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Delaware Clamps Down On Parasitic Shareholder Litigation

Feeding FrenzyFCPA Professor has been highlighting for years the parasitic nature of many FCPA-related civil claims.

The actions are as predictable as the sun rising in the east and generally unfold as follows.

A company becomes the subject of Foreign Corrupt Practices Act scrutiny or resolves an FCPA enforcement action.

Then a feeding frenzy follows as plaintiffs lawyers representing (after recruiting) shareholders file civil suits alleging either breach of fiduciary claims under state law or securities fraud claims under federal law.

Like most shareholder litigation of this nature, success is often defined as passing the motion to dismiss stage, and in the FCPA context such FCPA-related civil claims rarely get past this most basic hurdle.

Yet some claims do indeed get past the motion to dismiss hurdle or even they do not are otherwise settled by companies because settlement represents the path of least resistance. In such situations, shareholders receive nothing of significance in the settlement, but the plaintiffs lawyers sure do make out nicely. (See this prior post “Nice Pay Day, But What Did You Accomplish?)

Yet, the actions, as well as the purported investigations by plaintiffs firm surrounding the issues, continue. As this 2010 Forbes column rightly observed:

“[The general increase in FCPA enforcement] has made corporate lawyers and accountants rich as big companies pay big law and accounting firms to investigate and defend potential violations. Plaintiff lawyers have noticed the enormous fees, which are often reaching into the hundreds of millions of dollars, enhanced FCPA enforcement is generating and are moving to extract their own cut.”

The latest company to find itself in the crosshairs of plaintiffs lawyers is Freeport-McMoRan Inc. concerning its business practices in Indonesia after an Indonesian politician resigned after allegedly asking for Freeport shares in exchange for assistance in securing a contract renewal for the company.

Within days, the usual cadre of plaintiffs firms filed lawsuits or otherwise announced investigations (see here, here, here, here, here, here) claiming that Freeport violated the FCPA and as a result various Freeport public statements were materially false and misleading.

Against the above backdrop and general dynamics was a recent notable decision by the Delaware Court of Chancery (the most high-profile trial court in the country when it comes to intra-corporate disputes).

The decision (here – in which Trulia, Inc. shareholders alleged that company directors breached their fiduciary duties in approving a proposed merger with Zillow at an unfair exchange ratio) did not involve FCPA-related civil claims, but did involve another vexatious form of shareholder litigation that typically follows corporate mergers. Perhaps you’ve heard the term “first the merger, then the lawsuit.”

While the decision is not a perfect parallel to FCPA-related civil claims, the language of the court in denying the proposed settlement between the parties is analogous to the FCPA context.

In denying the settlement, the court stated:

“The proposed settlement is of the type often referred to as a “disclosure settlement.” It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”

[…]

Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.”

Friday Roundup

Roundup2

Scrutiny alerts and updates, civil litigation updates, SEC enforcement statistics, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Millicom

The telecom and media company headquartered in Luxembourg with shares traded over the counter (OTC) in the U.S. recently disclosed:

“Millicom … announced that it has reported to law enforcement authorities in the United States and Sweden potential improper payments made on behalf of the company’s joint venture in Guatemala. A Special Committee of the Board of Directors made the decision in connection with an independent investigation being overseen by the Special Committee and conducted by international law firm Covington & Burling LLP, with the support of Millicom’s management team. Millicom is committed to fully cooperating with the authorities. It is not possible at this time to predict the matter’s likely duration or outcome. Millicom is committed to the highest ethical business standards and to full compliance with all applicable laws and regulations in every market in which the company operates.”

AEI

Speaking of FCPA scrutiny in Guatemala, according to this article in the Nation, Jaguar Energy Guatemala, a subsidiary of Houston-based AEI, “participated in an influence-trafficking scheme to obtain privileged information and favors from high-level Guatemalan officials. Among other things, the subsidiary is accused of paying to obtain meetings with the country’s former president Otto Pérez Molina.”

Goldman Sachs

The Wall Street Journal recently went in-depth regarding a Malaysian government investment fund,  1Malaysia Development Bhd., or 1MDB, and the role of Prime Minister Najib Razak. As noted in this article:

“[T]he fund has become the center of a political scandal that has engulfed Malaysia’s government. The fund is mired in debts of over $11 billion. It is a subject of a raft of local and international investigations, including, in Malaysia, by the central bank, auditor general, anticorruption agency and a parliament committee. It has faced accusations that billions of dollars are missing and that money was misused for political purposes or siphoned off in corruption by individuals.”

According to this article:

“Goldman Sachs Group Inc.’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal. As part of a broad probe into allegations of money laundering and corruption investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said. The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.”

Bristol-Myers

It was fairly obvious to knowledgeable observers that when the SEC brought an FCPA enforcement action against Bristol-Myers earlier this month (see here for the prior post), but the DOJ did not, that this signaled that there would not be a DOJ enforcement action as such parallel actions are almost always brought on the same day. Should there be any doubt, the company recently disclosed: “The Company has also been advised by the Department of Justice that it has closed its inquiry into this matter.”

Civil Litigation Updates

As highlighted in Foreign Corrupt Practices Act Ripples, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall consequences that can result from FCPA scrutiny or enforcement. Among other things, FCPA scrutiny or enforcement often leads to private shareholder litigation as well as other civil claims such as wrongful termination by employees who allegedly “blew the whistle.”

Two developments from the FCPA-related civil dockets.

This recent post highlighted the civil lawsuit filed by Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, against the company and certain executive officers and board members in the aftermath of the company’s FCPA scrutiny and enforcement action. In his complaint, Wadler alleged various unfair employment practices. In this recent decision from the Northern District of California, the court largely denied the defendants’ motion to dismiss and allowed the bulk of Wadler’s claims to proceed.

It did not take long for the Ninth Circuit to affirm a lower court order dismissing derivative claims against H-P directors for, among other things, alleged breach of fiduciary duty in connection with the company’s FCPA scrutiny.  The court’s 4 page order is here.

SEC Enforcement Statistics

Although the SEC has a specialized FCPA Unit (one of only five specialized units at the SEC) and declared the FCPA to be a “vital part” of its overall enforcement program, the fact remains that FCPA enforcement is a relatively minor part of the SEC’s overall enforcement program.

Indeed, as noted in this recent SEC release:

“In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.  Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.”

In the SEC’s FY 2015, there were 13 FCPA enforcement actions.

Nevertheless, the SEC’s release does mention:

Combating Foreign Corrupt Practices

Reading Stack

The most recent FCPA Update by Debevoise & Plimpton is here.

Miller & Chevalier’s Autumn FCPA Review is here.

An informative read here from Professor Peter Henning at his White Collar Crime Watch column in the New York Times titled “Reforming the SEC’s Administrative Process.”

*****

A good weekend to all.

Development From The “Other Universe” – In Dismissing FCPA-Related Securities Fraud Claims, Judge Repudiates FCPA Enforcement Theory

parallel universe

Foreign Corrupt Practices Act issues often co-exist in two parallel universes.

One universe is ruled by all-powerful gods with big and sharp sticks  in which subjects dare challenge the gods.

Another universe consists of checks and balances in which independent actors call the balls and strikes.

The first universe refers to FCPA enforcement by the DOJ and SEC.

The second universe refers to litigation of FCPA-related claims in which judges make decisions in the context of an adversarial legal system. This second universe is often referred to as the rule of law universe.

There are several examples of theories used in the first universe that do not work in the second universe.

For instance, the FCPA enforcement agencies frequently take a seeming “if / then” position when it comes to issuer internal controls.  In other words, if some misconduct occurred somewhere within an issuer’s business organization or if some employee within that organization circumvented the issuer’s internal controls, then the issuer did not have effective internal controls.

However, when this simplistic theory is used in civil litigation, courts have routinely concluded that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient.  (See e.g., Midwest Teamsters Pension v. Baker Hughes, 2009 WL 6799492 (S.D. Tex. 2009);  Freuler v. Parker Drilling 803 F.Supp.2d 630 (S.D. Tex. 2011).

This post concerns the most recent example regarding the parallel universes.

As readers likely know, a recent development in the first universe was the SEC’s enforcement theory in the BNY Mellon (“internship”) enforcement action (see here and here for prior posts) that bribery includes “things of value” provided indirectly to “foreign officials” if the thing of value is subjectively valued by the foreign official.

In the words of the SEC in BNY Mellon, ““The internships [for family members of alleged “foreign officials”] were valuable work experience[s], and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”

Yet, in the other universe a federal court judge recently stated as follows.

“[The FCPA’s anti-bribery provision] does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials.” (emphasis added).

Those words were written by U.S. District Court Judge Melinda Harmon (S.D. Tex.) in dismissing securities fraud claims brought against Hyperdynamics Corporation in the aftermath of its FCPA scrutiny.  (See here for the opinion).

Before discussing the ruling, a bit of background.

It is often as predictable as the sun rising in the east.

When a company is the subject of FCPA scrutiny or resolves an FCPA enforcement action, plaintiff lawyers representing shareholders will emerge like bats from a cave bringing derivative actions and/or securities fraud actions against the company as well as officers and directors.  To learn more about this dynamic, see “Foreign Corrupt Practices Act Ripples.”

For instance, in September 2013 Hyperdynamics Corp. disclosed that it was the subject of FCPA scrutiny (see here for the prior post).  On the day of the disclosure, the company’s stock fell approximately 15%.  As sure as the sun rises in the east, a few days later, not one but two, plaintiffs firms issued releases (here and here) announcing an “investigation” and civil actions soon followed alleging Section 10(b) and Rule 10b-5 claims based on general risk disclosures in SEC filings referring to corruption.

As stated by Judge Harmon (certain internal citations omitted):

“Defendants issued twenty statements disclosing a risk of FCPA violations before they disclosed the FCPA subpoenas.  (“We operate in Guinea, a country where corrupt behavior exists that could impair our ability to do business in the future or result in significant fines or penalties.”). Seven of the statements further revealed Hyperdynamics had found “control deficiencies” in its accounting practices in 2009. (“Some of the identified internal control deficiencies contributing to our material weaknesses in financial reporting relate to our operations in Guinea. These material weaknesses make it more likely that [an FCPA] violation could have occurred.”). The control deficiencies are not identified in the record. Defendants state: “Hyperdynamics had historically had some difficulties—mainly during the period before the management and board were largely replaced beginning around 2009— maintaining adequate internal controls.” Four of the statements specifically deny violations of the FCPA. (“Neither the Company, nor any of its Subsidiaries, nor, to the Knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries, has, in the course of its actions for, or on behalf of, the Company, violated or is in violation of any provision of the [FCPA].”).

Defendants do not contend the statements above were adequate disclosures of FCPA related risks. Defendants tentatively argue: “Plaintiff never meaningfully addresses the Company’s risk disclosure language, including its disclosure beginning in 2009 that certain internal control weaknesses ‘make it more likely that a[n] [FCPA] violation could have occurred.’” Defendants maintain FCPA violations did not occur.

Plaintiffs respond that the disclosures were false or misleading by omission, because violations occurred. Plaintiffs have not, however, established that FCPA violations occurred. The only authoritative evidence in the record that FCPA violations occurred is Hyperdynamics’s disclosure of subpoena requests by the DOJ in September 2013 and the SEC in January 2014.  On March 12, 2014, Hyperdynamics’s partner Tullow Guinea Limited declared these subpoenas a force majeure event but retracted the declaration in May 2014. These disclosures do not establish that FCPA violations occurred or that Defendants knowingly omitted FCPA violations. See Konkol v. Diebold, Inc., 590 F.3d 390, 402 (6th Cir. 2009) (“The mere existence of an SEC investigation does not suggest that any of the allegedly false statements were actually false . . . [,] nor does it add an inference of scienter.” (quoting In re Hutchinson Tech., Inc. Secs. Litig., 536 F.3d 952, 962 (8th Cir. 2008))). Defendants cannot be held liable for not preempting the SEC process and issuing a public confession. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014) (rejecting argument that “in addition to disclosing the existence of an investigation, defendants were required to disclose that [defendant] UBS was, in fact, engaged in an ongoing tax evasion scheme,” because “disclosure is not a rite of confession”).”

Judge Harmon next stated and concluded (certain internal citations omitted):

“Plaintiffs have not alleged FCPA-related facts which would render either the sixteen risk disclosures or the four specific denials misleading by omission and which Defendants had a duty to disclose. Furthermore, Plaintiffs have failed to allege facts which would render the specific denials false or misleading.

The FCPA prohibits a company from making an “offer, gift, promise to give, or authorization of the giving of anything of value” to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity” in obtaining business. This prohibition does not bar a company from giving anything of value to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill, even if the gift indirectly influences government officials. Nor does it prohibit misappropriation by a foreign official without the company’s knowledge.

Here, Plaintiffs have alleged Defendants made donations to the government of Guinea during three phases of negotiations over Hyperdynamics’s concession. Plaintiffs claim these donations constituted bribery under the FCPA. The first donation occurred after Hyperdynamics received a letter in 2005 indicating the government had cancelled its concession. Defendants met with the Secretary General of Guinea at the Presidential Palace and were told the letter was a “fake” but that further review was necessary. On August 1, 2006, Defendant CEO Kent Watts founded a nonprofit organization called American Friends of Guinea for the purpose of making charitable contributions “for the welfare of the Guinean population.”  Shortly thereafter, on September 22, 2006, the government approved the first renegotiated concession.

The second instance of alleged bribery occurred during negotiations from late 2007 to 2009, after the renegotiated concession became a local news story and the government again threatened to cancel it. In September 2007, a delegation led by the Secretary General visited Hyperdynamics’s office in Houston, and vice versa. Over the next year, American Friends of Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who were stricken with cholera and quarantined as a result thereof. AFG also planned new water well projects to get to the source of solving the problem.”  In addition, Plaintiffs cite an  investor forum, www.investorvillage.com, which cites an article from a Guinean news website, www.guinee24.com, stating the Minister Secretary General “disbursed by means of [H]yperdynamics, the sum of five hundred (500) million Guinean francs, which were distributed to some of Ioubards [hooligans] Municipality of Kaloum and other districts in the capital of Guinea. Ioubards [were seen] in the streets two days before the fateful day of the strike of January 10, 2008. . . .”  Plaintiffs allege the “hooligans” supported the President and organized street protests against the Prime Minister. On February 8, 2008, according to a Wikileaks cable,Hyperdynamics CFO Briers met with the U.S. Embassy. The cable states, “Briers raised the issue of FCPA violations” by the Company during the meeting, and did so “without prompting.” Briers denied the Company paid the 500 million Guinea francs to the reported hooligans. Briers also denied Hyperdynamics had paid the Secretary General “to push through their contract.” Plaintiffs argue, “Despite Briers’ denials of specific instances of alleged bribery, his voluntary whistleblowing of FCPA violations further reinforced the Embassy’s view that Hyperdynamics was violating the act.” The cable explains the Embassy declined Brier’s request for assistance in negotiating with the government on grounds that “commercial advocacy would be very difficult, if not impossible, due to the fact that the [U.S. Government] does not recognize the military junta as a legitimate government.” According to another Wikileaks cable, Tidiane Diallo, a new employee of the Ministry of Mines who formerly worked at USAID told the Embassy, “I am sure Hyperdynamics was the minister’s ticket for his appointment.” According to the cable, Diallo based his statement on the fact that “the minister was appointed on August 27 . . . and that Hyperdynamics was at the ministry the very next day. The company’s contract was reinstated a few days later.” Diallo also claimed Hyperdynamics had offered to donate $56 million to the government to pay its annual bill for power plant fuel. The cable states: Diallo reportedly warned the minister of mines to reject the offer, pointing out that it is not clear what Hyperdynamics wants in return, and accepting a “donation” at this point would undermine the [government’s] future bargaining power. He said that the [government] has not yet decided whether or not to accept the funds, but that the ministers of mines and finance may decide to do so because of significant budgetary pressures. The embassy officer asked Diallo directly if the donation was a bribe, and Diallo responded, “yes and no.” Diallo explained, “[O]n the one hand, the offer is public and no one is trying to negotiate a deal behind closed doors. At the same time, the fact that the [government] does not know what Hyperdynamics wants in return raises questions about the company’s intent.” Again, Defendants’ negotiations bore fruit. On September 11, 2009, a Memorandum of Understanding was signed, partially affirming and modifying Hyperdynamics’s concession.  On September 29, 2009, Hyperdynamics made a donation to American Friends of Guinea of stock. On the same day, a director of Hyperdynamics resigned, following the firing of the CEO and resignation of the CFO and another director during the summer of 2009. The concession was approved by presidential decree in May 2010.

The third instance of alleged bribery occurred in 2011, after the concession was again disputed by the transitional government and modified by way of a mining code promulgated in September 2011. Plaintiffs cite testimony from confidential witness CW-1, a former Logistics Operations Manager for Hyperdynamics, alleging Hyperdynamics donated and installed $20,000 of computer equipment for the Ministry of Mines in 2011 and $8,000 to $10,000 of computer equipment for the Guinean Offshore Department of Environment, “an agency that the Company helped to create from scratch.” Plaintiffs do not specify any particular official action influenced by the computer donations. Plaintiffs also fail to plead donations to the government and the American Friends of Guinea constituted gifts to a “foreign official for purposes of . . . influencing any act or decision of such foreign official in his official capacity.”

In sum, Plaintiffs’ FCPA-related fraud claims are based on speculations of uncharged, unadjudicated FCPA violations that are not plausibly material.”

Former Bio-Rad General Counsel Brings Employment Claims Against Company And Executives In The Aftermath Of An FCPA Enforcement Action

Bio-Rad

In recent years several terminated corporate employees have alleged unfair employment practices in connection with some aspect of FCPA scrutiny or enforcement.

Indeed, in 2010 FCPA Professor coined the term “noisy exit” to describe this dynamic.

Last week, Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, filed this civil complaint in federal court (N.D. Cal.) against the company and certain executive officers and board members alleging various unfair employment practices.  In summary fashion, the complaint alleges:

“This matter presents the classic case of whistleblower retaliation. After learning of his employer Bio-Rad’s involvement in extensive bribery occurring in Russia, Thailand, and Vietnam, Wadler investigated evidence of similar violations of the Foreign Corrupt Practices Act (“FCPA”) in China, where corruption is notoriously endemic. Key Bio-Rad officers and directors wanted Wadler to turn a blind eye to this misconduct or sweep it under the rug, but he refused. Instead, and following his mandatory duties under federal securities laws as the Company’s chief legal officer, Wadler investigated this potential criminal activity and reported it up the ladder. When Wadler reasonably began to believe that the conspiracy to violate the FCPA went all the way to the top of the corporate hierarchy, he reported his concerns to the Company’s audit committee. Then, just shortly before Bio-Rad was scheduled to present to the SEC and DOJ regarding the Company’s investigation into potential FCPA violations, the Company fired Wadler precisely because he refused to be complicit in its wrongdoing. A company is not allowed to attempt to silence whistleblowers in this manner.”

Wadler’s complaint asserts various federal and state law claims.

As highlighted in this previous post, in November 2014 Bio-Rad agreed to pay approximately $55 million to resolve DOJ and SEC FCPA enforcement actions.

Wadler’s complaint contains interesting allegations as to the inner-workers of how FCPA allegations were handled at Bio-Rad as well as critical allegations concerning the law firms hired by Bio-Rad to conduct the FCPA internal investigation.

Wadler is represented by Michael Von Loewenfeldt of Kerr & Wagstaffe LLP

Texas Supreme Court Dismisses Defamation Claim Against Shell And Concludes That Providing An Internal Investigation Report To The DOJ Is “Absolutely Privileged”

Defamation

Shell Oil Company v. Writt is a civil defamation case that has been closely followed by the corporate community given its impact on conducting internal investigations and cooperating with government enforcement agencies.

This recent opinion by the Texas Supreme Court will be welcome news to the corporate community because the court concluded that providing an internal investigating report to the DOJ is “absolutely privilege” under the defamation laws.

In terms of background, as stated by the Texas Supreme Court:

“Shell Oil Company and Shell International,E&P,Inc.(collectively, Shell) received an inquiry from the Department of Justice (DOJ) regarding possible violations of the Foreign Corrupt Practices Act by one of its contractors. Shell met with the DOJ, agreed to perform an internal investigation and report the results to the DOJ, and then did so. Robert Writt, who was employed by Shell until his employment was terminated following the investigation, sued Shell for wrongful termination and for defamation. Writt’s defamation claim was based on Shell’s furnishing the DOJ its report that contained allegedly defamatory statements about him. [His defamation claim was based on allegations that in the report provided to the DOJ, Shell falsely accused him of approving bribery payments and participating in illegal conduct.] Shell asserted that it was absolutely privileged to provide the report to the DOJ and moved for summary judgment. The trial court granted Shell’s motion; the court of appeals reversed.”

In the words of the Texas Supreme Court, the court of appeals:

“[H]eld that the summary judgment evidence did not conclusively establish that at the time Shell provided its report to the DOJ a criminal judicial proceeding against either Shell or Writt was ongoing, actually contemplated, or under serious consideration by either the DOJ or Shell. Therefore, the report was only conditionally, not absolutely, privileged. The court reasoned that Shell cooperated with the DOJ during an ongoing investigation and created the report as a part of its own voluntary internal investigation, but that those actions were not enough to conclusively establish that Shell provided the report under a serious threat of prosecution; nor was the fact the DOJ eventually initiated a criminal proceeding against Shell conclusive evidence that such a proceeding was actually contemplated or under serious consideration by the DOJ as of the time Shell provided the report.”

The Texas Supreme Court addressed the following question: “whether the providing of a report regarding possible criminal activity to a government agency was an absolutely privileged communication or a conditionally privileged one.”

As noted by the court, Texas recognizes two classes of privileges applicable to defamation suits: absolute privilege and conditional or qualified privilege. “An absolute privilege is more properly thought of as an immunity because it is based on the personal position or status of the actor. . . . Such immunity, however, attaches only to a limited and select number of situations which involve the administration of the functions of the branches of government, such as statements made during legislative and judicial proceedings.”

Shell argued that an absolute privilege extends to the report and the statements in it because it was furnished to the DOJ preliminary to a proposed judicial proceeding. It argues that the information contained in its report, including information about Writt, was solicited by the DOJ during an ongoing FCPA investigation; Shell compiled and provided the report under serious and good faith contemplation of a judicial proceeding; and those circumstances are sufficient for an absolute privilege to apply.

Writt did not assert that Shell’s providing the report to the DOJ was not privileged; he simply urges that the court of appeals was correct in classifying Shell’s communication as being conditionally privileged. He argued that Shell’s report was provided during an ongoing investigation, but not as a communication preliminary to a judicial proceeding or as part of a quasi-judicial proceeding

The Texas Supreme Court concluded “that Shell’s statements were made preliminary to a proposed judicial proceeding and were absolutely privileged.”

According to the Texas Supreme Court:

“The summary judgment evidence establishes that at all relevant times, Shell was a target of the DOJ’s investigation.”

[…]

“[W]hen the DOJ’s leverage over Shell vis-à-vis the FCPA and its somewhat draconian potential penalties are considered, it is manifest that Shell was, practically speaking, compelled to undertake its internal investigation and report its findings to the DOJ.”

“From the time Shell was first contacted by the DOJ to the time it provided its report to the DOJ, FCPA compliance was of great concern for U.S. businesses operating overseas and potential violations were not taken lightly. Moreover, businesses that chose not to cooperate were subjected to substantially greater punishments if a DOJ prosecution was successful.”

“In sum, the summary judgment evidence is conclusive that when Shell provided its internal investigation report to the DOJ, Shell was a target of the DOJ’s investigation and the information in the report related to the DOJ’s inquiry. The evidence is also conclusive that when it provided the report, Shell acted with serious contemplation of the possibility that it might be prosecuted.”

As noted in the Texas Supreme Court opinion:

“Six former United States Attorneys General, Michael B. Mukasey, Benjamin R. Civiletti, Edwin Meese, III, 1 Richard L. Thornburgh, William P. Barr, and Alberto R. Gonzales, submitted an amicus curiae letter in support of Shell. The Chamber of Commerce of the United States of America, the National Association of Manufacturers, and the American Petroleum Institute submitted an amicus curiae brief in support of Shell.”

See this prior post concerning the underlying 2010 FCPA enforcement action against Royal Dutch Shell.

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