Internal Investigations - The Right Way Lessons Learned from the Trenches

Internal Investigations - The Right Way Lessons Learned from the Trenches

Hale and Dorr Senior Partner Karen Green prepared the following presentation for the Northeast Chapter of the American Corporate Counsel Association in April 2000.

Internal Investigations

Internal investigations are not a new feature of the corporate landscape. The appointment of special counsel to investigate and report on the Securities and Exchange Commission's allegations of wrongdoing was a common feature of SEC consent decrees in the early 1970's. Nevertheless, several recent developments have reaffirmed the value of conducting internal investigations and have made them even more common. These include the adoption of voluntary disclosure programs by various government agencies 1; a 1996 Delaware Chancery Court decision finding that corporate directors have a duty to attempt, in good faith, to assure that an adequate corporate information and reporting system exists and that a failure to do so may render a director liable for losses caused by non-compliance with legal standards 2 ; and the Department of Justice's 1999 issuance of guidelines on the Federal Prosecution of Corporations, which state that a corporation's voluntary disclosure of wrongdoing, cooperation, and remedial measures should be considered in deciding whether to charge it with a crime. 3

The central purposes of an internal investigation are to investigate allegations of misconduct and to lay the foundation for devising and implementing appropriate remedial measures. An internal investigation may be initiated by management or prompted by an external event such as the receipt of a grand jury subpoena or the initiation of a civil lawsuit or agency inquiry. The context in which an internal investigation arises significantly shapes its timing, form, substance, and documentation.

When to Consider an Internal Investigation

Management should consider the advisability of an internal investigation whenever it becomes aware of potential employee misconduct. In so doing, management must bear in mind its duty to act in the company's best interest, as well as the company's potential criminal liability for an employee's misconduct if the employee acted within the scope of his employment and intended, at least in part, to benefit the organization.

The factors militating in favor of an internal investigation are especially compelling -- if not overwhelming -- in the context of a private suit or government inquiry. It is axiomatic that management must do all it can to prepare an informed defense to existing or anticipated allegations of wrongdoing. Moreover, facts uncovered during an internal investigation may argue persuasively against prosecution. The facts may convince the government that as a matter of law, an enforcement action cannot be sustained against the company or, as a matter of policy, that investigative, enforcement and prosecutorial resources would be more effectively utilized if directed elsewhere. An exhaustive review of the facts may, at the very least, offer support for a lighter penalty. An internal investigation that yields corrective action may also reaffirm a company's integrity in the eyes of the government and the general public.

Even outside the context of a private lawsuit or government investigation, a company's potential exposure may militate in favor of an internal investigation. The investigation may be required for the company intelligently to fashion prophylactic or remedial policies and procedures. Against these considerations the company must weigh the investigation's cost and other potential drawbacks, including the potential repercussions if confidentiality is not maintained.

Who Should Conduct the Internal Investigation

If management decides that it is advisable to initiate an internal investigation, management must next determine who will conduct it. This analysis invariably requires selection of experienced counsel.

It obviously benefits the company if its fact finder is sensitive to the full panoply of legal issues raised by internal investigations. Counsel can structure the investigation in a manner that will enhance the application and preservation of the attorney-client privilege and work product doctrine. Counsel can weigh the benefits of and draft joint defense and confidentiality agreements, if necessary. Counsel will be well-versed in the criminal statutes that potentially apply to the process, including those governing perjury, witness tampering and obstruction of justice. At each and every stage of the investigation, counsel can offer substantive guidance about the rights, obligations and liabilities of the company and its employees.

Management should consider whether these functions are best performed by outside or in-house counsel, or some combination of both. At a minimum, management should analyze whether outside counsel is apt to be perceived as more independent, whether in-house counsel is a witness to the events at issue, and whether outside counsel has superior substantive expertise or trial experience to offer. Ideally, counsel should also have a proven track record of dealing effectively with prosecutors and regulators. Cost is another obvious factor to consider.

If in-house counsel is selected to conduct the investigation, he should distinguish clearly between his legal advisory role and his business advisory role. If a court finds that in-house counsel was acting in a business, rather than legal, advisory role, then the attorney-client privilege may not apply, and an advice of counsel defense may be unavailable. If outside counsel is engaged, counsel's retention should be memorialized in a document clearly setting forth that counsel is being directed to conduct an investigation and render legal advice in anticipation of litigation.

Structuring the Investigation

The scope of the investigation and reporting lines should be delineated early on.

It is crucial that at the outset, management and counsel clearly define the scope of the investigation and establish reporting lines. They should consider, among other things, the extent to which the company's outside directors should be involved.

The groundwork should also be laid for preserving the attorney-client privilege and work product doctrine, which together are the principal vehicles for preserving the confidentiality of the ensuing inquiry. These protections attach under strictly-defined circumstances, and a limited waiver of the privilege (even inadvertent) may open the door to a broad inquiry by the government or civil litigants.

Conducting the Investigation

Document analysis and witness interviews are the linchpins of the investigation.

The cornerstones of the internal investigation are: (1) collecting, organizing and analyzing documents; and (2) conducting witness interviews.

The document process commences with the systematic and exhaustive collection of all relevant materials. In the first instance, counsel must familiarize himself with the company's organization, filing system and document retention policy. Once the pertinent universe of documents has been isolated, it must be preserved by photocopying, imaging or otherwise. The documents are then marked for identification and privilege, and organized in a manner that permits them to be processed intelligently. Counsel should consider whether documents should be encoded and summarized on a database to facilitate their efficient retrieval and use.

The isolation of key documents and development of a chronology are central goals of this process. Documents also must be handled in a manner that preserves all applicable privileges.

Witness interviews should be conducted with equal care. Counsel should prepare for interviews by familiarizing himself with pertinent documents. In addition, at the outset of the interview, counsel should make it clear that he represents the company, not the employee, and that the interests of the company and employee may be adverse. Counsel should also explain that the interview is being conducted pursuant to the company's attorney-client privilege, that facts are being gathered so that counsel can advise the company in anticipation of litigation, and that the company has sole discretion to waive its privilege at any time. The interview should be documented in a fashion designed to protect its contents.

An employee with interests potentially adverse to the company's may elect to retain his own counsel. The employee may be entitled under his employment contract, company by-laws, state law, or otherwise to indemnification for his legal expenses under certain circumstances.

Assuming that any applicable joint defense agreement does not compromise the interests of the company, counsel for the company should make every effort to ensure that his communications with the employee or his counsel are protected by the "joint defense" or "common interest" privilege in jurisdictions where it is recognized.

Documentation and Disclosure of Findings

Management must confront the delicate issues of documentation and disclosure.

One of the difficult decisions confronting counsel and management is whether to reduce to writing the findings and conclusions of an internal investigation.

The benefits of a detailed report may include its promotion of the development of policies and procedures tailored to avoid any future misconduct. Other potential benefits flow from disclosing a written report that offers detailed, tangible evidence of a thorough investigation: the report may be used to convince an agency that exculpatory evidence exists, that no misconduct occurred, that any misconduct took place under mitigating circumstances, or that the company has undertaken an in-depth investigation and is well on its way to putting its house in order without government interference; the report may meet disclosure obligations imposed by a government agency; and the report, if compiled in the wake of a shareholder derivative action, may offer compelling documentation of the reasons why the suit should be terminated.

The risks of a written report often outweigh the benefits, however. Applicable rules of evidence may permit any "admissions" to be used against the company in a private or government proceeding. Production of the report may waive privileges otherwise protecting the underlying information, thereby exposing the company to civil or criminal liability. The report may contain assertions that expose both its authors and the company to libel suits.

Any report prepared should be distributed only on a "need to know" basis, with as few copies generated as possible. The report should make clear that it was prepared in response to a request by the company for legal advice. Recipients should be admonished to keep the report and its contents confidential.

Even in the absence of a written report, the company must consider the extent to which the results of its internal investigation should be disclosed. The general rule is that a company has no duty to voluntarily disclose information suggesting criminal conduct. Active concealment, affirmative misrepresentation or partial disclosure will put the company at risk, however. Moreover, certain industries (such as health care), are subject to independent statutory disclosure requirements. The requisite analysis is delicate and case specific; management should consult closely with counsel to ensure that it is fully cognizant of all disclosure obligations that apply.

Even absent a duty to disclose, management may nevertheless conclude that disclosure is in the company's best interest. In addition to the foregoing considerations, management should assess whether it can shield itself from criminal prosecution by taking advantage of a formal disclosure program adopted pursuant to agency guidelines.

Impact of Federal Sentencing Guidelines

The federal sentencing guidelines for organizational defendants are intended in part to reflect the principle that the range of fines for organizations should be based on the seriousness of the offense and the culpability of the organization. Culpability generally is determined by the steps that the organization takes prior to the offense to prevent and detect criminal conduct, the level and extent of involvement in or tolerance of the offense by certain personnel, and the organization's actions after an offense has been committed. The guidelines specifically provide that an organization's criminal penalty may be reduced if it: (1) voluntarily discloses the offense to appropriate governmental authorities within a reasonably prompt time after becoming aware of the offense and before an imminent threat of disclosure or government investigation; (2) cooperates fully in the subsequent government investigation; and (3) clearly recognizes and accepts responsibility for its criminal conduct.

Should management determine that it is in the company's best interest to disclose the results of its internal investigation, then management should carefully evaluate by who, when, and to whom that disclosure should be made. Like the many other facets of internal investigations, this requires an informed analysis of complex factual, tactical, and legal issues.


1 For example, voluntary disclosure programs have been adopted by the Department of Health and Human Services, the Department of Defense, the Securities and Exchange Commission, and the Department of Justice?s Antitrust Division and Environment and Natural Resources Division.

2 In Re Caremark Int'l, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

3 See Department of Justice, Federal Prosecution of Corporations, issued June 16, 1999.

The Attorney-Client Privilege in an Internal Investigation


Corporations often perform internal investigations in response to subpoenas or other government requests for information, calls by employees into company "hotlines," actual or potential litigation, and to develop corporate policy. One of the key issues facing companies performing such investigations is how to ensure that privileged communications and attorney work product remain protected. Without that protection, the results of these often sensitive investigations may be subject to discovery by government agencies and adversaries in litigation. This bulletin addresses the attorney-client privilege in the context of internal investigations and discusses the factors counsel should consider to preserve the confidentiality of the information they collect.

The Attorney-Client Privilege and "Corporate Communications"

Communications shared in the course of an internal investigation, including documents which contain or constitute communications between employees and in-house or outside counsel, are subject to the attorney-client privilege if they are made with a reasonable expectation of, and in confidence between, privileged persons, and for the purpose of seeking, obtaining, or providing legal assistance or advice. 1

In 1981, with the issuance of Upjohn Co. v. United States, the Supreme Court clarified the privileged nature of "corporate communications," holding that such communications are protected by the attorney-client privilege. 2 In Upjohn, the Court rejected a narrow control-group test and upheld the assertion of the attorney-client privilege to protect communications between in-house counsel and mid-level managers. In making its determination, the Court considered the following factors: the communications concerned matters within the scope of the employees' duties; the employees cooperated with counsel at the direction of their superiors; the information was not available from upper-management employees; and the employees were aware that they were being questioned so that the company could obtain legal advice. The Court further noted that the corporation tried to maintain the confidentiality of the information.

Although the cases following it reveal that courts make case-by-case determinations on attorney-client privilege, it is possible to derive a helpful set of guidelines for companies and their counsel performing internal investigations, including:

  1. Employees should be told about the investigation only on a need-to-know basis and should be asked for their cooperation.
  2. Only those employees whose work falls within the scope of the investigation should be interviewed.
  3. Documents containing privileged information should be shared only with employees directly concerned with the matter either to clarify the information or to report it to them (i.e. company management).
  4. All memoranda created pursuant to such communications should be clearly marked as privileged and confidential.
  5. Counsel should endeavor to ensure that the confidentiality of the communications is preserved and that inadvertent disclosures are prevented.
  6. Where non-lawyers are involved in an investigation, they should work only under the guidance and direction of counsel.

Employees Must Be Informed That the Company Is the Client

In addition to the above considerations, counsel performing internal investigations should inform employees who are interviewed or are otherwise involved in the investigation that counsel represents the company; that the attorney-client privilege applies to the company, not to the employee; and, therefore, that the decision whether to waive the privilege belongs to the company. Such a disclosure will help to avoid misunderstandings and conflicts of interest between the company and individual employees and eliminate potential concerns about whether and when a company has the right to waive the privilege.

The Privilege and Former Employees

Companies should also consider the manner in which the attorney-client privilege applies to communications with former employees. Generally, the company maintains the right to assert or waive the privilege for communications with employees, even after they have left the company's employ. Whether a court will uphold the corporation's right to assert or waive the privilege in such a situation, however, depends, in part, on how the company obtained the information. For example, if the former employee can show that he or she believed that the communication at issue was for the purpose of seeking personal legal advice, a court may be reluctant to allow the company to waive the privilege. Further, although not covered by this article, communications between former employees and corporate counsel can implicate joint-defense privileges, which may also limit a company's power to exercise a waiver.

Waiver of the Privilege

Sharing Information with Third Parties . As in any other context, the corporate attorney-client privilege may be waived. Counsel should, therefore, make every effort to ensure that they do not disclose privileged communications to third parties. Whether a waiver occurs will depend on whether the third party is involved in the matter at issue and the nature of that person's role with the company. For example, the disclosure of a communication to a company's auditors, even for the purposes of resolving an issue related to the company's finances, may result in a waiver. 3 In addition, disclosure of information to an underwriter for due-diligence purposes has also been found to be a waiver. 4 Finally, courts usually find that the disclosure of privileged materials to government agencies results in a waiver. 5

In contrast, courts have left the privilege intact when the communication was shared with a consultant or agent whose duties were directly related to the communication. 6 If such consultants are retained specifically for the investigation at issue, counsel should hire and direct them. Further, before sharing communications in these circumstances, counsel should instruct the consultant to maintain the confidentiality of the information shared.

Inadvertent Disclosures . Inadvertent disclosures of information may also result in a waiver. Some courts have taken a very limited view of "inadvertent" disclosures, determining, for example, that the privilege attached to documents mistakenly intermingled with other documents in a production was waived. 7 Many courts, however, now consider the "involuntariness" of the disclosure before determining whether a waiver occurred. Under this less draconian approach to waiver questions, courts consider a variety of factors, including: the reasonableness of precautions taken to prevent inadvertent disclosure; the number and extent of inadvertent disclosures; and the delay or measures taken to rectify such disclosures. 8 Thus, when documents are produced to counsel as part of an internal investigation, counsel should reserve any privileges and design the document review and production procedures to prevent, where possible, the inadvertent production of privileged information to those not involved in the investigation.

Crime-Fraud Exception

Finally, counsel must weigh communications in the context of the "crime-fraud exception." Under the crime-fraud exception, communications concerning completed crimes or frauds are privileged, but those to facilitate future or ongoing crimes, frauds, or torts are not.

Although counsel performing an internal investigation presumably do not consider themselves to be acting in furtherance of a crime or fraud, the facts of the investigation may allow for a challenge as such. For example, if a crime or fraud evolves from legal advice, the privilege may not apply. 9 Indeed, one court ordered a company to produce memoranda its legal counsel had drafted in order to collect information to assist in the defense of ongoing litigation on the grounds that the information was collected in order to further misrepresentations about the safety of a product. 10 In order to prevent any misunderstanding about whether the investigation is for the purpose of developing legal advice, counsel should consider informing interviewees and those from whom it obtains documents both of that fact and of the company's general position on appropriately responding to potentially problematic information it might collect.

Parties seeking to obtain information on the basis of this exception must make a prima facie showing of the immoral or fraudulent activity. Most courts require some evidence that, at the time of the communication, the client intended to commit a wrongful act. 11 Thus, specific evidence of communications, or other information concerning the alleged misconduct, is generally necessary for the other party to win an attack on the assertion of the attorney-client privilege based on the crime-fraud exception. 12


In summary, although communications shared in the course of an internal investigation may raise many difficult issues concerning the attorney-client privilege, companies which follow several basic guidelines are likely to succeed when invoking the privilege's protection. Starting at the beginning of an investigation, companies, through their Boards of Directors or management, must distinguish between business and legal advice, and then specifically request counsel to perform the internal investigation for the purpose of rendering legal advice. When counsel conduct the investigation, they should share information with, and involve only those persons who, by virtue of their position with the company, either have knowledge about the matters at issue or whose duties encompass issues related to the investigation. Counsel should then inform all persons whom they contact that the attorney-client privilege belongs to the company and may be exercised or waived only by the company. And, finally, any information retrieved in the course of the investigation should be designated as confidential and should be maintained in a manner designed to safeguard its confidentiality.


1 See Griffith v. Davis, 161 F.R.D. 687, 694 (C.D. Cal. 1995). Note, however, that communications involving business, and not legal advice, are not protected by the attorney-client privilege, even if those communications involve counsel. Thus, it must be clear that counsel conducting an internal investigation are conducting the investigation to provide legal advice.

2 449 U.S. 383 (1981).

3 In re John Doe Corp ., 675 F.2d 482, 489 (2d Cir. 1982).

4 Id. at 489. See also In re Grand Jury Proceedings, 727 F.2d. 1352 (4th Cir. 1984) (finding information given to attorney for prospectus which never issued was not privileged).

5 Cf. In re Steinhardt Partners, L.P ., 9 F.3d 230, 234-36 (2d Cir. 1993) (voluntary disclosure of materials to Securities and Exchange Commission and Department of Justice waived work-product protection). But see Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc) (disclosure of privileged material to SEC in response to subpoena in nonpublic investigation held to be only "limited waiver").

6 Rager v. Boise Cascade Corp., 1988 WL 84724 (N.D. Ill. August 5, 1988) (discussions between corporate counsel and non-employee hired to assist in handling of unemployment compensation matter for company were covered by privilege, where non-employee acted as employee of company and communication consisted of legal advice); In re Bieter Co., 16 F.3d 929, 939 (8th Cir. 1994) (disclosure of otherwise privileged documents to independent contractor who is "functional equivalent" of employee did not destroy privilege where communications concerned matters within scope of contractor's duties with company).

7 U.S. v. Kelsey-Hayes Wheel Co., 15 F.R.D. 461, 465 (E.D. Mich. 1954) (further noting insufficiency of company procedures for maintaining confidentiality of documents).

8 See, e.g., Parkway Gallery v. Kittinger/Pennsylvania House Group, Inc., 116 F.R.D. 46, 50 (M.D.N.C. 1987).

9 See In re A.H. Robins Co., Inc., 107 F.R.D. 2, 9 (D. Kan. 1985).

10Id. at 14 (finding that company sought attorneys' advice in order to aid in commission of ongoing fraud; therefore, memoranda drafted by attorneys seeking information concerning Dalkon Shield litigation and for purpose of building company's defenses were not privileged).

11 In re Sealed Case, 754 F.2d 395, 399-400 (D.C. Cir. 1985) (finding no privilege where government produced evidence of company's ongoing efforts to conceal wrongdoing with aid of its legal department).

12 Id.

Invoking the Fifth Amendment: Evidentiary Implications of an Employee Assertion of the Privilege as Grounds for Refusing to Testify In a Civil Lawsuit Involving His or Her Employer


Corporations often face multiple legal actions arising out of the conduct of their employees. The same conduct that subjects a corporation to potential civil liability may also expose the corporation, and its employees, to criminal prosecution by any number of federal and state government authorities. One important issue raised by these so-called "parallel proceedings" is how to protect the corporation's interests when one or more of its employees is the subject or potential subject of a criminal investigation and invokes the Fifth Amendment privilege against self-incrimination in a civil suit in which the corporation is a party. It is clear that, under certain circumstances, an employee's refusal to testify, based on the privilege, can be used as evidence of the corporation's liability in the civil action. This bulletin discusses the law on this issue, and suggests strategies for the corporation facing legal attacks on multiple fronts.

The Fifth Amendment

The Fifth Amendment to the United States Constitution guarantees that no person shall be compelled to give self-incriminating testimony. The privilege can be asserted in any civil, criminal, administrative or judicial proceeding. It also applies in the investigative, as well as the adjudicative stage of these proceedings. 1 While the privilege applies only to individuals, not corporations, 2 corporations act through their individual employees. An employee, who may also face personal criminal liability, thus faces a dilemma when called to testify in a civil suit involving his or her employer. The employee's voluntary testimony as to incriminating facts will "waive his privilege with respect to those facts and the details thereof." 3 Government prosecutors could then use the testimony in a subsequent criminal action against the employee. 4 Not surprisingly, employees facing this dilemma often choose, absent immunity, to claim the privilege when called to testify in the civil suit against their employer.

The Adverse Inference

When an individual asserts the Fifth Amendment privilege in a civil action, opposing counsel may inform the jury of the invocation, and it is within the court's discretion to permit the fact finder (whether judge or jury) to "infer by such refusal that the answers would have been adverse to the witness' interest." 5 This adverse inference may be drawn based on a witness' assertion of the privilege in a wide array of civil proceedings, including general civil litigation, 6 administrative adjudications, 7 and in civil forfeiture matters. 8

The assertion of the Fifth Amendment need not occur at trial. It may also occur at other stages of a civil proceeding -- a party or witness may refuse to answer discovery or may refuse to testify in a hearing for injunctive relief or for a dispositive pre-trial motion. 9 Whatever the context in which it occurs, the invocation of the privilege can be used, assuming certain requirements are met, as evidence against the witness and, as discussed below, his or her employer.

Judicial Guidelines for Allowing the Inference

The general rule is that it is within a court's discretion whether to admit a witness' invocation of the Fifth Amendment into evidence in a civil action. "[T]he overarching concern" which governs this decision "is fundamentally whether the adverse inference is trustworthy under all of the circumstances and will advance the search for the truth." 10 Even if the court finds the invocation admissible as trustworthy evidence, it must still determine whether the probative value of the evidence outweighs its prejudicial effect on the fact finder. 11

1. Admissibility

To assess trustworthiness or admissibility, courts will look initially at whether the witness is a party or non-party. If a party, it is well-settled that the invocation is admissible against that party. 12 This is true even where criminal proceedings are pending or might be brought against the defendant claiming the privilege. 13 If both the individual and the corporation are parties, the invocation of the privilege may create, under certain circumstances, an adverse inference against both the individual and the corporation. 14

When the witness is a non-party, however, courts generally engage in a multi-factor, case-by-case analysis to determine whether the adverse inference may be drawn against a party related to the non-party. This area of law is still developing, 15 but a number of circuits have spoken on the issue. 16 The Second Circuit recently listed the following non-exclusive factors for assessing admissibility:

The nature of relevant relationships;

a. Nature of Relevant Relationships

Courts do recognize that a former employee may have an incentive to imply falsely through invocation of the privilege to have engaged in criminal conduct for which the defendant employer would be liable. 18 In cases where the employer can establish that the former employee has an ax to grind, courts appear to be less likely to allow an adverse inference against the employer based on the former employee's invocation of the privilege. Courts look for signs that the former employee retains some loyalty to his former employer as an indication that he is justifiably invoking the Fifth Amendment. The fact that the employer is paying for the former employee's attorney, for example, is evidence that there is a positive relationship -- or at least not a negative one -- between the employer and former employee. 19 Other factors such as blood relationships, personal friendships, ongoing business relationships, and legal relationships also may be factors that would make it less likely that the non-party witness would testify falsely. 20

b. Degree of Control

A number of courts have analyzed employee refusals to testify based on the privilege as vicarious admissions against the employer. 21 Such admissions are admissible pursuant to various jurisdictions' rules of evidence, such as Federal Rule of Evidence 801(d)(ii)(D), which excepts from hearsay a statement offered against a corporate party and made by its "agent or servant concerning a matter within the scope of his agency or employment ... during the existence of their relationship..." If the party vested the non-party with control over key facts and the general subject matter of the litigation, it is likely that this degree of control will be sufficient to allow the adverse inference. 22

The witness' status as a former employee will not preclude evidence of his or her invocation of the Fifth Amendment. 23 If the former employee's assertion of the privilege relates directly to the facts at issue in the case, it is admissible. 24 In Brink's Inc. v. City of New York, the company was accused of negligence relative to its employees' theft of parking meter revenues. The court allowed the adverse inference to be applied to the claim of privilege asserted by the non-party former employees because the question that triggered the claim related to the employees' work. 25

c. Compatibility of Interest of Party and Non-Party Witness

The court in LiButti v. United States instructed that "[t]he trial court should evaluate whether the non-party witness is pragmatically a non-captioned party in interest and whether assertion of the privilege advances the interests of both the non-party witness and the affected party in the outcome of the litigation." 26 This factor naturally requires an analysis of the relationship between the non-party and the party and the degree of control of the party over the non-party.

d. Role of Non-Party Witness in Litigation

If the non-party witness played a key or controlling role in any of the underlying events or the litigation itself, the court will consider that fact in evaluating whether to allow the adverse inference. 27 The ultimate consideration, however, is "whether the adverse inference is trustworthy under all of the circumstances and will advance the search for the truth." 28

2. Weight of the Inference

Admissibility, of course, is not the end of the story. Courts have imposed limitations on the weight accorded the adverse inference. Assertion of a claim of privilege does not prevent an adverse finding or even summary judgment if other evidence supports such a finding and if the litigant does not present sufficient evidence to satisfy his evidentiary burden. 29 In other words, a "party who asserts the privilege against self-incrimination must bear the consequence of lack of evidence." 30 If a party seeks to withdraw the privilege, courts will allow the withdrawal unless the court believes that opposing parties have suffered undue prejudice from the prior decision to invoke the privilege. 31 If, however, the court determines that invocation of the Fifth Amendment privilege was done to abuse or obstruct the discovery process, then the court may adopt remedial measures or impose sanctions to prevent prejudice to opposing parties. 32 The remedial measures may include barring testimony about matters previously hidden from discovery through invocation of the privilege. 33

The adverse inference, however, is "not sufficient by itself to meet an opponent`s burden of proof." 34 Indeed, an adverse inference should be drawn only if other probative evidence of the issue at stake exists. 35 Not surprisingly, courts have been reluctant to force a party to choose between self incrimination in a criminal case and losing a civil case at the summary judgment stage. Allowing summary judgment in such a situation, based solely on the adverse inference, has been construed to be a violation of the defendant's Fifth Amendment protection. 36

3. Rule 403 Prejudice

Even if a court concludes that the invocation is admissible, the judge may exclude it if the prejudicial effect of such evidence substantially outweighs its probative value. 37 Despite the powerful impact that a witness' recitation of the Fifth Amendment may have on a jury, however, the majority rule is that the prejudicial effect in the abstract is not sufficient to exclude evidence that the witness exercised his or her Fifth Amendment right. 38 The principal exceptions to this general rule occur when the evidence of the invocation is unduly emphasized by one of the parties when considered in relation to other key evidence introduced at trial, or when it is suggested to the jury that they should base their entire decision solely on the exercise of the privilege. 39


A corporation's strategies for addressing the host of problems raised by an employee's assertion of the Fifth Amendment in a civil action will vary depending on the nature of the case, and also on the stage of the lawsuit in which the privilege is asserted. Nevertheless, the following guidelines may be useful:

1. Recognize the Conflict and Inform the Employee

As an initial matter, the corporate employer must recognize its potential conflict with an employee whose conduct is the basis for potential civil or criminal liability for the corporation and the individual employee. Counsel performing internal investigations for the employer should inform employees who are interviewed or otherwise involved in the investigation that they represent the company, that the attorney client privilege is the company's privilege, and that the company may waive it. Failure to do so can create the risk of disqualifying the company's counsel and impeding representation of the company's interest.

If the person invoking the privilege is a former employee, the company should consider what evidence it has that the former employee may be using the privilege to retaliate against his former employer. In addition, the company can avoid application of the adverse inference against it by showing that there is no ongoing relationship between the former employee and the company, that the company no longer has any control over the former employee, that the company's interests and those of the former employee are diverse, and that the former employee did not play a key or controlling role in the underlying events.

2. Aggressively Manage Discovery

Once a civil lawsuit has commenced against a backdrop of potential criminal liability, it is imperative for the corporation to prepare for and manage the discovery process aggressively. Employees represented by independent counsel are likely either to refuse to answer discovery requests, or to seek a protective order preventing discovery based on the assertion of the Fifth Amendment. The completion of an exhaustive internal inquiry prior to discovery will provide the corporation with critical information -- i.e., what the employee's testimony would likely be and what evidence contrary to the inference can be used to argue that an inference is inappropriate. The corporation also should establish whether there is any probative evidence aside from the adverse inference. Without that additional evidence, the adverse inference generally will not be drawn.

3. Consider Seeking a Stay of the Civil Action

The employer (or the employee) may also seek to stay the civil action in light of a pending and related criminal matter. Stays, however, are granted only rarely, and usually only if a defendant can demonstrate that parallel civil and criminal actions involve substantially the same facts, and staying the civil action is not likely to harm the public interest. 40 Courts generally find that the public interest and the interests of private plaintiffs trump the defendant's concerns against adverse inferences being drawn in a civil case. While obtaining a stay is a difficult task, it is available under appropriate, but limited circumstances. 41

4. File a Pre-trial Motion to Exclude the Evidence

Assuming that a stay is not granted, an employer should seek to exclude evidence of an employee's invocation of the Fifth Amendment by a pre-trial motion or a motion in limine at trial. The motion should argue that the evidence is not admissible because it is untrustworthy, and that its prejudicial effect outweighs its probative value. If the evidence is in fact admitted at trial, the final step is to request that the court instruct the jury that it may, but need not, draw the adverse inference. 42 Such an instruction allows the jury to reject the adverse inference.


While parallel civil and criminal proceedings pose a serious challenge to corporations with employees facing criminal liability, there are steps that a corporate employer can take to protect its interests in the civil action in which such employees may be called as witnesses. Recognizing the potential conflict between employer and employee and initiating an exhaustive, internal investigation at an early stage are crucial. Although it may not assure success, an aggressive approach to controlling discovery and seeking pre-trial relief, such as obtaining a stay of the civil action, is also important. Finally, an informed analysis of the complex factual, tactical and legal issues must be undertaken as early as possible in the process to better meet the challenge of a potential civil trial in which the company's employees assert their Fifth Amendment right not to testify.

1 See Lefkowitz v. Cunningham, 431 U.S. 801 (1977); Kastigar v. United States, 406 U.S. 441 (1972).
2 Curcio v. United States, 354 U.S. 118 (1957).
3 In re Standard Financial Management, 76 B.R. 864, 865 (Bankr. D. Mass. 1997) (citing Rogers v. United States, 340 U.S. 367 (1951)).
4 See Mid-America's Process Service v. Ellison, 767 F.2d 684, 686 (10th Cir. 1985).
5 Brink's Inc. v. City of New York, 717 F.2d 700, 707 (2d Cir. 1983); see also Baxter v. Palmigiano, 425 U.S. 308 (1976); National Acceptance Co. of America v. Bathalter, 705 F.2d 924, 929 (7th Cir. 1983) (stating that "after Baxter there is no longer any doubt that at trial a civil defendant's silence may be used against him, even if that silence is an exercise of his Constitutional privilege against self-incrimination"); United States v. Lileikis, 899 F. Supp. 802, 804 (D. Mass. 1995).
6 See Brinks, 717 F.2d at 708 (allowing adverse inference to be drawn against corporation in civil proceeding for theft by its employees).
7 See Keating v. Office of Thrift Supervision, 45 F.3d 322 (9th Cir. 1995) (permitting inference to be drawn in Office of Thrift Supervisor enforcement matter).
8 See United States v. Two Parcels of Real Property, 92 F.3d 1123 (11th Cir. 1996).
9 See National Acceptance Co., 705 F.2d at 927.
10 LiButti v. United States, 107 F.3d 110, 124 (2d Cir. 1997).
11 See id. at 124; Brinks, 717 F.2d at 710.
12 See Baxter, 425 U.S. at 316-20; FDIC v. Elio, 39 F.3d 1239, 1248 (1st Cir. 1994); Quintal v. Commissioner of Dept. of Employment and Training, 418 Mass. 855, 861 (1994).
13 See McGinnis v. Aetna Life & Cas. Co., 398 Mass. 37, 39 (1986). If, however, a claimant in a civil case is also a defendant in a criminal case, an adverse inference may not be taken when the claimant is forced to choose between waiving the privilege and losing the case on summary judgment. See Two Parcels of Real Property, 92 F.3d at 1129.
14 See Veranda Beach Club, L.P. v. Western Surety Co., 936 F.2d 1364, 1374 (1st Cir. 1991).
15 See LiButti, 107 F.3d at 120 (noting the "undeveloped posture of the law pertaining to adverse inferences when non-party witnesses invoke the Fifth Amendment in civil litigation").
16 See, e.g., FDIC v. Fidelity and Deposit Co., 45 F.3d 969, 977-78 (5th Cir. 1995) (endorsing case by case analysis; rejecting rule that would bar party from calling non-party witness who had no special relationship to party, merely for the purpose of having that witness exercise his Fifth Amendment right); Cerro Gordo Charity v. Firemen's Fund Am. Life Ins. Co., 819 F.2d 1471, 1481 (8th Cir. 1987) (adopting factor-based case-by-case analysis); RAD Services, Inc. v. Aetna Cas. & Sur. Co., 808 F.2d 271, 275 (3rd Cir. 1986) (holding that mere fact that witness no longer works for corporate party should not preclude evidence of his invocation of the Fifth Amendment); Rosebud Sioux Tribe v. A&P Steel, Inc., 733 F.2d 509 (8th Cir. 1984) (noting that circumstances of a given case, rather than a bright line rule, should govern the admissibility of adverse inferences in civil actions).
17 See LiButti, 107 F.3d at 123.
18 See RAD Serv., Inc., 808 F.2d at 276.
19 See id.
20 See LiButti, 107 F.3d at 123; In re Adler Coleman Clearing Corp., 1998 WL 182808 (Bankr. S.D.N.Y. Apr. 17, 1998).
21 See, e.g., Brink's, 717 F.2d at 710.
22 See In re Adler, 1998 WL 182808 at 8.
23 See RAD Serv., Inc., 808 F.2d at 275.
24 See United States v. District Counsel of New York City and Vicinity, 832 F. Supp. 644, 652 (S.D.N.Y. 1993). See also Brink's, 717 F.2d at 710; Cerro Gordo, 819 F.2d at 1482.
25 Brink's, 717 F.2d at 710.
26 LiButti, 107 F.3d at 123.
27 Id. at 123.
28 Id. at 124 (citing Idaho v. Wright, 497 U.S. 805, 819 (1990)).
29 See United States v. 4003-4005 5th Avenue, 55 F.3d 78, 83 (2d Cir. 1995).
30 United States v. Taylor, 975 F.2d 402, 404 (7th Cir. 1992).
31 See 4003-4005 5th Ave., 55 F.3d at 84.
32 See id. at 84-85.
33 See id. at 85.
34 Custody of Two Minors, 396 Mass. 610, 616 (1985); Frizado v. Frizado, 420 Mass. 592, 596 (1995).
35 See Hasbro, Inc. v. Serafino, 958 F. Supp. 19, 25 (D. Mass. 1997).
36 LaSalle Bank Lake View v. Seguban, 54 F.3d 387, 391-92 (7th Cir. 1995) (emphasizing that adverse interest alone cannot support summary judgment); Securities Exchange Commission v. Graystone Nash, Inc., 25 F.3d 187, 191 (3d Cir. 1994) (reviewing case law on this subject and concluding that preventing party from opposing summary judgment was too draconian a sanction); United States v. Premises, 946 F.2d 749, 756 (11th Cir. 1991) (finding against party on summary judgment due to invocation of privilege violates the Fifth Amendment if invocation deprives party of any defense to summary judgment, not just best one).
37 See. e.g., FRE 403; LiButti, 107 F.3d at 124.
38 See Brink's, 717 F.2d at 710; Cerro Gordo, 819 F.2d at 1482.
39 Cerro Gordo, 819 F.2d at 1482.
40 See SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1376 (D.C. Cir. 1980).
41 As noted by Judah Best and D. Annette Fields in The Practitioners Guide to Parallel Proceedings, in Internal Corporate Investigations: Conducting Them, Protecting Them (Section of Litigation, American Bar Association, Brad D. Brian and Barry F. McNeil eds., 1992), factors which support the granting of a stay include: (1) the actual indictment of the defendant seeking a stay; (2) the civil and criminal actions involve the same issues, but the civil suit is not an enforcement action brought by the government; and (3) the relief requested is narrow, e.g. postponing discovery for a limited time, as opposed to staying the entire action. See, e.g., RAD Serv., Inc., 808 F.2d at 279 n.3; United States v. Certain Real Property, 751 F. Supp. 1060 (E.D.N.Y. 1989); Brock v. Tolkow, 109 F.R.D. 116 (E.D.N.Y. 1985).
42 See Brink's, 717 F.2d at 707.

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