Second Circuit Criminal Law Blog

Second Circuit Reaffirms The Right of A Corporation To Impose Consequences On Employees Who Do Not Cooperate With Internal Investigations

In Gilman v. Marsh & McLennan Cos., No. 15-0603-cv (Kearse, Winter, Jacobs), the Second Circuit held that a corporation can fire an employee for cause if the employee refuses to participate in an internal investigation of the company’s possible criminal wrongdoing.  Masquerading as an employment dispute, the decision could have important consequences for how a corporation and its employees handle internal investigations when there is the potential for criminal prosecution.

The upshot of Gilman for employees is clear:  don’t count on the Fifth Amendment right against self-incrimination to keep you clear of an internal investigation—and if you do refuse to participate, be prepared to suffer the consequences, including termination and loss of benefits.  For employers, the message is more nuanced.  Under Judge Jacobs’ analysis, it may be important for a corporation to delineate whether an internal investigation, and the employee interviews that go along with it, is being done solely to appease the government, or whether there are other, business-related reasons.  As long as the internal investigation has reasonable business objectives, a corporation can impose consequences on recalcitrant employees (including suspension or outright termination)  without infringing on the employees’ constitutional rights.

Background

This case has its beginnings in then-New York Attorney General Eliot Spitzer’s investigation of the insurance business in the mid-2000s.  Marsh, one of Spitzer’s targets, came under scrutiny in late 2004, when an AIG employee pleading guilty to felony charges implicated two Marsh employees—William Gilman and Edward McNenney—as co-conspirators.  In a meeting between Marsh and Spitzer, Spitzer allegedly agreed to forgo criminal charges against Marsh if it turned over an internal investigation being conducted by the Davis Polk law firm, waiving attorney-client and work product protection.  It was widely expected, however, that the AG’s office would bring criminal charges against individuals.

Marsh instructed Gilman and McNenney to attend interviews with Davis Polk attorneys as part of its investigation, but the employees refused.  Marsh responded by firing the two employees for cause, depriving them of retirement benefits including severance pay and stock options.

Gilman and McNenney were eventually indicted and found guilty of violating the Donnelly Act in February 2008 after a 10-month bench trial.  The conviction was overturned in 2010, however, after the court held that the government failed to run over thousands of pages of Rosario and Brady material.  In overturning the conviction, the New York State Supreme Court judge observed that Marsh itself had avoided criminal charges in part by voluntarily turning over documents to the AG, but that the AG had failed to give those same Marsh documents to Gilman and McNenney to prepare their defense.  The AG declined to retry Gilman and McNenney who, in 2010, filed suit against Marsh to recover the employment benefits they lost when they were terminated.

Internal Investigations by Corporations Under Criminal Investigation

In ruling on the employment question—whether Gilman and McNenney were properly terminated for cause under their employment contracts—the Second Circuit made several common-sense observations about how a rational corporation behaves when it is being investigated for criminal wrongdoing.  First, the Second Circuit held that it was reasonable for Marsh to ask Gilman and McNenney to submit to interviews about allegedly criminal conduct that was undertaken as part of Gilman and McNenney’s employment and that potentially exposed Marsh to criminal prosecution. Judge Jacobs noted that the allegations of criminal conduct against Gilman and McNenney, made in open court and under oath, would have been enough to give Marsh cause to fire them; “[i]t is difficult to see how [the employees’] claims for benefits improved because Marsh instead gave them the chance to explain themselves, and they refused to comply.”  And Marsh was entitled to demand information from its employees about “suspicions of on-the-job criminal conduct.”  Anyone who practices in this area will tell you that institutions often interview anyone who has any possible awareness of the wrongdoing being investigated by the government.  The scope of the internal investigation is often quite broad, and it’s no surprise that Marsh sought to interview Gilman and McNenney; indeed, the opposite would have been surprising.

Second, the Court recognized that because of the demand from their employer to participate in an interview, Gilman and McNenney found themselves in “the tough position of choosing between employment and incrimination (assuming of course the truth of the allegations).”  Assuming that the employees received warnings pursuant to Upjohn v. United States, 449 U.S. 383, 389-97 (1981), the employees would have been told that their statements would be conveyed to the government if Marsh deemed the disclosure to be in its interest.  Given Marsh’s cooperation, the employees would have expected that any incriminating statements would likely be passed to the authorities.  While Gilman and McNenney had the right to refuse to sit for the interview, they had to accept the consequences of that decision, including being terminated for failing to follow a reasonable instruction from their employer.  Public employees do not face this difficult choice.  See Garrity v. State of New Jersey, 385 U.S. 493, 497-98 (1967) (holding that public employees may not be forced to choose between self-incrimination and continued employment).

Third, the Court rejected the employees’ argument that the interview request was nothing but a ploy by Marsh to sacrifice its employees to save itself from criminal charges, even as the Court recognized that Marsh planned to turn over the internal investigation results to demonstrate its cooperation with the government.  Here, the Court gave some importance to the timing of the interview requests:  Marsh requested that Gilman and McNenney meet with outside counsel before Marsh met with Spitzer and Spitzer agreed not to bring criminal charges against the company in exchange for cooperation.  In many internal investigations, there has been some discussion between prosecutors and company counsel before the interviews are conducted, but the fact that the interviews were requested prior to the offer of a non-prosecution agreement to Marsh seemed relevant to the Court.

Employees’ Fifth Amendment Rights

Finally, the Court turned to the employees’ argument that their Fifth Amendment right against self-incrimination was violated by Marsh’s demand that they sit for interviews with outside counsel.  To make that case, Gilman and McNenney would have had to show that Marsh’s request was the equivalent of state action—in effect, that the government forced Marsh to demand the interviews, and then fire the employees for not attending.  But the Court held that “Marsh had good institutional reasons” for demanding the interviews and terminating Gilman and McNenney, including its sinking stock price and demands for explanations from clients, directors and shareholders, in addition to the government.  The government did not “intervene[]” or “steer[]” Marsh’s action; Marsh decided to interview the employees on its own.

In reaching this ruling, the Court waded in to the long-running debate, framed by the courts as well as by DOJ and state government policy, over how far a corporation can go in making a “sacrifice to an angry prosecutor” of its employees.  Gilman and McNenney tried to compare their situation to United States v. Stein, 541 F.3d 130 (2d Cir. 2008), which held that employees’ Fifth Amendment rights were violated when KPMG—succumbing to “overwhelming influence” from federal prosecutors—stopped advancing employees’ legal fees in a criminal investigation. But Judge Jacobs, himself the author of Stein, held that Stein didn’t go so far as to protect employees from having to participate in an internal investigation.  He observed that KPMG abandoned its preferred course of paying employee legal fees only when prosecutors demanded it.  Here, by contrast, Marsh chose on its own to ask Gilman and McNenney to submit to interviews and to fire them for refusing.  Judge Jacobs acknowledged that “Marsh was compelled by circumstances to conduct an investigation,” and that one of those “circumstances” was fear of criminal prosecution.  But even absent that threat, Marsh would have had good reason to carry out its investigation and expect cooperation from its employees.  Here, because it was Marsh, not the state, that required Gilman and McNenney to appear at an interview, there was no state action and therefore no violation of the employees’ Fifth Amendment rights when they were fired for refusing to do so.

On this last point, the Court’s ruling seems to limit Stein to its specific and somewhat unusual facts, which were developed after a lengthy hearing.  In many cases, company counsel will take the precise steps that the prosecutors would like them to take even without a specific request from the prosecutors because it’s well understood what is required demonstrate full cooperation with a government investigation.  One such step is to interview the employees who are alleged to be involved in the wrongdoing.  There is no doubt that the Court is correct that Marsh, not the government, required the employees to appear for the interview.  But there is also no doubt that it was done in part to curry favor with the government, even in the absence of an express request.  Limiting the reach of Stein to cases in which the government makes an express request which causes the company to deviate from its preferred course of action could have the unintended result of encouraging the government to evade Stein by using winks and nods when communicating with company counsel.  The Court seems content to leave employees in this difficult position:  submit to an interview and incriminate yourself, or lose your job immediately for failing to submit to the interview. 

-By Stephanie Teplin and Harry Sandick