Editor: Are more cases fleeing the system and what are the
consequences?
Gerson: It has long been the case that very few cases, civil or
criminal, go to trial. increasingly, civil corporate parties attempt to opt out
of the judicial system altogether and pursue alternate routes of resolution that
might involve less risk of irrational judgments.
The difference is that now we've reached a critical mass. So many cases now
settle or otherwise occur outside the judicial system that there is a lack of
decisional law to provide guidance in a number of key areas. This is true not
only of the fraud cases that I handle under the False Claims Act, but in a
number of other areas as well. We're likely to see the same phenomenon in
Sarbanes-Oxley cases.
Editor: Why are corporations fearful of litigating cases?
Gerson: The stakes are higher than ever. What were multi-million
dollar cases are now billion dollar cases. For a public corporation, the adverse
result of a trial with concomitant publicity can mean ruin. In fact, many such
companies that settle for large dollar amounts often have been rewarded in the
stock market for getting rid of the litigation. It's like the old saw: "when
somebody on the street wants to steal your watch, give it to him and get on with
your life."
There is another important phenomenon. For companies that contract with the
government or are reimbursed through government programs, for example in health
care or defense, litigating and losing can be a death sentence because of the
risk of debarment or exclusion. Because every case is potentially problematic,
this risk frequently drives corporations to settle even if they have arguably
viable defenses.
There are other factors. The very high expense of litigation, particularly in
discovery, which fuels as much as 80% of the total cost of litigation,
influences many companies to settle. Discovery of electronically stored
information has added to the burden. You can conduct digital searches at great
expense over a long period and still miss critically important e-mails - and if
you do, the sanctions can be immense. There is a pending federal rule that
should put a little more sanity into e-discovery and give parties and their
counsel significant new guidelines with regard to the retention and production
of digital documents.
Courts are part of the problem, because they rarely check discovery or
promptly decide dispositive motions. Parties settle a case when they have a
strong feel for the probable outcome. If it is unclear where the probabilities
lie because motions practice is unavailing, settlement comes late in the process
and discovery expenses continue to escalate. I favor amending the rules of
procedure covering offers of settlement to allow them to be made bilaterally and
serially with regard to any matter in contest. By allowing for limited cost
shifting at various stages of the litigation, the system would gain efficiency
and impose discipline.
Editor: How important is the possibility of punitive damages in
encouraging settlement?
Gerson: Punitive damages are rarely awarded, but they introduce an
element of uncertainty into the settlement equation that forces a company to
confront the possibility of a potentially disastrous outcome - even if remote.
Many corporate parties attempt to force cases into arbitration and other ADR to
minimize this risk. The Supreme Court to date has only provided a rough sense of
the permissible boundaries for punitive damages, which still leaves enough
uncertainty to encourage high settlements.
Editor: Is the decision to prosecute affected by the existence of an
effective compliance program?
Gerson: Especially at the federal level, the answer is a clear "yes."
Having an effective compliance program in place before questionable conduct is
identified is extremely important both to protect against corporate prosecution
and to minimize the sanction if there is a prosecution or civil litigation.
There has been a tremendous shift in what a corporation does to respond to a
government investigation. The Federal Organizational Sentencing Guidelines make
it very clear that having a thorough-going results-oriented compliance program
can save the majority of potential penalties to a corporation.
Various departments and agencies within the United States government and the
states have their own guidelines affecting the decision to prosecute and the
severity of remedies. The latest iteration of the policy at the Justice
Department is the "Thompson letter," named after a former Deputy Attorney
General. The letter mandates a number of things that a corporation must do or
show during an investigation that will ultimately determine whether the
corporation, as opposed to individuals, will be prosecuted.
A corporation is, under most circumstances, liable for the actions of its
officers and agents within the scope of their authority. Cooperation is the
touchstone enunciated in the Thompson letter for use by prosecutors in
determining whether to charge the corporation. This can include waiving
attorney-client privilege and providing all background information, internal
memos, and records of discussions, including any information uncovered as a
result of internal investigations. The defense of reliance on the advice of
counsel automatically waives attorney-client privilege. It's very clear today
that companies have tremendous inducements to open the door to the government
and give it virtually everything they have.
Editor: Will this reduce communications with counsel?
Gerson: There is no reduction, but it is changing the nature of such
communications. It is leading to less documentation being prepared by lawyers.
It is certainly changing the relationship between lawyer and client just as the
relationship between auditor and corporation has been changed radically by
Sarbanes-Oxley. The lawyer now must anticipate that any document that he or she
prepares has a significant probability of disclosure.
Editor: The guidelines of the Inspector General of the Department of
Health and Human Services are very similar to what is contained in the
Organizational Sentencing Guidelines.
Gerson: They are virtually the same. The IG's guidance applies to
health care providers whose products and services are reimbursed through
Medicare and Medicaid. The Inspector General has the power to exclude such
providers from participation in those programs even if they're not direct
billers, like pharmaceutical companies for example. That is one reason why
companies are entering into such huge settlements, even in questionable cases
where there were significant potential defenses.
Editor: Government has an interest in compliance on the one hand, and on
the other hand an interest in not creating a situation where the perils are so
great that corporations are frightened away from an industry that serves the
public interest. How does it balance those interests?
Gerson: Benefits result to corporations that participate in voluntary
self-disclosure programs of the Justice Department, the Department of Health and
Human Services and other agencies. These programs are designed to encourage
corporations not to wait for the grand jury or an agency to investigate. If you
engage in voluntary self-disclosure you reduce the chances of a case turning
into a criminal case. You certainly increase your access to meaningful
discussions with prosecutorial and civil investigative authorities along the
way.
There is a real value judgment to be made as a general counsel. In some
circumstances, I have recommended to companies that they engage in
self-disclosure and they have benefited. Under other conditions, I have
recommended that they should not. Voluntary self-disclosure can become a tar
baby. Sometimes you can't get rid of a matter once you self-disclose - it just
becomes larger and larger - and stickier and stickier.
If you have a demonstrated track record of reliability, you can get a fair
hearing in the Justice Department or in a U.S. Attorney's office, or elsewhere
in the government. Many experienced counsel can meet with senior government
officials, but we never go over the heads of the line lawyers with whom we have
been working. We always keep them involved. Talking to senior government people
is essential where important government policies are implicated. The government
is, in appropriate cases, open to such discussions. But, one should be careful
not to overplay one's hand.
Editor: What about communications with government officials at a state or
local level? Would that approach be equally effective?
Gerson: It might not be. A lot depends on who the attorney general is
and who the line lawyers are. I think it's not unfair to say certain attorneys
general are subject to greater political pressures to pursue litigation that
will attract public attention than is a U.S. attorney, but that is not to say
that various U.S. attorneys don't act in much the same way that certain highly
visible state AGs have been acting.
Local autonomy is much greater in federal criminal cases than in civil cases.
When I was head of DOJ's Civil Division, I could impose national standards on
the U.S. attorneys' offices. There were disagreements but they would get
resolved. When it comes to criminal cases, the U.S. attorney who signs the
indictment generally has more latitude.
In the large fraud cases I now work on as a private attorney, you have
involvement of both the U.S. attorney at the local level and lawyers in the
Civil and, perhaps Criminal Divisions, of the Justice Department. You have
senior people involved. Such proceedings present unusual challenges.
Negotiating a fair settlement is much more difficult where a state AG or
pension fund administrator hires a private attorney to pursue a claim. At the
federal level, you also may find yourself dealing with private lawyers for a
qui tam relator, someone who brings a False Claims Act suit in the name of
the United States. More often than not these attorneys are proceeding without
the involvement of the government. That is an added challenge, particularly in
those cases where multiple damages are available and both the relator and his or
her attorney have substantial economic inducements to litigate.
Editor: Do you find that plaintiffs' counsel sometimes ignore their
clients' interests?
Gerson: While there certainly are many highly-responsible plaintiffs'
lawyers who serve their clients interests well, there are a number of areas in
which it is difficult to detect the interests of a client at all. Securities
fraud cases are one such area. Such cases virtually are never tried and the
prime beneficiaries of settlement appear to be the lawyers who bring the cases,
often doing little more than tracking company press releases. The argument is
that such suits strengthen the market and benefit stock buyers generally.
However, in many cases, shareholders, the ones who bear the ultimate costs, are
in essence penalized twice. In the end, I wouldn't do anything to bar the
courthouse to plaintiffs with cognizable claims, but I think there should be
consequential market discipline available in cases where lawyer self-interest
can substantially exceed client benefit.
Published July 1, 2005.
