Second Circuit ruling gives legal backing to Yates Memo

Corporate legal and compliance departments have reason to celebrate a recent federal appeals court ruling affirming that companies have cause to terminate employees who refuse to cooperate in internal investigations. The decision is beneficial to any company that faces allegations of corporate misconduct and is seeking cooperation credit during a government investigation.

In the case Gilman v. Marsh & McLennan the U.S. Court of Appeals for the Second Circuit agreed with a summary judgment ruling of the U.S. District Court for the Southern District of New York that under Delaware law—which governed the employment contracts at issue in this case—a “cause” for termination includes the refusal by an employee to obey “a direct, unequivocal, reasonable order of the employer.”

Although the Gilman decision may not come as a surprise to many legal and compliance officers—and even though the underlying issue predates the Yates Memo by more than a decade—its significance in a Post-Yates Memo corporate environment establishes for the first time a solid legal framework supporting a company’s right to terminate an employee who fails to cooperate in an internal investigation.

As Compliance Week previously reported, the “Yates Memo,” issued by Deputy Attorney General Sally Yates in September 2015, states that companies must disclose all relevant facts relating to the individuals responsible for misconduct, if the company hopes to receive cooperation credit during that investigation. “This decision seems to give more license to organizations to deal with these issues in a starker way,” says Ronald Zdrojeski, a partner at law firm Sutherland and co-leader of the litigation practice group.

Marsh declined to respond to the decision, other than to say, “We are pleased that this matter has been resolved.”

“Marsh was presumptively entitled to seek information from its own employees about suspicions of on-the-job criminal conduct.”
Second Circuit Court Opinion

Case details

The underlying dispute dates back more than a decade to 2004, when then-New York Attorney General Eliot Spitzer launched an investigation against insurance broker Marsh & McLennan over allegations that some of its employees participated in a bid-rigging scheme by steering clients to particular insurance carriers. Marsh launched an internal investigation of its own into the allegations.

In the midst of Marsh’s internal investigation, an AIG employee—one of the alleged co-conspirators—pled guilty to participating in the scheme, while at the same time implicating two of Marsh’s employees: William Gilman and Edward McNenney. The following day, the AG filed a civil complaint against Marsh, which agreed to cooperate with the investigation in order to avoid criminal prosecution.

As part of its own investigation, Marsh asked Gilman and McNenney to cooperate and be interviewed by outside corporate counsel. Marsh warned them that if they did not cooperate, they would be terminated and would lose access to the bonuses, stock options, and other benefits that had accrued.

McNenney refused to be interviewed and was terminated the following day. Gilman, on the other hand, tried to pull a fast one by scheduling the interview—one day after submitting paperwork purporting to effectuate early retirement, according to the opinion. Later that same day, McNenney’s attorney conveyed Gilman’s refusal to be interviewed. Marsh fired him the next day and did not accept his purported retirement.

In 2008, Gilman and McNenney were found guilty of antitrust charges, but their convictions were thrown out on appeal. That’s when the pair jointly brought a lawsuit against Marsh in the Southern District of New York seeking to recover certain employee benefits that were forfeited upon their termination. The district court, however, dismissed the case finding that Marsh was entitled to terminate them for refusing to cooperate.

GILMAN v. MARSH & MCLENNAN

Below is an excerpt from the Second Circuit Court of Appeals decision in Gilman v. Marsh & McLennan.
Gilman and McNenny argue that the October interview requests were unreasonable, because Marsh had already interviewed them earlier in the year. This is nonsense. In the spring and summer of 2004, the AG was investigating potential civil infractions involving insurance brokers steering clients to certain insurance carriers. Come September, however, the AG shifted focus to a criminal bid-rigging scheme. Then, in mid-October, Gilman and McNenney were named as co-conspirators in the criminal conspiracy and the AG filed a civil complaint against Marsh in which Gilman and McNenney were named. Circumstances had altered and stakes were raised. There is no reason to believe the October interviews would have been duplicative of the earlier interviews; and even if all Marsh sought was updated reassurance, the demand for interviews would have been reasonable. No doctrine limits a company’s inquiries as to allegations of employee misconduct.
Gilman and McNenney also argue that the interviews were intended to produce incriminating evidence that Marsh could turn over to the AG to assist in the looming prosecution of Gilman and McNenney, and that Marsh did that as quid pro quo to save itself from criminal prosecution by the AG. But this argument ignores the incontestable fact that Marsh’s interview requests predated Cherkasky’s October 25 meeting with Spitzer in which (Gilman and McNenney contend)the AG agreed not to prosecute Marsh, and Marsh agreed to waive attorney-client privilege and work-product immunity.
Given the circumstances, Marsh’s demand that Gilman and McNenney explain themselves in an interview under the penalty of termination was unassailable, even routine. It did what any other company would do, and (arguably)what any company should do. Marsh’s interview demands were reasonable and it had cause to fire Gilman and McNenney for refusing to comply.
Source: Gilman v. Marsh & McLennan

Cause for termination

Gilman and McNenney appealed to the Second Circuit, which affirmed the district court’s decision. The question at issue before the court was whether it was reasonable for Marsh to request that Gilman and McNenney cooperate with the investigation. In short, the Second Circuit agreed with Marsh that it was.

“Marsh was presumptively entitled to seek information from its own employees about suspicions of on-the-job criminal conduct,” the court said. “And as corporate officers, Gilman and McNenney had a duty to Marsh to disclose information they had about the AG’s allegations.”

In the course of the AG’s investigation, Marsh’s stock price had plunged, several civil lawsuits were brought against the company, and the CEO was replaced, according to the opinion. “Given the circumstances, Marsh’s demand that Gilman and McNenney explain themselves in an interview under the penalty of termination was unassailable, even routine,” Judge Dennis Jacobs said in the court’s opinion.

“It did what any other company would do, and (arguably) what any company should do,” Jacobs wrote for the court. “Marsh’s interview demands were reasonable, and it had cause to fire Gilman and McNenney for refusing to comply.”

In this case, the court noted that Gilman and McNenney had the personal right not to sit for interviews, but yet that did not immunize them from the consequences of their actions.

“As an employer, you have to distinguish between someone’s personal rights and their obligations as an employee,” says Barbara Hoey, a partner at law firm Kelley Drye. “Those things don’t necessarily mesh.”

What’s more, the court’s decision gives nod to the fact that companies do not have the same level of authority as prosecutors. “A corporation can’t put employees in jail; the most severe action it can take is to fire the employee, and they did that here,” Zdrojeski says.

The court further rejected Gilman and McNenney’s argument that Marsh’s interview demands constituted a “state action,” because Marsh was cooperating with the AG and any incriminating statements they made would be turned over. Thus, they argued, forcing their cooperation with the investigation infringed their Fifth Amendment right against self-incrimination.

The court disagreed. According to the opinion, no evidence supports the argument that the AG “‘forced’ Marsh to demand interviews, ‘intervened’ in Marsh’s decision-making, ‘steered’ Marsh to request interviews, or ‘supervised’ the interview requests,” the opinion stated.

Nor did any evidence support Gilman and McNenney’s argument that the government framed the nature and scope of the pending interviews. “The expansion of Marsh’s internal investigation was precipitated by allegations advanced by the government, but it is not a measure it would have forgone ‘but for’ the AG’s influence,” the opinion stated.

Neither the Yates Memo nor the Gilman decision go as far as to require companies to terminate employees who choose not to sit for an interview; that’s a decision that remains up to the company. 

Broader lessons

What the Gilman decision confirms is that in many cases an employee’s refusal to cooperate in an internal investigation will constitute a valid cause for termination. In the realm of employment litigation overall, the court’s reasoning can apply to a wide variety of cases where an employee’s refusal to cooperate may be grounds for termination, including harassment investigations or other investigations of workplace misconduct, Hoey says.

During any internal investigation, it is best practice to retain one law firm to represent the company and another law firm or investigator to conduct the employee interviews, Hoey says.

The Gilman decision also serves as a reminder about the importance of giving employees advance warning about the potential adverse employment impact of refusing to cooperate in an internal investigation. Consider including this language in employment contracts for senior executives, corporate bylaws, as well as the company’s grievance and internal investigation policy and within the company’s Code of Conduct.

“It’s essential to have those written policies,” Hoey says. “If you don’t have it in your policies, it’s going to be hard to require the cooperation that you need.” To be clear, the threat of termination—or a warning about that potential consequence—will not be the appropriate strategy in every case.

Companies should also be aware that employees do not have the right to have a lawyer present for an internal investigation concerning a civil case. “This question comes up all the time,” Hoey says.

If it involves a criminal matter, on the other hand, that’s when companies have an obligation to give employees clear notice about their rights, letting them know that information given during the investigation will be shared with senior executives, the board, and maybe even with criminal authorities.

“They have to weigh whether to consult a lawyer,” Hoey says. “It’s a case-by-case decision. It really depends on the situation.”

Moving forward, it’s likely that other courts and defense counsel will cite the Gilman decision in other cases in which employees refuse to cooperate in internal investigations. “The decision on its face seems well-reasoned,” Zdrojeski says. That being said, only time will tell how other circuits will come down on future cases.