Most policyholders that have experience with insurance claims will likely confirm that the mere fact that you have given the insurer timely notice of a claim is no guarantee of a timely response. Consequently, the policyholder may be required to go it alone by funding its own defense while awaiting a response from its insurer. And, of course, there is no guarantee that the insurer will actually provide a defense.

Insurance policies generally include a cooperation clause and exclude coverage for claims settled without the insurer’s agreement. What is a policyholder to do when it has a chance to settle on a reasonable and cost-effective basis before its insurer has agreed to defend or denied coverage? The policyholder is faced with a dilemma. Should it bear the expense and risk associated with the defense of a claim where the insurance carrier has not accepted that risk and the policyholder has a reasonable chance to mitigate the exposure from the claim through settlement?

A January 2016 decision by the Illinois appellate court should encourage policyholders to pursue opportunities to mitigate the risks associated with claims where their insurers have not accepted responsibility for the defense. In United National Insurance Company v. Faure Brothers Corporation, 2016 IL AP (1st) 132419-UB, an Illinois appellate court clarified that a policyholder is not required to incur defense costs and forgo a reasonable settlement opportunity in circumstances where the insurer does not accept its defense.

In Faure Brothers, the insurer rejected the policyholder’s claim, asserting that it did not fall within the policy’s coverage. Before the policyholder received its insurer’s response, the policyholder was presented with an opportunity to settle the claim. Liability on the claim appeared near certain. Faced with certain and significant defense costs and the exposure of a bad claim, the policyholder negotiated a settlement of the lawsuit. It then pursued a claim for the amounts incurred in defense and for the cost of the settlement against its insurer. The insurer responded by suing the policyholder seeking a declaration concerning its duty to provide a defense and to indemnify the policyholder for settlement.

The insurer asserted that the policyholder was obligated to present evidence essentially that it would have lost the lawsuit if it had not settled. The insurer asserted that its policyholder would have to prove the merits of the claim for which it sought coverage in order to get the insurance carrier to fund the settlement. The appellate court rejected that argument. The court held that the burden of proof in the case was with the policyholder in the first instance. But the court found that what the policyholder had to prove to prevail against its insurer was, essentially, the reasonableness of the settlement rather than the merits of the claim. Specifically, the court held that the insurer was required to fund the settlement¹ if the policyholder established three things:

1. that its claim fell within the coverage of the insurance policy;
2. that the settlement was made in reasonable anticipation of liability; and
3. that the amount paid in settlement was “reasonable” in light of the quality and quantity of evidence that the policyholder would expect to be offered against it at trial.

What should a policyholder do when it finds itself in the circumstance presented in Faure Brothers? First, a policyholder is well-advised to give its insurers (any insurers who wrote policies that might apply) timely written notice of a claim. Second, there is no reason for a policyholder to sit back and await a decision from an insurer while defense expenses mount, especially if there is an opportunity to bring the case to an early cost-effective resolution. Instead, a communication from counsel, helping the insurer to focus on why the claim is within the coverage as well as potential for early resolution, can expedite the process. Third, if the policyholder is considering settlement, it should provide written notice to the insurer keeping it advised of the settlement negotiations and affording it an opportunity to participate.

Where the policyholder has afforded its insurer a reasonable opportunity to act on the policyholder’s behalf, the policyholder is not required to bypass reasonable settlement opportunities and, assuming the claim is within the coverage, the policyholder will be well-positioned to obtain reimbursement from its insurer.

¹ The insurer was obligated to reimburse defense costs as long as at least some claim asserted was potentially within the coverage of the insurance policy.

While viability of strict ‘two-year rule’ is in question in Illinois, employers should consider alternatives to make sure non-competes are enforced

Some Illinois appellate courts, beginning with Fifield v. Premier Dealers Services, Inc., 2013 IL App. (1st) 120327, have applied a bright line rule requiring two years of continuous at-will employment to support an employee restrictive covenant absent additional consideration. The Illinois Supreme Court has not yet addressed the issue. And a majority (but not all) of the federal courts that have considered the issue have predicted that the Illinois Supreme Court will find there is no bright line rule as to the duration of at-will employment that is sufficient to support the enforcement of a non-compete agreement.

The issue was addressed most recently in Traffic Tech, Inc. v. Kreiter, Case No. 14-CV-7528 (N.D. Ill. Dec. 18, 2015). The court emphatically refused to apply Fifield’s “two-year rule,” holding that “Illinois law does not require a strict application of the two-year rule in assessing the enforceability of a non-solicitation clause (or any similar restrictive covenant).” Instead, the court held that courts should use a fact-based, totality of the circumstances approach in determining the adequacy of consideration supporting restrictive covenants.

But the fact-based assessment that the court found should be applied has uncertainty baked into it. In determining whether the non-solicitation clause at issue was unenforceable as a matter of law, the court considered a number of facts, including that the employee voluntarily resigned, worked for Traffic Tech for only nine months and received a $250,000 signing bonus. It rejected a hard and fast “two-year” rule. The court found, in essence, that each case inherently turns on its own facts. Consequently, the issue of the adequacy of the consideration of agreements that turn on duration of employment will be an open question until the issue is litigated.

For employers requiring new hires to sign non-competes in Illinois (and elsewhere), the uncertainty of Illinois law on this point may be frustrating. To ensure that non-competes can be effective tools to protect a business’ assets and relationships, there are a variety of options for how to structure consideration to reduce uncertainty. What constitutes sufficient “additional consideration” under Illinois law to support a non-compete? In Traffic Tech, the court considered that the employee received a signing bonus in determining the adequacy of consideration for the subject non-solicitation clause. Other courts in Illinois have considered additional benefits, such as health insurance, training, growth opportunities and bonuses as additional consideration to support restrictive covenants.

Until the Illinois Supreme Court decides the issue, employers should consider offering consideration to those employees signing restrictive covenants that is different from or greater than that offered to employees who are not signing restrictive covenants, such as the benefits identified above, to enhance the likelihood that the non-compete agreements on which they rely to protect their assets are enforced.

The new year is upon us, and franchisors across the U.S. are focusing on updating their franchise disclosure documents and renewing their franchise registrations. In this busy time, it is easy to overlook other filing requirements for franchisors.

Since 2009, franchisors that have at least one franchisee that does business in New York state and is required to be registered as a sales tax vendor are required to file information returns with the New York State Department of Taxation and Finance. The reporting period is from March 1 to February 28 (or 29) of the subsequent year. The return is due on March 20.

The reporting requirement applies where the franchisor-franchisee relationship falls within the broad franchise definition under the New York franchise statute. The reports are generally intended to give the New York tax authorities a double check on state tax filings submitted by New York franchisees, and the contents of the franchisor report are in line with that purpose. For example, a franchisor must report the franchisees’ gross sales in New York both as reported by the franchisee and as audited by the franchisor (if there was an audit), information about the amount of royalty payments from each franchisee location in New York and the amount of sales made by the franchisor and its affiliates to each franchisee location. Franchisors are also required to inform franchisees of the reported information.

Penalties of up to $10,000 may be imposed for failure to comply with the reporting and information requirements.

For additional information or questions on filing requirements for franchisors, please contact any of the attorneys in our Franchising & Distribution practice group.

A recent Illinois Appellate Court decision serves as a good reminder that when it comes to restrictive covenants, one size does not fit all. A consistent theme in recent court decisions has been that “form” employment agreements with overly broad restrictions not anchored to the employee’s job responsibilities and related to the employer’s protectable interests will not be enforced.

This approach was recently illustrated in AssuredPartners, a case in which the Illinois Appellate Court applied the “rule of reasonableness” analysis and found that the restrictive covenants in a senior vice president’s senior management agreement were unenforceable as a matter of law.

Illinois courts examine the enforceability of restrictive covenants subject to a “rule of reasonableness” analysis. Under this analysis, a restraint is only likely to be upheld if four criteria are met:

1. the restraint is no greater than necessary to protect a legitimate business interest of the employer;
2. the restraint does not impose undue hardship on the employee;
3. the restraint does not injure the public; and
4. and the restraint has reasonable activity, time and geographic restrictions.

Factors relevant to evaluating the legitimate business interest to be protected by the restraint include, but are not limited to, the near-permanence of customer relationships and the employee’s acquisition of confidential information during employment. An employer has a better chance of enforcing a restrictive covenant when the restriction is specifically tailored to that employee’s position and the legitimate business interests of the employer.

In AssuredPartners, the defendant worked as a wholesale broker selling lawyers’ professional liability insurance by acting as an intermediary between a retail broker and an insurance carrier. In performing his job, the defendant identified a carrier that was willing to provide the specialized coverage the retail broker’s client wanted and then would negotiate the premium and policy wording with the insurance carrier. The defendant had worked in this capacity for a number of years, including before becoming employed by the plaintiffs. And in his years in the field, the defendant built a substantial book of wholesale lawyers’ professional liability insurance business.

In 2006, the defendant employee entered into an employment agreement with ProAccess that contained certain restrictive covenants. This employment agreement included a carve-out for some of the employee’s pre-existing relationships. In 2011, AssuredPartners acquired ProAccess, and the defendant employee entered into a senior management agreement. Under the terms of the senior management agreement, the defendant would be employed for a term of four years and guaranteed a base salary with the opportunity to earn a performance bonus at later date. The defendant employee’s senior management agreement contained restrictions on post-employment competition and solicitation.

In 2013, the defendant resigned from AssuredPartners and began competing against it. Among other things, after his resignation, he contacted his former customers. AssuredPartners filed suit against him to enforce the restrictions in his senior management agreement. The trial court found that the noncompetition and nonsolicitation restrictions in the employee’s agreement were unreasonable and unenforceable. AssuredPartners appealed.

The appellate court found the noncompetition provision to be overly broad and unenforceable as it prohibited the defendant from engaging in any “portion of the Restricted Business that relates to professional liability Insurance Products or professional liability Related Services” anywhere in the United States or its territories. The appellate court noted that the noncompetition restriction was not limited to the specific kind of professional liability insurance practice the employee had developed during his employment — lawyers professional liability insurance. Rather, the noncompetition provision restricted the defendant employee from working with all types of professional liability insurance. Further, the appellate court noted that AssuredPartners did not have a legitimate protectable interest in a business relationship with retail brokers, vendors or LPLI clients with which it did not do business.

The nonsolicitation provision prohibited the defendant employee from directly or indirectly causing any “Potential Target, customer, supplier, licensee or other business relation of” plaintiffs and their subsidiaries to cease doing business with them. The appellate court found the nonsolicitation provision to be overly broad because it extended to any customer (potential or otherwise) regardless of whether the defendant employee had contact with them, including customers that became customers after he left his employment. In short, the restriction prevented the defendant employee from working with any customers, suppliers and other business entities with which he never had any contact.

The employer could have imposed noncompetition and nonsolicitation provisions on its employee that would have been enforceable had the employer not overreached. Employers frequently believe they are better off imposing broader restrictions. The view is that courts may narrow restrictions to the extent that they are overly broad and make an employee subject to such restrictions less attractive to competitors. However, AssuredPartners shows the dangers of overly broad restrictions. Employers should have the restrictions in the employment agreements of their key executives and salespeople evaluated to see whether those restrictions are likely to be enforceable. If the review reveals that these restrictions are overly broad, there are steps the employer may be able to take to make them enforceable.

Does your company’s business insurance cover the risks presented by the ordinary course of its operations? The unhappy lesson to the policyholder in Phusion Projects v. Selective Insurance, a December 2015 decision by an Illinois appellate court, is that the time to make that inquiry is before your company faces multiple lawsuits tied to the design of its product. And a sound way to manage the risk associated with your business is to undertake a risk audit against your risk management strategies.

The policyholder in Phusion Projects manufactured and distributed energy-infused alcoholic beverages. The manufacturer faced multiple lawsuits from people who claimed that the energy enhancers masked the high alcohol content of the beverages, causing consumers to drink beyond safe limits. By way of example, a claim presented the question of whether the death of someone struck by an Amtrak train while “mooning” was caused by her intoxication or whether her erratic behavior was caused as claimed by the energy enhancers in the alcoholic beverages that “caused” her to overindulge. Each of the claims involved irresponsible or erratic behavior involving intoxication coupled with the assertion that the energy enhancers masked the intoxicating effects. The appellate court affirmed a finding that there was no coverage for the manufacturer in any of the cases due to the “liquor liability” exclusion in the manufacturer’s insurance policy.

The liquor liability exclusion in the insurance policy excluded coverage to the manufacturer for bodily injury or property damage for which an insured may be held liable by reason of causing or contributing to cause a person’s intoxication. The manufacturer argued that the claims did not fall within this exclusion because the claims against it were tied to the role played by the “energy enhancement” incorporated in the alcoholic beverages. It argued that the claims tied to the masking of intoxication caused by the products’ energy enhancement attributes could be separated from the claims tied to intoxication such that the claims were not solely claims for causing intoxication.

The same argument — that the claims were “stimulant liability” claims as opposed to “liquor liability” claims — had been rejected by a federal appellate court in the context of similar claims arising under a similar insurance policy. And the Illinois appellate court reached the same conclusion: It held that the issue presented inherently involved intoxication caused by the product, regardless of whether the stimulants masked or enhanced the intoxication.

The opinion does not indicate whether the manufacturer made a conscious choice to purchase insurance coverage subject to the liquor liability exclusion. It is possible that the company concluded that its exposure from claims arising from causing intoxication in connection with the sale of its alcoholic beverages was an acceptable business risk. However, this case serves as a reminder of the importance of evaluating the risks associated with one’s business and playing those risks out against the coverage and exclusions from coverage in the business’s insurance policies. The time spent with a risk audit before those risks actually hit can provide an effective tool for managing and controlling the costs presented when the risks become realities.

The case is Phusion Projects, Inc. and Phusion Projects, LLC v. Selective Insurance Company of South Carolina, 2015 IL App (1st) 150172, decided Dec. 18, 2015.

The roles of today’s corporate compliance officer are varied and many. Among other things, corporate compliance officers design or implement internal controls, develop policies and procedures to ensure compliance with numerous laws and establish employee ethics training programs. In addition, most compliance officers find themselves conducting internal investigations based upon complaints, some of which are anonymous. When faced with an anonymous complaint, one might initially think, “It’s an anonymous complaint, why not just ignore it?”

As a threshold matter, an organization has to decide whether to allow employees to submit anonymous complaints. This decision has many critics and supporters. Those who oppose allowing the submission of anonymous complaints argue, among other things, that such a policy reduces the number of frivolous or bad-faith complaints. On the other hand, supporters argue that allowing anonymous complaints to be filed provides employees with an avenue to report misconduct without fear of retaliation.

There are merits to both of these positions. Nevertheless, regardless of the pros and cons of allowing such filings, the reality is that many companies do allow employees to file anonymous complaints and, even if a company does not, an employee may still submit an anonymous complaint. For compliance officers with limited time and resources, deciding whether to investigate a matter themselves or ask outside counsel to investigate can be challenging. Below is information regarding the types of anonymous complaints you might receive and guidance or hints to help you decide whether to investigate, as well as potential consequences of not ignoring such a complaint.

The Vague Anonymous Complaints

There are generally two types of anonymous complaints a compliance officer might encounter. The first is the vague complaint that provides little, if any, valuable information. These complaints are fairly simple to deal with. Examples might include complaints that allege:

• management is violating rules and refuses to take action; or

• a division supervisor is “corrupt” or unethical.

These types of anonymous complaints can be easily resolved because there is little to investigate. In addition, there is usually no corroborating evidence to support the allegations. In each of the above examples, the person who filed the anonymous complaint does not provide the name of the alleged wrongdoer, nor do they identify a specific rule or policy the alleged wrongdoer violated. Thus, without additional information, it would generally be futile to spend time investigating this type of complaint.

The Factual Anonymous Complaint 

The second type of anonymous complaint is usually much more fact-intensive and generally includes specific information about the alleged wrongdoing. In addition, this complaint will usually, although not always, be accompanied by corroborating evidence. For example, a factual anonymous complaint might identify persons by name and title and might even cite to a specific rule or policy being violated. These complaints might allege:

• employees at a particular company’s division hire unqualified, politically connected and incompetent people labeled as “staff assistants;” or

• a director (A) recommended the company invest funds in Bank (B) and is receiving consideration from the bank (Bank B) in regard to his or her outstanding personal loans.

There are several things that differentiate the more fact-specific anonymous complaints from others that would not call for an investigation. First, if in reviewing a factual anonymous complaint, the compliance officer determines that the complaint alleges things that if true allege serious wrongdoing, as a compliance officer, you should probably investigate.

Second, in reviewing factual anonymous complaints, the compliance officer should also consider who might have filed such a complaint. For example, if the complaint appears to be the type an employee with “inside” company information may possess, this fact likely increases the veracity of the complaint and might reflect some merit. An anonymous complaint that is factually specific might indicate it was filed by an employee who wishes to expose the misconduct but is fearful of retaliation because the alleged wrongdoer might be a direct supervisor, a co-worker or a high-ranking company official. Although a compliance officer who receives this type of allegation would be unable to interview the person who filed the complaint, the officer should probably still take investigative steps to substantiate (or not) the complaint.

The third, final and perhaps best reason to investigate a factual anonymous complaint might be because as the corporate compliance officer, that is your job and failure to investigate may have consequences for you and your company. If it turns out that you received a factual anonymous complaint that on its face alleged wrongdoing against a high-ranking official and appeared to be filed by someone in the company who had inside information, but you do not investigate, you may find yourself having to justify your non-action. As a compliance officer, you should be aware that an anonymous complaint you received might also have been submitted to other investigatory agencies, such as the local prosecutor’s office, the state inspector general, the U.S. Department of Justice or a member of the news media. If one of these third parties investigates the complaint and discovers wrongdoing, they will likely also discover that you too received the complaint but took no action. As a result, you may find yourself responding to questions about other anonymous complaints you may have received but took no action on. Worse, perhaps you may become the subject of a newly launched investigation, the results of which will likely not be anonymous. So the next time you receive an anonymous complaint, don’t just ignore it.

9th Circuit finds copyright holders must consider fair use or risk liability before issuing takedown notices under the DMCA.

In a matter of first impression, the 9th U.S. Circuit Court of Appeals ruled on Sept. 14, 2015, that copyright holders must consider fair use before issuing a takedown notice under the Digital Millennium Copyright Act (DMCA). The court also ruled that the question of whether a copyright holder properly considered fair use is a subjective test for the trier of fact. A copyright holder will incur liability if it lacked a subjective good faith belief that the challenged use did not constitute a fair use.

The case arose when Stephanie Lenz, a Pennsylvania mother of two, recorded a 29-second video of her toddlers dancing to the song “Let’s Go Crazy” by Prince and uploaded the home video to YouTube. Universal Music Publishing sent YouTube a takedown notice under the DMCA, alleging the home video infringed Universal’s copyright in the Prince song. When YouTube complied, Lenz sued Universal for misrepresentation of copyright claims under the DMCA. She sought injunctive relief and damages.

The district court granted Lenz’s partial motion for summary judgment, rejecting Universal’s affirmative defense that Lenz suffered no damages. The district court also denied both parties’ subsequent motions for summary judgment on Lenz’s claim that Universal misrepresented that the home video infringed Universal’s copyright. Both parties appealed to the Ninth Circuit.

The Court of Appeals remanded the case to the district court for factual determination as to whether Universal considered the question of fair use and had formed a subjective good faith belief that Lenz’s posted home video did not constitute a fair use. Even if it is determined that the video constitutes fair use, the court’s ruling suggests Universal would face liability only if its actions were insufficient to form a good faith belief to the contrary. The dissenting opinion disagrees with such a result, arguing that a party cannot truthfully represent that a work subject to the fair use doctrine is infringing if the party has knowingly failed to consider whether the doctrine applies given the plain language of Section 107 of the Copyright Acts that a fair use is not an infringement.

The Ninth Circuit’s ruling also allows that Lenz may recover nominal damages should she prevail at trial for harm suffered as a result of Universal’s misrepresentation regarding fair use, even in the absence of actual damages. Consequently, the ruling provides alleged infringers with another arrow in their quivers to fight back against content takedown under the DMCA.

In the wake of the Lenz opinion, copyright holders should audit their enforcement policies and procedures to ensure they include analysis of fair use considerations or risk liability arising from takedown notices.

The case is Lenz v. Universal Music Corp., No. 13-16106, 2015 WL 5315388, at *7 (9th Cir. Sept. 14, 2015).

DOJ “Yates Memo” and release of 20-year study of white collar prosecutions suggest major changes in the way white collar crime is prosecuted and defended.

Two separate news items, each released on Sept. 10, 2015, are well worth noting by all practitioners of white collar criminal defense, general counsel for corporations, business executives and employees and, indeed, the general public.

The first news item, which has received the most media attention, is the new Department of Justice memo titled, “Individual Accountability for Corporate Wrongdoing.” The memo, authored by Deputy Attorney General Sally Quillian Yates and addressed to all of the divisions of the U.S. Department of Justice as well as every U.S. Attorney in the nation, has received a great deal of media coverage (e.g., a front page article in the New York Times). The Yates Memo, as it will no doubt be known, seeks to do nothing less than redirect all federal prosecutors, civil and criminal, to focus their efforts to an unprecedented degree on individual corporate executives and employees.

The Yates Memo also redefines the standard corporations seeking “cooperation credit” from the DOJ as part of resolving federal investigations will have to meet. These changes may dramatically raise the personal risks for all such individuals while also placing new pressure on any corporation DOJ attorneys opt to target. Attorneys attempting to defend and give counsel to such corporations and individuals will need to take these new policies into account.

The second important news item — much less noticed in the mainstream media — is a report about a recent study researchers at Syracuse University conducted that relied upon Department of Justice statistics. The Syracuse Study found a truly stunning overall decline in federal white collar criminal prosecutions, more than 36 percent over the past 20 years. The Syracuse Study also noted that this downward trend, at least up to now, appears to be continuing.

The Syracuse Study’s finding of an unprecedented drop in the number of white collar prosecutions, in juxtaposition with the Yates Memo’s newly minted far more aggressive approach to white collar cases, portends that large and potentially ominous changes are in store for all businesses and business people. The picture presented is of a white collar criminal prosecution landscape that has been at historically low levels of late, but which is primed to soon become much more active in ways not seen before.

Each news item deserves more examination.

Syracuse Study

As noted, the Syracuse Study, which was originally released in April 2015 but only reported in major news media now, looked at DOJ white collar prosecutorial statistics going back 20 years to reach their conclusion about the precipitous drop in such prosecutions. Indeed, the study noted that the downward trend appears to be ongoing, with current statistics suggesting that 2015 white collar prosecutions are projected to be 12.3 percent lower than the 2014 figure and are down 29.1 percent from five years ago.

The Syracuse Study identifies two possible explanations for the precipitous drop in white collar prosecutions. First, they note that the amount of federal resources devoted to investigating white collar crime has shrunk over the years, including a 15 percent drop since 2011 in the number of Department of Justice employees engaged in white collar investigations and prosecutions.

A second explanation the Syracuse researchers advance is potentially even more intriguing. They posit that the decline in white collar criminal prosecutions at the federal level may also be the result of more attorneys and law firms around the country engaging in more proactive, preventive lawyering on behalf of those engaged in business activities that might be targeted for white collar criminal investigations. Thus, they suspect, many prosecutions likely have been avoided altogether by early and effective attorney representation.

This observation by the Syracuse researchers validates the model of legal representation adopted by a small but growing number of otherwise traditional white collar practitioners around the country, including Greensfelder, Hemker & Gale’s Government Interaction & White Collar Practice Group. These practitioners seek to work with clients likely to have interactions with the government to prepare in advance for any problem and, when possible, take steps to avoid the kinds of situations that can lead to white collar criminal prosecutions. The Syracuse researchers’ observation of the impact of such forward-looking legal representation is significant.

The Yates Memo

Whether the Department of Justice was aware of, or considered, the results of the Syracuse University study before they issued the Yates Memo is unknown. What is clear is that the DOJ has decided to take a significantly more aggressive position regarding federal prosecutions for white collar crime. Only time will tell whether the DOJ’s aggressive new stance will reverse the current historically low level of federal white collar prosecutions identified by the Syracuse Study. But, of key importance, the Yates Memo elevates the investigation and prosecution of individual corporate employees to the first rank of importance for all federal criminal and civil attorneys.

While it would be an overstatement to suggest that the Yates Memo represents a complete break with prior DOJ policy, it is important to note that it is unmistakably intended to send a very clear message that individual criminal prosecutions are to be given a higher priority and, in fact, any federal prosecutor anywhere in the country bringing a white collar case that does not include charges against individuals will have a heavy burden of justifying that decision to her or his superiors in Washington. Moreover, corporations must now deal with the reality that to gain cooperation credit from the DOJ, they will be expected to provide a perhaps unprecedented degree of information to the government about their own employees.

The Yates Memo identifies what it describes as “six key steps to strengthen our pursuit of individual corporate wrongdoing:”

• Corporations may only receive “cooperation credit” if they provide to the DOJ all information in their possession regarding individuals who are potentially responsible for misconduct;

• All criminal and civil corporate investigations should focus on individuals from the beginning of the investigation;

• Criminal and civil DOJ attorneys working on a corporate investigation should be in “routine communication” with one another throughout the investigation;

• “Absent extraordinary circumstances or approved departmental policy” the DOJ will not release individuals from civil or criminal liability when resolving a matter with a corporation;

• DOJ attorneys are instructed to not resolve matters with corporations without a clear plan regarding individual cases and any decision to decline to pursue individuals in such cases will have to be “memorialized;” and

• Civil attorneys should “consistently focus on individuals” and evaluate whether to bring suit against an individual based on considerations not including whether the individual in question has any ability to pay any civil judgment that is obtained.

The Yates Memo describe these “six key steps” in greater detail over approximately seven single-spaced pages, but the import of the “six key steps” is clear: Corporate individuals are now a priority target. In any event, while a detailed analysis of the entire memo is beyond the scope of this blog posting, some initial observations may be useful.

First, as is well known, the DOJ has received significant criticism since the so-called “economic collapse” for allegedly being too ready to be content with monetary settlements with large corporations while not pursuing prosecutions of specific corporate employees. How much of this criticism is warranted by the reality of the facts and the law is a matter for reasonable debate, but the magnitude of the criticism is undeniable.

Second, the Yates Memo is clearly intended to respond to this criticism. Whether this very public move on the part of the DOJ represents the beginning of a radically changed prosecution practice in white collar cases, or is mere window dressing designed to appease the critics, remains to be seen. However, anyone who has ever worked for the Department of Justice as an attorney would recognize that given the unambiguous marching orders contained in the Yates Memo, every DOJ attorney in the country is now on notice that their bosses want them to go out and prosecute individuals in white collar cases and that if they fail to do so, they will likely have some explaining to do.

Third, every corporation in the country, and every one of their general counsel, is now on notice that if they come under DOJ scrutiny, they will be faced with unprecedented pressure to provide evidence to the government against their own individual employees. Specifically, the DOJ’s insistence that to gain credit for cooperating with a government investigation, the corporation must disclose “all information” it has about its employees has profound implications for how internal investigations should be conducted. As the Yates Memo makes clear, the DOJ attorneys will define what “all information” means in this context, and so corporations will be pressured to independently gather information about which of their employees are responsible for whatever the government is investigating if the corporation wants to get cooperation credit. Also, it appears that a corporation’s ability to protect its employees and “carve them into” settlements with the government may now be severely limited. In addition, and very troubling, is the fact that the potential implications for the future status of attorney-client privilege in such investigations will be numerous and potentially profound. It is hard to imagine that changes wrought by the Yates Memo will not dramatically alter how corporations respond to government investigations and how corporate individual employees choose to cooperate during the course of internal investigations.

Indeed, in a speech at New York University School of Law on the same day that the Yates Memo was released, Deputy Attorney General Yates herself noted that these changes in policy by the DOJ may very well lead to fewer settlements of federal white collar investigations and more trials. Yates’ comments are as good a confirmation as there could be that the Yates Memo raises significant issues for corporations, their general counsel, individual corporate employees and the outside white collar attorneys who advise them all and may very well lead to explosive changes in white collar prosecutions.