FCPA Lawsuits - They're Not Just for the GovernmentAugust 15, 2011
As has been widely reported, over the last five years the Department of Justice and the U.S. Securities and Exchange Commission have initiated an unprecedented number of investigations and prosecutions premised on alleged violations of the Foreign Corrupt Practice Act ("FCPA"). Although 2011 actions are off to a relatively slow start (only 19 total new enforcement actions as of June 30, 2011, compared to 74 new enforcement actions during 2010), companies should expect the aggressive enforcement trend by the government to continue. Indeed, DOJ recently named a new lead FCPA prosecutor, added two assistant chiefs, and increased the number of line prosecutors in the unit.
But the government is not the only plaintiff with corporate America in its crosshairs. More and more, private plaintiffs are finding creative ways to bring civil actions based in part on alleged FCPA violations.
Shareholder Derivative Suits
The most common category of private civil actions is shareholder derivative suits alleging failure to manage risk appropriately so as to prevent the company from violating the FCPA. In bringing these actions against officers and directors, opportunistic plaintiffs hope to bring directors and officers ("D&O") insurance coverage into play -- all with the hope of extracting potentially lucrative settlements.
Almost all of the civil suits arising out of alleged FCPA violations claim that board members breached fiduciary duties by failing to implement or maintain compliance programs necessary to avoid FCPA violations. Shareholders have filed suits both at the inception of government investigations and after the conclusion of the government's case. For example, shortly after Bio-Rad Laboratories filed its Form 10-K with the SEC last year reporting likely FCPA violations, a shareholder (the City of Riviera Beach General Employees' Retirement System) sued the company and its directors alleging failure to employ appropriate compliance oversight.1 Likewise, shortly after Johnson & Johnson settled criminal and civil FCPA actions with the government in April 2011, shareholders filed a derivative suit claiming breach of fiduciary duty as a result of the company's failure to implement controls necessary to prevent bribery of foreign public officials.2 Each suit remains in the preliminary pleading stage.
FCPA Compliance as a Defense
A plaintiff bringing a shareholder derivative action must overcome the business judgment rule, and establish that the defendant acted fraudulently or in bad faith. Not surprisingly, in addition to technical procedural arguments applicable to derivative claims, the business judgment rule also serves as a primary defense to civil FCPA-based claims. Companies that have established robust FCPA compliance programs, and that conduct thorough internal investigations when potential violations come to light, should be well positioned to defend derivative actions based on alleged FCPA violations.
For example, in July 2010, shareholders filed suit against Avon Products and its board alleging that the directors failed to establish sufficient anti-corruption compliance controls, thereby causing or otherwise enabling company employees to bribe various foreign officials.3 After learning about alleged violations of the FCPA, Avon conducted a thorough internal investigation led by outside counsel, with oversight from the company's Audit Committee. After the investigation, Avon voluntarily reported its findings to the SEC and DOJ, and continued to cooperate with those agencies.
Avon moved to dismiss the shareholders' complaint arguing, among other things, that the plaintiffs failed to allege that Avon's board acted in bad faith or that it committed fraud. Indeed, the facts allowed defendants to argue (persuasively) that Avon's board exercised sound business judgment by hiring outside counsel, conducting an investigation, and reporting its findings. Furthermore, because it acted at the direction of outside counsel, Avon was able to argue that its board members fulfilled their fiduciary duties, and did not act in their own self-interest. Avon is currently awaiting a ruling on its motion.
Other Private Litigation
Shareholder derivate suits are not the only potential avenue for litigation by private plaintiffs when a FCPA violation comes to light. For example, competitors have brought civil antitrust suits alleging that winning bidders unfairly obtained foreign government contracts by bribing foreign officials in violation of the FCPA.4 Foreign governments have even taken their turn as plaintiffs: In 2008, the Iraqi government filed a lawsuit in federal court in New York alleging that several companies breached their fiduciary duties and committed fraud when they paid kickbacks to the Hussein regime in connection with the U.N. Oil-for-Food program.5 Companies also have faced wrongful termination claims brought by former employees alleging that they were terminated for refusing to engage in conduct that violated the FCPA.6
As the government continues its aggressive FCPA enforcement, the plaintiffs' bar will seek independent avenues of recovery on behalf of their clients. Regardless of the difficulty plaintiffs may have proving their claims, these lawsuits are often expensive to defend. By putting in place effective controls to help prevent FCPA violations and by reacting appropriately once a violation is discovered, however, a company can dramatically lower its risk of paying a windfall to private plaintiffs.
1 Bio-Rad Laboratories, Inc., March 31, 2011, Form 10-Q, Section 12 (Legal Proceedings).
2 Wollman v. Coleman, No. 11-cv-02511 (D.N.J. filed May 2, 2011).
3 White v. Jung et al, No. 10-cv-5560 (S.D.N.Y. filed July 21, 2010).
4 See e.g. NewMarket Corp. et al. v. Innospec Inc. et al., No. 3:10-cv-00503 (E.D. Va. filed July 23, 2010).
5 See Republic of Iraq v. ABB AG, No. 08-cv-05951 (S.D.N.Y. filed Jun. 27, 2008).
6 See e.g. Jacobs v. Las Vegas Sands Corp., A-10-627691-C, (Clark County, Nevada, filed October 20, 2010); Lowe V. Allison Transmission, Inc., 49D10-10-11PL049493, (Marion Superior Court, Indiana, filed November 15, 2010).