorporated in that jurisdiction.

In general, because a derivative claim is an asset of the company, a plaintiff who seeks to bring a derivative lawsuit must show either that the plaintiff has demanded that the company bring the suit in its own name and that the company refused to do so, or that such a demand would be futile.[30] When such a pre-suit demand is made, companies may form what is called a ‘special litigation committee’ to independently determine whether pursuing a shareholder’s proposed claim is in the best interests of the company. A committee’s determination that such a claim should not be brought can provide a strong defence for the individual defendants named in a shareholder derivative action.

In a derivative case, the plaintiff typically names the company as a nominal defendant.[31] Any ultimate recovery in a derivative lawsuit flows to the company.[32]

35.3.2.3 Indemnification and advancement

Corporate directors and officers are frequently entitled to indemnification and advancement under a company’s by-laws and by state law.[33] Company by-laws typically provide that the company will advance (i.e., pay before final resolution of the litigation) attorneys’ fees and costs to an individual director or officer who is named as a defendant in a lawsuit asserting claims arising out of his or her service to the company. Frequently a company’s by-laws will afford an individual director or officer the right to advancement or indemnification not just to the minimum extent required under state law but to the fullest extent permitted under state law.

Directors and officers are not typically entitled to indemnification where bad faith conduct is proven, including in situations involving admissions of criminal acts or regulatory misconduct.[34] In these cases, whether and to what extent indemnification is available can become quite complex as parties dispute whether amounts claimed are subject to indemnification in light of certain admissions. While court determinations regarding whether the alleged misconduct rose to the level of bad faith are still pending, directors and officers may have the right to advancement subject to a potential undertaking to repay the amount advanced. How these various disputes are resolved will depend on the specific by-laws at issue and the relevant statutory framework.

35.3.3Commercial and contract litigation

In addition to class actions and derivative actions, parallel civil litigation also frequently arises from direct disputes, including contract claims and business torts. Commercial litigation may be predicated on a wide range of theories, including breach of contract, breach of fiduciary duty and employment disputes. Highlighted below are some of the more common types of direct civil litigation that is likely to be filed parallel to a government or regulatory investigation or proceeding.

35.3.3.1 Contract claims

Conduct that is illegal or contrary to public policy, and therefore may be the subject of a government investigation or prosecution, can also render commercial contracts void or voidable. The common law doctrine of illegality generally prohibits the enforcement of a contract tainted by illegality or misconduct. Of course, litigation outcomes in this area are highly dependent on the particular facts and circumstances, requiring courts to weigh a range of factors in determining whether to enforce a contract or specific contractual provision. Some misconduct can render a contract unenforceable by statute as well.[35]

Companies may also face parallel civil litigation brought to enforce a contract. Once government or regulatory investigations are made public, contractual counterparties may assert that the conduct giving rise to the investigation also breaches a term in a contract, including, for example, contractual representations by a company that it is in full compliance with particular laws, that it has robust anti-bribery and compliance procedures, or that it is not the subject of an active investigation or under threat of investigation.

35.3.3.2 Business torts

Government investigations may also result in the public disclosure of conduct that gives rise to alleged liability in the private civil tort context as well. For example, allegations from a government regulator could generate a claim brought by commercial counterparties alleging that the same conduct constitutes fraud, tortious interference with commercial relations, or other unfair or deceptive business practices.[36]

35.3.3.3 Statutory claims

Conduct at issue in government or regulatory investigations can also give rise to claims premised on alleged violations of statutes that include a private cause of 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;[37]
  • anticompetitive business collusion;[38]
  • the submission of false claims to the government;[39] and
  • the making of false statements in commercial advertising.[40]

35.3.3.4 Employment claims

Investigations may also have employee-related consequences for a company. For instance, employees may commence a lawsuit against employers arising from the underlying conduct being investigated. Employees may also bring claims for defamation based on statements their employer makes regarding that employee’s conduct or character.[41] Employers may also pursue claims against employees implicated in the conduct under investigation. In situations where investigations involve an employee whistleblower, companies should also be mindful of whistleblower protections to avoid claims for breach of their rights.

35.4 Evidentiary issues

Concurrent civil litigation and government investigations raise potentially vexing issues related to the staging, timing and exposure of evidentiary findings. The evidentiary dilemmas run in both directions – implicating both evidence from the civil action that could play a role in the criminal or regulatory proceedings, and vice versa.

35.4.1Reliance by civil litigants on regulatory findings

Litigants may seek to incorporate facts developed in a regulatory investigation into a subsequent or concurrent civil claim.

To the extent that facts are admitted by a company, for example, in a deferred prosecution agreement or a guilty plea, those facts may be admitted into evidence as party admissions under US evidentiary rules.[42] Deferred prosecution or plea agreements may also specifically prohibit a company from denying certain facts.[43] In addition, to the extent that a party discloses otherwise privileged information to the government in connection with a deferred prosecution or plea agreement, a civil litigant may argue that the party waived privilege as to that information and perhaps more generally, as discussed below.

35.4.2Reliance by regulators on findings by a court in civil litigation

Facts discovered and publicly disclosed during the course of civil litigation may also draw the attention of the government or regulators, which may rely on the findings in a civil case as grounds for commencing an investigation or taking some other enforcement action.

A civil defendant facing an actual or potential parallel government investigation should factor these risks into its consideration of how best to proceed with respect to the parallel civil proceedings.

35.4.3Collateral use of disclosed documents

In the United States, the scope of discovery in civil cases is relatively broad. Parties in federal civil litigation must typically disclose all reasonably accessible relevant non-privileged evidence, whether helpful or harmful.[44] The purported confidentiality of a relevant document is not a justification for refusing to disclose it, although confidential documents can be afforded some level of protection from public disclosure by court-issued protective orders.[45]

As a result, companies or individuals involved in civil proceedings are frequently required to disclose sensitive documents to their adversary. If an adversary is aware of a government or regulatory investigation, it will typically demand production of any document that has been given to the government; in practice, these documents are often produced. In making this production to an adversary, a company should seek a protective order that requires, among other things, that the adversary maintain the information as confidential and refrain from using the information for any purpose other than litigation. However, even with the benefit of such a protective order, it can be challenging to maintain the confidentiality of any document or information used in connection with a summary judgment motion or at trial due to the policy in favour of open-court proceedings.[46]

35.4.4Potential privilege waiver and disclosure obligations

During an investigation, documents entitled to privilege or work-product protection may be provided to relevant authorities, often to demonstrate co-operation.

These include not only privileged communications between attorney and client but also documents generated by external counsel, such as witness interview memoranda, which may be covered by the attorney work-product privilege. Depending on the applicable privilege law, which can vary materially from state to state and even between the federal Circuit Courts of Appeal, sharing such information will not necessarily constitute a general privilege waiver for the purposes of subsequent civil proceedings (particularly if it is made clear that the material was shared on a limited basis).[47] In cases involving multiple jurisdictions, it is critical that a company obtain advice on all potentially applicable privilege laws prior to sharing potentially privileged documents to the government, as the effect of providing a potentially privileged document to the authorities may vary depending on which law governs questions of privilege.

In addition, representation and privilege issues may arise if the interests of the company and its employees are not aligned. For example, company counsel may represent a key employee witness at deposition in a civil case, but in the context of a subsequent criminal investigation may be conflicted from continuing the representation should the employee’s interests diverge from the company’s interests,[48] such as if the company wishes to disclose misconduct to the government but the employee wishes to invoke his or her Fifth Amendment privilege against self-incrimination.

35.5 Additional practical considerations

It is helpful to consider additional practical considerations concerning the management of multi-track disputes, including (1) coordination between civil and investigatory response teams, (2) attempting to negotiate parallel settlements, (3) business events likely to give rise to parallel litigation, and (4) insurance considerations.

35.5.1Coordination with internal investigations team

It is important that in-house teams responsible for managing parallel civil litigation are in regular communication with the internal team responsible for dealing with investigations, to ensure that:

  • a clear, holistic strategy is developed for managing investigations and parallel civil proceedings and anticipating areas of potential risk;
  • litigation teams are nimble and capable of responding in real time to new developments;
  • both teams understand, and appreciate the risks of, new developments in both the criminal and civil contexts; and
  • any proposed action by the company or associated persons, in the civil or criminal context, is carefully analysed to determine the potential repercussions for the related proceedings and investigations.

Issues can arise, for instance, where:

  • factual admissions are made in civil proceedings (such as in an answer or in interrogatory responses) that may undermine the defence of the criminal case;
  • an authority seeks disclosure of privileged documents from the company in circumstances where the company may wish to assert privilege over those documents in subsequent civil proceedings;
  • witnesses, whose testimony may be important for the company’s case in civil proceedings, are under investigation, or have been classified as subjects of criminal investigations by the government and have concerns about self-incrimination;
  • pleading possible defences (such as illegality) in civil proceedings, which may strengthen the company’s case in those proceedings but may undermine the position it has taken in relation to an investigation; or
  • as part of deferred prosecution agreement negotiations, there is a risk that matters an authority seeks to include in an agreed statement of facts could be relied on in parallel civil proceedings against the company.

Close coordination is also necessary between the company’s criminal and civil external legal advisers to ensure consistency of approach and strategic alignment.

35.5.2Negotiating and executing concurrent settlements

Difficult issues may arise for companies when attempting to negotiate a global settlement of investigations, which can involve a variety of regulatory and prosecuting authorities across a range of different jurisdictions. Parallel existing (or potential) civil litigation adds a further layer of complexity to the analysis.

During settlement negotiations with government authorities, companies should be aware of the risk that a settlement, as well as any associated press coverage or documents (such as a statement of facts in a deferred prosecution agreement), may raise awareness of potential civil claims, and that documents pertaining to the negotiation of a settlement, including communications with the relevant authorities and drafts of the settlement, may be discoverable by plaintiffs in any such civil action.[49] Accordingly, to the extent possible, companies should avoid admitting liability as part of any negotiated settlement with the government. If an admission of liability is required, companies should ensure that it is narrowly tailored. Companies should also consider what they convey during the course of settlement discussions and how they communicate information.

There are also risks attendant to the settlement of civil claims for a company under investigation, in particular class action settlements, which are necessarily public. Companies should avoid admitting fault or liability in connection with any negotiated civil settlement. In addition, the government may perceive certain types of civil settlements (particularly settlements with potential witnesses for substantial sums) as suspect.

35.5.3Business events likely to give rise to parallel litigation

There is a heightened risk associated with certain corporate events generating potential parallel regulatory investigations and civil litigation. In particular, mergers and acquisitions can present heightened risks for these types of developments and companies engaging in such transactions should be particularly attuned to the potential risks. In addition, potential purchasers of or investors in business entities should evaluate the risk that a target company acted in an illegal fashion and that any corresponding liability associated with the resolution of proceedings arising from the misconduct could be acquired in connection with the transaction.

Historical illegal conduct by a target company (or its subsidiaries, or other related companies and persons) may have various negative consequences for an acquiring entity, which can include financial consequences (for example, the target may have been overvalued); legal consequences (both civil and criminal) for the target, the acquiring entity and relevant individuals (including officers of both entities),[50] with associated legal costs; and other practical consequences (for example, reputational damage, which may have a consequent effect on business).

As a result, acquiring entities should take appropriate precautions to minimise these risks. Typically, these include conducting proportionate, risk-tailored pre- and post-acquisition due diligence of the target and its business, including a review of material aspects of the target’s business dealings and third-party contracts, implementing compliance programmes, and including appropriate protections in the relevant contractual documentation.

Contractual provisions, such as representations, indemnities and warranties designed to provide protection should also be incorporated into purchase agreements. The scope of protection will depend on the particular provisions negotiated, but they can be widely drafted, such that they explicitly encompass:

  • the conduct of the target company and its subsidiaries, and of all directors, officers, employees, affiliates, agents and distributors of the target and its subsidiaries;
  • compliance with laws generally, and more specifically compliance with anti-money laundering laws and standards, anti-bribery and corruption laws and standards, and sanctions laws (including whether any of the aforementioned persons are, have been, or are likely to become, subject to sanctions); and
  • representations as to whether any of the aforementioned persons are, or have been, subject to an investigation or any proceedings, or whether an investigation or any proceedings in respect of those persons are pending, threatened, contemplated or even likely.

Accordingly, the fact of an investigation (or related proceedings), or conduct that is the subject of an investigation, may give the acquiring entity contractual rights it can later seek to enforce (including through litigation or arbitration). The acquiring entity should, therefore, review material aspects of the target’s business dealings and third-party contracts for potential exposure, which may include consideration of the target’s in-house and external legal advice relating to those dealings and contracts.[51]

35.5.4Insurance considerations

The costs associated with defending civil litigation and investigative matters can be significant, particularly in the United States. Identifying any applicable insurance policies and providing timely notice of potential claims under those policies is 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 relate to:

  • the coverage terms of the policy and whether the allegations in the regulatory investigation or civil lawsuit give rise to a potential claim under the policy;
  • limits on the reimbursement of attorneys’ fees and provisions allowing the insurer to assume defence of a matter;
  • the liability period covered by the policy;
  • provisions governing the time and nature of any claim made pursuant to the policy; and
  • the amount of the deductible and policy limit per occurrence and per policy.

Although the terms of the applicable policies should control, 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. Managing the relationship with an insurer that is in the process of making a coverage determination or assessing whether to assume the defence of a litigation is important. Frequently, insureds or potential insureds will benefit by providing insurers with regular updates of developments and strategic decision-making with respect to key issues in the parallel actions.

In addition, 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, insureds should be particularly mindful of ensuring that their insurance resources are appropriately spent on the most important priorities, especially if there is a risk that there is inadequate insurance to cover the full range of government investigations and civil litigation. For example, an insured may not want to spend all its insurance asset on a civil litigation, leaving it with inadequate funds to properly defend a potential criminal proceeding.

These matters are complicated by the fact that, in cases of parallel proceedings, there can often be multiple different insured parties all covered under the same insurance policy or policies with potentially competing priorities. For example, an individual who has been personally sued in a civil litigation may prioritise settling the specific lawsuit against her or him even though the company or another insured may prioritise the settlement or defence of other claims or investigations. Although the wording of the insurance policy generally controls and the law can vary from state to state, in many instances, insurers are expected to pay covered claims in the order they are presented. This can, in certain circumstances and absent coordination, create a rush to access the insurance proceeds. Accordingly, coordination between and among potential co-defendants or investigation targets can be particularly important in the event of parallel investigations and civil litigation involving multiple insured parties.

On the other hand, while uncommon, in some circumstances, a company or individual may consider foregoing insurance coverage or negotiating a compromise in the amount of insurance due from an insurer, so as to prevent an insurer from assuming the defence of a matter, especially where allowing an insurer to take control of the defence of a matter might diminish a person’s ability to appropriately manage parallel claims.

In the event of a dispute between an insured and an insurer about coverage, an individual or entity can potentially find herself, himself or itself involved in parallel insurance coverage litigation in addition to the pending investigations and civil litigation. This, of course, raises and potentially magnifies many of the same issues addressed in this chapter. For example, an insurer may seek to deny coverage by attempting to prove the investigations or civil lawsuits were the result of intentional misconduct by an insured, which may be excluded from coverage, and which could also be in tension with the insured’s criminal and civil defence strategy. As such, it is important to be mindful of all the potential ramifications when dealing with insurance in the context of parallel civil and criminal and regulator matters.

35.6 Conclusion

Appropriately managing parallel civil litigation and criminal and regulatory proceedings can present many potential challenges and hurdles. Handling the complications associated with competing parallel proceedings requires careful strategic decision-making and forethought. The insights covered in this chapter are intended to provide robust, practice-oriented guidance to those navigating these challenges.


Footnotes

[1] Nichola Peters and Michelle de Kluyver are partners at Addleshaw Goddard LLP. Michelle de Kluyver co-authored this chapter for the first edition with Edward McCullagh and would like to thank him for his contribution as co-author and then as author of later editions, as well as Jonathan Hitchin of Allen & Overy LLP for his support on all earlier editions.

[2] See, e.g., China Export & Credit Insurance Corporation v. Emerald Energy Resources Limited [2018] EWHC 1503 (Comm), [61].

[3] CPR, Part 3.1(2)(f).

[4] For example, section 9 of the Arbitration Act 1996.

[5] See Akcine Bendrove Bankas Snoras (in bankruptcy) v. Antonov [2013] EWHC 131 (Comm), [18].

[6] R v. Panel on Takeovers and Mergers, ex parte Fayed [1992] BCC 524, 531.

[7] Panton and others v. Financial Institutions Services Ltd [2003] UKPC 95, [11].

[8] FSA v. Anderson [2010] EWHC 308 (Ch), [19].

[9] Arbitration Act 1996, sections 33-34.

[10] Arbitration Act 1996, section 45.

[11] See further Zuckerman on Civil Procedure: Principles of Practice, Adrian Zuckerman, 3rd edn (2013); Improving Access to Justice through Collective Actions, Civil Justice Council (2008).

[12] Representative actions may also be brought in more limited circumstances pursuant to CPR, Part 19.7.

[13] CPR, Parts 19.1 and 7.3.

[14] For instance, 255 claimants were joined to proceedings in the recent case of Bravo and Others v. Amerisur Resources plc [2020] EWHC 203 (QB).

[15] CPR, Practice Direction 51M.

[16] The Financial Conduct Authority v. MS Amlin Underwriting Limited and Others [2020] EWHC 2448 (Comm) (Test Case). An appeal of the High Court decision was heard by the Supreme Court on 16-19 November 2020 (The Financial Conduct Authority v. MS Amlin Underwriting Limited and Others [2020] UKSC 2020/0177).

[17] Dorothy Gibson v. Pride Mobility Products Ltd [2017] CAT 9 and Walter Hugh Merricks CBE v. MasterCard Incorporated and Others [2017] CAT 16.

[18] Collective proceedings in relation to the European Commission’s 19 July 2016 decision (Case AT.39824 – Trucks), concerning a cartel in the truck manufacturing industry have commenced. UK Trucks Claim Limited v. Fiat Chrysler Automobiles N.V. and Others was listed for December 2019. The main hearing of the collective proceedings order applications, however, has now been vacated pending the Supreme Court appeal in MasterCard Incorporated and Others v. Walter Hugh Merricks CBE UKSC 2019/0118.

[19] Walter Hugh Merricks CBE v. MasterCard Incorporated and Others [2019] EWCA Civ 674.

[20] FCA Final Notice to Tesco plc and Tesco Stores Limited dated 28 March 2017.

[21] FCA, Consumer Redress Schemes sourcebook, Chapter 2.

[22] Kallakis v. AIB Group plc and Others [2020] EWHC 460 (Comm).

[23] In re J. E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227.

[24] See further paragraph 49 of the judgment in Taylor Goodchild Ltd v. Taylor and Another [2020] EWHC 2000 (Ch) for a summary of recent case law in which the courts have emphasised the breadth of section 996 (Part 30) CA 2006 and have refrained from limiting the power to grant relief under it.

[25] See further Minority Shareholders: Law, Practice and Procedure, Victor Joffe QC, David Drake, Giles Richardson, Daniel Lightman and Timothy Collingwood, 6th ed. (2018).

[26] See further The Securities Litigation Review, ed. William Savitt, 5th edn (2019).

[27] The high-profile RBS Rights Issue litigation involved claims under section 90 of FSMA; and, in more recent litigation arising out of an overstatement of expected profits by Tesco plc in 2014, claims have been made under section 90A of FSMA. (See also Section 34.3.6.)

[28] In addition to private enforcement, public enforcement proceedings may also be brought against companies (typically by the FCA) for breach of securities rules.

[29] [2016] UKSC 42.

[30] See, for example, Stoffel & Co v. Grondona [2020] UKSC 42.

[31] See, for example, Henderson v. Dorset Healthcare University NHS Foundation Trust [2018] EWCA Civ 1841 (appeals to Court of Appeal and Supreme Court both dismissed (Henderson v. Dorset Healthcare University NHS Foundation Trust UKSC 2018/0200)).

[32] See further Bowstead and Reynolds on Agency, ed. Peter Watts QC, 21st edn (2017).

[33] As discussed in Richard Conway & Deborah Conway v. Prince Arthur Ikpechukwu Eze [2019] EWCA Civ 88.

[34] See further Wood v. Commercial First Bank Ltd (in Liquidation) and Others [2019] EWHC 2205 (Ch).

[35] An indemnity against a criminal liability may, however, be unenforceable for public policy reasons.

[36] See further Anti-Bribery Due Diligence for Transactions: Guidance for Anti-Bribery Due Diligence in Mergers, Acquisitions and Investments, Transparency International UK (2012).

[37] Companies should also be aware of the risk that illegal behaviour (for example, bribery) may occur during the merger, acquisition or investment transaction.

[38] However, see footnote 35, above, in relation to indemnities against criminal liability.

[39] See further Gatley on Libel and Slander, eds. Alastair Mullis and Richard Parkes QC, 12th edn (2013).

[40] See further Whistleblowing: Law and Practice, John Bowers QC, Martin Fodder, Jeremy Lewis and Jack Mitchell, 3rd edn (2017).

[41] See further International Commercial Arbitration, Gary Born, 2nd edn (2014).

[42] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, Article V(2)(b); Arbitration Act 1996, section 103(3)

[43] As discussed in Ibrahim v. HCA International Ltd [2019] EWCA Civ 2007.

[44] Regulation (EU) 2016/679.

[45] In the United Kingdom, the relevant authority is the Information Commissioner’s Office.

[46] See GDPR, Articles 79, 80, 82 and 83. The courts recently permitted a broad representative action against Google to proceed, in which the representative claimant sought compensation which was estimated as being in the range from £1 billion to 3 billion (Lloyd v. Google LLC [2018] EWHC 2599 (QB)). It was argued that Google had acted in breach of a duty imposed by the Data Protection Act 1998 (allegedly by secretly tracking the internet activity of Apple iPhone users, and using and selling the accumulated data). Following a successful appeal of the original High Court decision, the court found (among other things) that, on the facts alleged, relevant damage had been suffered because a person’s control over their data could be valued, and that class members did have the same interest as they had lost control of their data over the same period and were not relying on any differentiating factors such as the amount of extracted date (Lloyd v. Google LLC [2018] EWCA Civ 1599). The Supreme Court has since granted Google permission to appeal the order and the hearing is scheduled for the end of 2020 or early 2021.

[47] GDPR, Articles 33 and 34.

[48] FCA Final Notice to Tesco Personal Finance plc dated 1 October 2018.

[49] Wm Morrison Supermarkets Plc v. Various Claimants [2020] UKSC 12.

[50] Hollington v. F Hewthorn & Co Ltd [1943] KB 587.

[51] See e.g. JSC BTA Bank v. Ablyazov & Anor [2018] EWHC 1368 (Comm), [19].

[52] Rogers v. Hoyle [2014] EWCA Civ 257, [53]–[55].

[53] Civil Evidence Act 1968, section 11.

[54] Crime and Courts Act 2013, Schedule 17, paragraph 5(1); Deferred Prosecution Agreements Code of Practice, paragraph 6.1.

[55] FCA Final Notice to Mr Anthony Verrier, dated 27 January 2014; FCA Final Notice to Mr Stephen Robert Allen, dated 14 April 2015; Stephen Robert Allen v. The Financial Conduct Authority [2014] UKUT 0348 (TCC).

[56] See Disclosure Pilot for the Business and Property Courts Press Announcement, dated 31 December 2018, accessible on http://www.judiciary.co.uk, CPR Practice Direction 51U and the 122nd Practice Direction (PD) Update, dated 21 July 2020. Additionally, proposed changes to the scheme were approved by the Civil Procedure Rule Committee on 9 October 2020 and will be included in the next PD update.

[57] See, for example, The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch), and the first-instance decision in The Director of the Serious Fraud Office v. Eurasian Natural Resources Corp Ltd [2017] EWHC 1017.

[58] The Director of the Serious Fraud Office v. Eurasian Natural Resources Corp Ltd [2018] EWCA Civ 2006; see also Bilta (UK) Ltd v. Royal Bank of Scotland [2017] EWHC 3535 (Ch) (concerning litigation privilege) and Property Alliance Group Limited v. The Royal Bank of Scotland Plc [2015] EWHC 3187 (Ch) (in the legal advice privilege context).

[59] See Tchenguiz v. Grant Thornton [2017] EWHC 310 (Comm) for the broad interpretation of collateral ‘use’ in relation to CPR Part 31.22, which includes, for example, reviewing documents for relevance; and see also The ECU Group Plc v. HSBC Bank Plc & Ors [2018] EWHC 3045, in which the judge emphasised the importance of the rule in CPR Part 31.22.

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