United States: Conducting Internal Ivestigations - Part 2

Documents are a key part of almost all internal investigations. Documents often contain important information. Government law enforcement officials tend to place great weight on the documents. Documents can assist counsel in obtaining information from witnesses by, for example, educating counsel so that counsel can ask more informed questions or refresh a witness’s recollection.

As soon as the company becomes aware of allegations of wrongful conduct, it should consider suspending normal document retention procedures in order to ensure that company personnel do not destroy or otherwise dispose of documents relating to the transaction or the incident that is the subject of the investigation. For example, the legal department might circulate to appropriate personnel a memorandum instructing personnel not to destroy or discard specified categories of documents. Such a memorandum is especially appropriate where the company is aware that the government has already initiated an inquiry or investigation.⁷ While communicating the importance of not destroying relevant documents, the memorandum should disclose only as much information regarding the matter under investigation as the recipient needs to know. It is important to consider the possibility that the company may be discarding or overwriting computerized information in the ordinary course of business as back up media are rotated and reused, and tapes are recycled, electronic media storage devices are replaced, and new software is loaded.

A diligent search should be taken to locate and secure the documents that relate to the subject transaction or incident. Before designing the search for documents, it is important to learn the types of documents routinely generated by the corporation, to review the organization chart of the company and identify company personnel likely to possess relevant documents, and to learn the company’s practices regarding document retention and storage. Consideration should also be given to obtaining copies of the calendars and message slips of appropriate personnel. Similarly, compliance manuals, training materials, personnel directories, and job descriptions for the period of time that is the subject of the internal investigation should be obtained.

In designing the search for documents, consideration must be given to information saved in electronic form, such as word-processing documents, reports generated by databases, e-mail, and spreadsheets. It may be necessary to search the hard drives of certain PC’s. It may also be possible to recover "deleted" materials from the user’s hard drive. In many investigations, a thorough search for documents can only be conducted through individual interviews of employees about their individual document retention practices.

In conducting its document search, the company must limit its reliance on individuals who might have participated in the suspected underlying misconduct. In some instances, it is best to have counsel show up at the critical locations and search for relevant documents without prior warning so that the individuals involved in the suspected underlying misconduct will not have an opportunity to destroy or discard significant documents.

There are several reasons why it is important to act promptly to secure relevant documents. The retained documents might contain exculpatory information that would assist in the company’s defense. Regulators and law enforcement officials are more likely to take severe action against a company if they learn that relevant documents were destroyed or discarded once red flags had been identified. Under some circumstances, the destruction of evidence might result in an increase in the criminal penalty to be imposed on the company, see United States v. Grewal, 39 F.3d 1189, 1994 WL 587395 *3 (9th Cir. 1994)(imposing two-level adjustment for obstruction of justice), or might give rise to an adverse inference against the company, see Farrell v. Connetti Trailer Sales, Inc., 727 A.2d 183 (RI Sup. Ct. 1999) (advising the jury that it can draw an adverse inference against the plaintiffs because plaintiffs caused certain evidence to be unavailable to defendants).

The investigation team must organize the documents according to various criteria. Documents are generally classified in a spectrum ranging from irrelevant to crucial. In general, the relevant documents should be organized to facilitate preparation of a chronology, an analysis of key topics (e.g., a particular meeting with officials at which the prospective contract was discussed), and witness interviews. It usually is appropriate to maintain a file containing the crucial documents. This file is often referred to as the "hot document" file. In many instances, it is necessary to rely, at least in part, on a computerized system for organizing and storing documents.

A careful record should be maintained listing the locations that were searched in connection with the investigation and the individuals who were contacted in connection with the document search. A log should be created identifying the location from which each document was obtained. Where the relevant files are being actively used, consideration should be given to marking (or otherwise making a record of) the documents that were in the file at the time of the document search. The documents gathered should be numbered sequentially (e.g., bates labeled).

V. Interviewing Witnesses

Interviews are also a key aspect of the investigation process. Along with documents, interviews are the primary source of the information that will be gathered during the investigation. In addition, interviews present an important opportunity for the investigators to assess the credibility of the witness.

Counsel should interview all company personnel likely to have knowledge regarding the relevant transaction or the alleged violation. Before interviewing personnel, counsel should review the relevant documents and interviews, prepare an outline of topics to be covered with the witness, and select the documents that should be shown to the witness during the interview. Questioning witnesses regarding documents can serve several purposes. The author of a document might be able to explain what a document was intended to convey or why a document was drafted in a particular way. Other witnesses might be able to put important documents into context. The document might refresh a witness’s recollection or persuade a witness to provide accurate information that the witness might otherwise have been reluctant or unwilling to provide. Counsel should be aware that showing a privileged document to a witness during the interview could result in a court later holding that the privilege has been waived.

Questionnaires should be used sparingly, if at all. In general, the use of questionnaires should be limited to soliciting objective information in order to screen for individuals who need not be interviewed. For example, in an investigation involving insider trading, it might be appropriate to circulate a questionnaire to company personnel asking them whether they were (or might have been ) privy to the material nonpublic information prior to a certain date and whether they are aware of anyone else - other than identified individuals - who was (or might have been) aware of that information prior to that date.

Other company personnel should be discouraged from attending employee interviews. The presence of senior officers at interviews could chill the candor of the witness and may undermine the protection of the attorney-client privilege. Additionally, the senior officer’s presence can be misconstrued as part of an effort to compare and conform the witness’s recollection with the version of the facts advocated by the executive.⁸

In some instances, counsel will need the assistance of experts from outside the company. In order to maximize the likelihood that the interviews will be protected by the attorney-client privilege and/or the work product doctrine, experts should be retained by counsel, and the engagement letter should contain provisions designed to preserve the confidentiality of information shared with and the work product of those experts.

At the outset of each interview, counsel should inform the witness that: (1) senior management (or the board of directors or a special committee of the board of directors) has authorized counsel to state that company employees should cooperate in the investigation; (2) counsel are attempting to determine the truth relating to the matter and the surrounding circumstances; (3) counsel are not asking the witness to provide untruthful or misleading information to any government investigators; and (4) the witness should not destroy or discard any documents relevant to the investigation. If the investigators are attorneys they should also: (1) identify their client, and state they do not represent the individual witness;⁹ (2) explain that they are seeking information to assist in providing legal advice and services to the company; (3) indicate that, in order to protect the privileged nature of the interview, it is important that the witness keep the substance of the interview confidential from anyone other than counsel; and (4) state that the company controls the privileges associated with the investigation and has the sole right to determine whether to waive those privileges and disclose the substance of the interview to the government. If the company has already agreed to disclose to the government information obtained in the interview, counsel should advise the witness of this agreement.

This is a delicate part of the interview. In communicating this information to the witness, counsel should be sensitive to the danger that these communications will cause undue alarm on the part of the witness and thereby impede the ability of the company to gather the necessary information.

Consideration should be given in advance (with the company) to whether the witness should be specifically advised that he or she may have personal counsel present at the interview. If appropriate, the witness should also be advised that the company will indemnify him or her for reasonable fees and expenses associated with the participation of personal counsel. In deciding whether the company should agree to pay these fees and expenses, the company should consider the applicable corporate indemnification statutes, the corporate charter and bylaws, the applicable contract provisions if any, and the benefits that the company may derive by providing separate counsel.

It is preferred to have at least two investigators present for each witness interview. Having two investigators present makes the interview more effective since one of the investigators can take the lead in asking questions and the other can focus on taking notes. In addition, the second investigator can later serve, if necessary, as a witness to corroborate the recollections of the first investigator regarding both the statements of the witness and that the first investigator conducted the interview appropriately.

It is usually appropriate for a senior attorney to conduct the interview. First, obtaining information from a witness is a delicate art that requires substantial experience. Second, the credibility of the witness will often be important. A senior attorney might have a better sense both for assessing the credibility of the witness on behalf of the company and for evaluating whether a government agency and/or a trier of fact would find the witness to be credible.

Both the notes of the interview and the memoranda summarizing the interview should be marked as "confidential," and should note (if true) that they reflect the attorney’s mental impressions and are not a substantially verbatim record of the interview. The notes should clearly reflect that the investigators made the appropriate statements to the witness (as discussed above) at the outset of the interview. The interview memoranda should contain and intertwine the attorney’s mental impressions and explicit strategy because such memoranda are more likely to be protected as opinion work product under the work product doctrine. In drafting interview memoranda, the investigator should be conscious of the possibility that the memoranda will ultimately be disclosed to prosecutors or to counsel for a plaintiff litigating against the company.

If the witness is represented by counsel, caution should be exercised before agreeing that the interview will be subject to an undefined "joint defense privilege" or other limitation on the ability of the company to use the information obtained in the interview. See United States v. Weissman, 195 F.3d 96 (2d Cir. 1999). Weissman involved two interviews of the chief financial officer of Empire Blue Cross and Blue Shield. Empire was represented at the interviews by both inside counsel and outside counsel and Mr. Weissman was represented by his personal attorney. After learning that Empire was the subject of a grand jury investigation, Empire’s counsel later provided its notes of the interviews to the prosecutors and the prosecutors indicted Weissman. There was a factual dispute as to whether the interviews had been expressly subject to a joint defense agreement. The Court of Appeals found that Weissman had failed to establish the existence of a joint defense agreement and that his damaging admissions made during the interviews could be used against him. Id.¹⁰

During the interview, counsel should ask questions designed to learn everything possible regarding the underlying transaction and the circumstances surrounding it. Thus, the investigator should refrain from relying on leading questions. Who, what, when, where, why and how questions are best relied on to elicit complete information. The investigator should listen attentively to the witness and attempt to encourage the witness to relax and tell the story in his or her own words.

It will sometimes be necessary to interview a witness more than once. At the beginning of the interview process, counsel might not be sufficiently familiar with the facts to appreciate the significance of a witness’s statements. After conducting the interview, counsel might become aware of statements by other witnesses or of documents that pose new questions for the witness. As a result of information gathered during the internal investigation, the scope of the investigation might broaden to include topics that were outside the scope of the investigation when the witness was previously interviewed.

The investigators may request that the witness contact them if the witness recalls any additional information or discovers any additional documents or if the witness is contacted regarding the transaction by the media or by government officials. While it would be improper and illegal to instruct a witness not to talk to U.S. government officials, it is appropriate to discuss with the witness that the witness has the right to decline to answer questions without first contacting the company or consulting with an attorney. In conducting the interview, investigators should be careful not to attempt to influence the witness’s answers. To the extent possible, the investigators should avoid telling one witness what another witness has told them or otherwise educating the witness regarding the transaction, although it will often be necessary to refresh the witness’s recollection regarding facts of which the witness once had knowledge.

Company counsel should not provide an employee with a copy of the interview memorandum. While having the employee review the memorandum might enhance the accuracy and utility of the memorandum, a witness who reviews an interview memorandum might be found to have adopted the memorandum as a witness statement, which might render the memorandum discoverable under U.S. law.

Similarly, it rarely is advisable to tape record witness interviews or to have a court reporter transcribe the interview. Such a record of the interview is less likely to be treated as protected by the attorney-client and/or work product privileges than a memorandum that has been prepared by counsel and that contains the mental impressions of counsel. The Federal Rules of Criminal Procedure require production of contemporaneously recorded statements after a witness has testified on direct examination at trial. FRCP 26.2. Because the witness has not yet had an opportunity to review the documents and refresh his/her recollection or because the witness might be prey to a misguided temptation to distort the truth, an initial interview is the moment when a witness is most likely to misstate the facts. The company’s ability to defend itself in a later law enforcement or private action could be substantially impaired by a record of these initial misstatements. The one exception to this rule would involve a situation where the company is the victim of the employee’s conduct and the company wishes to memorialize verbatim an employee’s admissions.

In many cases, former employees will be among the key witnesses. The interview of a former employee might be protected by attorney-client privilege if the witness is being interviewed regarding information obtained when the witness was an employee of the company represented by counsel. While the law is not completely settled, a number of courts have held that the attorney client privilege can apply to communications between a former employee of a company and counsel to a company, at least if the former employee had been employed by the company when the relevant conduct occurred. In re Allen, 106 F.3d 582, 605 (5th Cir. 1997); In re Coordinated Pretrial Proceedings in Petroleum Prod. Antitrust Litig., 658 F.2d 1355, 1361 n. 7 (9th Cir. 1981).

VI. Preparing A Report Of The Investigation

The report of the investigation usually includes: (1) identification of the circumstances that prompted the investigation and a statement that the investigation was conducted in anticipation of litigation and for the purpose of providing legal advice; (2) a description of the action plan that was implemented (e.g., the locations searched, witnesses interviewed); (3) a summary of the relevant background facts (e.g., a chronology of the relevant events, a description of the relevant individuals and entities, an outline of the relevant agreement and/or transactions); (4) with respect to the key facts, a discussion of the evidence; (5) an outline of the relevant law; (6) an application of the law to the evidence gathered during the investigation; and (7) identification of the corrective measures that should be considered (or have been taken) as a result of any issues uncovered during the investigation. In many instances, the report should also include an introductory section (or executive summary) that briefly sets forth the investigator’s conclusions and recommendations.

To an extent, the preparation of draft portions of the report is integral to the conduct of the investigation. As the investigation is being commenced, the investigators should begin preparing a working chronology. This chronology should be annotated both to show the document(s) and interview(s) on which each entry is based and the document(s) and interview(s) that appear to be inconsistent with each entry. Then, as the investigation progresses, the chronology should be frequently revised to reflect new facts. Such a working chronology will help counsel better understand the facts and their implications and will also prompt certain new lines of questioning with the witnesses.

In order to protect the privileged nature of the chronology, its distribution should be carefully limited and it should never be shown to a witness.

The evidence relating to key facts is often ambiguous and/or conflicting. The description of this evidence in the report should be balanced and complete. It usually is appropriate to discuss incriminating evidence in the report even if the investigators believe that the incriminating evidence is outweighed by the exculpatory evidence. See, e.g., In re John Doe Corp., 675 F.2d 472, 489-92 (2d Cir. 1982) (a decision had been made to exclude from the report a reference to the possibility that a payment to an attorney was for the purpose of bribing local governmental officials, and the court held that this decision might have been for the purpose of creating a misleading report). A balanced report is more informative to the company officials who must act on the report and more credible to law enforcement officials who may later review it. A report that includes exculpatory as well as incriminating evidence is also more fair to the individuals and entities that may be criticized in the report.

To the extent appropriate, the report should include positive findings. For example, even if the investigation determines that a sales manager had caused U.S. technology to be reexported to Iraq, it might still be accurate to report that the company had established compliance procedures prohibiting such reexports, that these procedures were reasonably designed, that this prohibition had been stressed in specific training programs, that one factor in determining bonuses was the extent to which sales management promoted a good compliance atmosphere, that senior management had no prior involvement in the incident, and that when senior management learned of the incident, they promptly authorized an internal investigation, disciplined the sales manager, and took steps to enhance the compliance system.

Careful consideration should be given to whether some or all portions of the investigation should be reduced to writing. Reducing the report to writing can offer a number of benefits. Written reports often contain substantially more content and more precise analysis, and are easier for company management to digest, than oral reports. The Board of Directors may feel more comfortable relying on a written report than on an oral report. If disclosed to the government, a written report can help persuade the government that a thorough investigation had been conducted and either no wrongful conduct occurred or that government action is otherwise not warranted.

There are also a number of problems associated with reducing a report to writing. The process of writing a report can be expensive. If disclosed to the government or to others outside the corporation, the written report can be used against the company. Production of the written report is likely to jeopardize the privileges associated with the investigation. In subsequent litigation, adversaries will seek to discredit the report by identifying arguable omissions or inaccuracies in the report.

Careful consideration should also be given to whether the company should disclose the results of the investigation to the government. Under some circumstances, companies have a legal obligation to report to the government or otherwise disclose that they have engaged in conduct that is unlawful. The New York Stock Exchange requires that member firms promptly report to the NYSE whenever the member, or any employee associated with the member, has violated any provision of any securities laws or regulations or any rules of a self-regulatory organization or has engaged in conduct inconsistent with just and equitable principles of trade. NYSE Rule 351. Under some circumstances a publicly owned corporation may have an obligation under the federal securities laws to disclose in its periodic reports or on a Current Report on Form 8-K a violation of law that is material to the operations or financial condition of the company.^{11, 12} The Department of Commerce has promulgated regulations imposing on U.S. persons an obligation to report requests that the person take any action which has the effect of furthering or supporting a restrictive trade practice or boycott. 15 CFR §760.5.

In a criminal context, self-reporting can increase the likelihood of the company’s obtaining lenient treatment. As set forth above, a number of government law enforcement agencies have formal programs that offer leniency to companies that report violations before the government begins an investigation. Absent such a program, prosecutors may nevertheless exercise their discretion and decide not to prosecute a company that has voluntarily reported a violation. See John Gilbeaut, "Getting Your House In Order," ABA Journal 64, 68 (June 1999) ("As a practical matter, if a company self-reports, a prosecutor probably isn’t going to charge the corporation.") (quoting the U.S. Attorney for the Northern District of Illinois); Dominic Bencivenga, "Reporting Wrongdoing: Taking Time To Investigate Is Considered Delay," New York Law Journal at 5 (March 7, 1996) ("Corporations wanting to avoid indictment must be proactive, and [prosecutors] will not look kindly at a [reporting] delay.) (quoting the U.S. Attorney for the Southern District of New York). The federal sentencing guidelines for corporations provide for a corporation to receive credit for having an effective program to prevent and detect violations of law only if, after becoming aware of offense, the corporation does not unreasonably delay reporting the offense to appropriate government authorities. §8C2.5. Voluntary disclosure to the government might also assist the corporation in receiving credit for full cooperation in the investigation and for acceptance of responsibility for criminal conduct. For example, after Salomon Brothers (in the case discussed above) voluntarily notified the government of misconduct, provided to the government detailed information regarding the firm’s internal investigation, provided documents to the government, and made employees available for interviews and testimony, the U.S. Attorney announced that criminal charges would not be pursued. See Press Release, U.S. Attorney For the Southern District of New York (May 29, 1992).

A vivid example of the potential benefits of self-reporting can be found in the antitrust field. The Antitrust Division of the Department of Justice has established a program which, under certain circumstances, allows corporations and corporate officers to obtain leniency if the corporation or corporate officer reports antitrust activity of which the Division was previously unaware. See Stephen J. Squeri, "Minimizing Damage to Your Client Through Corporate Compliance Programs and the Antitrust Division’s New Corporate and Individual Leniency Programs," at 6.005-6.011 to be found in Materials on Antitrust Compliance (Business Laws, Inc. 1993). In some circumstances, corporations can obtain leniency by self-reporting even if the Antitrust Division has already begun an investigation. Id. In 1999, the Department of Justice obtained criminal fines totaling $500 million against two pharmaceutical firms, but did not criminally prosecute a third pharmaceutical company which had participated in the antitrust conspiracy. The Deputy Assistant Attorney General for the Criminal Division explained that the third company was treated leniently for having provided the information that the Division "needed to crack the largest antitrust conspiracy uncovered to date." Press Release, Department of Justice, "F. Hoffman– LaRoche Agrees To Pay $500 Million, Highest Criminal Fine Ever (May 20, 1999).

If the company decides to make some disclosure to the government, it might attempt to limit the extent of the disclosure. In some circumstances, the government might agree that it is sufficient if the company identifies the nature and extent of the offense and the individual(s) responsible for the criminal conduct. In general, however, the government will often press to see both the report of the internal investigation and/or the materials generated and collected in connection with the investigation. Outside legal counsel should always be consulted prior to making a disclosure to the government.

If the company decides to disclose a written report to the government, there is a substantial risk that all of the company’s privileges with respect to the investigation will be deemed waived. A majority of the courts addressing the issue have held that disclosure of a report to a law enforcement agency waives any privileges that would otherwise attach to the report under U.S. law. See In re Subpoena Duces Tecum (Fulbright and Jaworski), 738 F.2d 1367 (D.C. Cir. 1984); Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (3rd Cir. 1991); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988). The Eighth Circuit has held that voluntary disclosure of an internal investigation report does not waive the privileges that would otherwise attach to the report. Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977)(en banc). The U.S. Court of Appeals for the Second Circuit has held that there may be situations in which the agency and the disclosing entity may enter into an explicit agreement that the agency will maintain the confidentiality of the report. In re Steinhardt Partners, L.P. 9 F.3d 230 (2d Cir. 1993).

Accordingly, if a company decides voluntarily to disclose to a governmental agency the report of its investigation, the company should seek an agreement with the government expressly stating that: (1) the disclosure is being made at the request of the agency; (2) it is the intention of both the disclosing entity and the agency that the disclosed materials will be kept confidential; (3) it is the intention of both the disclosing party and the agency that the disclosure should not act as a waiver of the attorney-client privilege and the work product doctrine as to any other materials; and (4) it is the intention of both the disclosing party and the agency that with respect to any other entity the disclosure should not act as a waiver of the attorney-client privilege and the work product doctrine. Some law enforcement agencies may even agree to support the company if the company later has to argue that the voluntary disclosure to the government should not be deemed a waiver. For example, in connection with a company’s agreeing voluntarily to disclose the results of an internal investigation to the Securities and Exchange Commission, the SEC may now agree to intervene in a private discovery dispute and file papers urging that the disclosure should not be deemed to have waived the privilege.

If a company decides to disclose the report of the internal investigation to the government, and the report is critical of specific individuals and companies, disclosure of the report might result in a claim for defamation, invasion of privacy, publicity in a false light, tortious interference with economic interests, or infliction of mental distress. See Pearce v. E.F. Hutton, Inc., 664 F.Supp. 1490 (1987) (former E.F. Hutton branch manager sued E.F. Hutton and former Attorney General Griffin Bell in connection with a report of an internal investigation prepared on behalf of E.F. Hutton).

In any event, steps should always be taken to protect the investigation and any written investigation materials from discovery. Any documents or other written materials prepared as part of an investigation should be marked privileged and confidential, and their distribution should be limited.

VII.Taking Corrective Action Based On The Investigation

The company must assess what corrective action, if any, should be taken in light of the information gathered during the internal investigation. Throughout the course of the investigation, counsel and the company should be alert to whether there might be an ongoing, recurring or other prospective violation of law or of the company’s policies and procedures. If it appears that there might be an ongoing or recurring violation, then the company should take measures necessary to prevent any further violations. These measures can consist of instituting new procedures, instituting new training sessions, and/or disseminating compliance materials.

Furthermore, the company should consider whether any employee and/or agent should be disciplined and whether the investigation has revealed any areas in the compliance program that should be enhanced. In many instances, the decision to sanction the employee is difficult. The employee may be a valuable employee who has (lawfully) enabled the company to earn substantial money in the past. The disciplining of the employee may have an adverse impact on employee morale and may expose the company to legal liability. In addition, the disciplining of the employee may increase the likelihood of the government learning of the unlawful conduct. The imposition of discipline might trigger a reporting obligation,¹³ the disciplined employee might go to the government, or the disciplining of the employee might otherwise attract attention (e.g., the disciplined attorney might file a wrongful discharge action). In any subsequent litigation or governmental investigation, the disciplining of the employee may be considered an admission.

On the other hand, there are important reasons to impose sanctions on employees who violate company policies. The policies will lose their force if they can be violated with impunity. The employees might engage in future violations. If the company does not sanction employees who act improperly, the government will likely conclude that the company condoned the misconduct or lacks a meaningful compliance policy. The availability of an affirmative defense to a sex or race harassment claim may also depend upon whether sanctions were imposed. Under the Faragher/Burlington Industries analysis, the employer must show that it exercised reasonable care to prevent and promptly correct the harassing behavior. The effectiveness of the corrective steps taken must be assessed, such as whether or not the alleged harasser was removed as the immediate supervisor for the victim and whether, if there are prior incidents of harassment by the alleged harasser, the employer terminated, suspended, or at a minimum, severely reprimanded the alleged harasser upon finding that the alleged conduct occurred.

The sanction should reflect the seriousness of the offense, the extent to which the employee has been put on notice that the conduct at issue was contrary to company policy, and the need to protect the company from future violations. In some instances, the company can appropriately respond to an infraction with additional training and education coupled with a reprimand and/or warning. In other instances, the company can appropriately sanction the employee by suspending the employee, denying the employee a promotion, demoting an employee, or denying the employee a bonus. In other instances, especially instances involving criminal conduct that puts the company at risk or poses a substantial threat of future violations, it may be appropriate to terminate an employee. With respect to claims of employment harassment, the remedial steps must be "reasonably calculated" to halt the harassment. In considering the appropriate discipline to be imposed, the company should also consider the legal standard likely to be applied in evaluating whether the discipline was excessive (e.g., is the employee an at will employee or can the employee only be fired with just cause). The sanctions should be applied fairly and consistently.

In most instances, the employee should be provided advanced notice of the tentative findings of the internal investigation and should be given a fair opportunity to respond to that notice. In addition to the benefits intrinsic in providing a fair procedure to an employee before discipline is imposed, providing the employee with a fair opportunity to respond to the notice will benefit the company by permitting it to make a more informed decision regarding the sanction, if any, that is appropriate.

Disciplinary action that results in the termination of the employee responsible for alleged misconduct may lead to the employee bringing a lawsuit for wrongful discharge. Courts differ as to the legal standard to be applied in determining whether the disciplined employee has a cause of action against the company. Compare Cotran v. Rollins Hudig Hall International, Inc., 17 Cal. 4th 93, 69 Cal. Rptr.2d 900; 948 P.2d 412 (1998) and Sanders v. Parker Drilling Company, 911 F.2d 191 (9th Cir. 1990) (applying Alaska law). In Cotran, a company had terminated an employee after finding that the employee had sexually harassed certain fellow employees. The terminated employee sued his former employer alleging that he had been terminated without just cause. The trial court ruled that the issue was whether the employee had actually engaged in the alleged sexual harassment, found that the terminated employee had not engaged in sexual harassment, and held that the employee had therefore been terminated without just cause. The Supreme Court held that the employee had been terminated with just cause as long as at the time of the decision to terminate the employment, the employer, acting in good faith and following an investigation that was appropriate under the circumstances, had reasonable grounds for believing plaintiff had done so. 17 Cal. 4th at 109. In Sanders, two employees of Parker Drilling Co. informed Parker’s safety managers that several fellow employees were routinely smoking marijuana on the job and during break periods. The company asked for and obtained written statements from the two employees stating this accusation. The company then confronted the plaintiffs who denied using drugs. Based on this information, Parker terminated the plaintiffs. The Ninth Circuit held that to carry its burden of showing just cause for termination, Parker had the burden of showing that the discharged employees had engaged in the alleged prohibitive conduct and that Parker’s subjective good faith belief that it possessed good cause was insufficient. 911 F.2d at 194-95.

Finally, a company considering remedial action should consider taking additional remedial steps, such as making compensatory payments to individuals or entities that were overbilled; making job offers to job applicants against whom the company had discriminated; and correcting disclosure statements that have been released to the investing public.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.