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19.07.2018 | KPMG Law Insights

Internal company investigations – The Jones Day decision

The Jones Day Decision: Competitive Disadvantage for Non-EU Law Firms, Corporate Criminal Law as the Saving Answer, and the Demise of Internal Investigations?

On June 27, 2018, the Federal Constitutional Court ruled on a total of five constitutional complaints and decided that the search of the law firm Jones Day commissioned by VW in connection with the diesel issue and the seizure of documents in the course of investigative proceedings conducted against the Group subsidiary Audi were not constitutionally objectionable. VW had hired Jones Day to conduct internal investigations. Audi itself, however, had no client relationship with Jones Day. The Munich public prosecutor’s office is now allowed to evaluate numerous files and electronic data that were located in the office rooms, and thus the results of the questioning of several hundred VW employees as well as internal e-mails and documents, and use them against Audi. The decision of the Karlsruhe judges will initially result in direct disadvantages for non-EU law firms in the competition for being commissioned with internal investigations. However, the decision leaves the companies themselves in a dilemma: on the one hand, they have to conduct internal investigations; on the other hand, there is the risk of incriminating themselves, Group companies or employees as a result. It is possible that corporate criminal law – which is widely criticized – will be the solution here if the defendant/prosecution rights for companies planned by the grand coalition are introduced. However, not having internal investigations conducted at all or having them conducted by external lawyers until the legislature takes action in the meantime is not an option. In the future, however, against the backdrop of the decisions made in shaping the individual client relationship, a great deal of tact and profound legal expertise will be required in order to effectively protect the client.

Competitive advantage of German law firms

The Federal Constitutional Court rejected the constitutional complaints of the law firm Jones Day on the grounds that Jones Day, as a law firm organized as a partnership in the U.S. legal form of a partnership, could not invoke substantive fundamental rights. In the present case, the fact that one of its German offices (in this case, the Munich office) is affected by sovereign intervention measures does not mean that its constitutional complaints are to be treated in the same way as those of a domestic legal entity. Since only three of the more than 40 offices of the globally active law firm are located in Germany, whereas most of them are in the USA, it cannot be assumed that its principal place of business is in Germany or another EU member state. It also cannot be assumed that the Jones Day office in Munich has an independent organizational position (2 BvR 1287/17/; 2 BvR 1583/17). The Federal Constitutional Court rejected the constitutional complaint of the German lawyers of the law firm Jones Day on the grounds that they were not affected in their own fundamental rights (2 BvR 1562/17).

This means that law firms with a structure like Jones Day cannot invoke fundamental rights, either directly or indirectly, to prevent access by German law enforcement authorities to documents evaluated or produced in the course of internal investigations. As a result, such law firms have a direct competitive disadvantage on the German market compared to law firms organized under German law or in a legal form of another EU member state – at least as long as non-EU law firms do not structure “fundamental rights”. The question of whether to move the administrative headquarters to the EU or to choose a different legal form may also have to be asked by British law firms against the backdrop of the Brexit.

Corporate criminal law as an opportunity?

The Federal Constitutional Court also rejected VW’s constitutional complaints. In doing so, it dealt in detail with the question of whether the attorney-client privilege applied in the relationship between VW and Jones Day and whether the documents that originated from the internal investigations and were held by the law firm were therefore covered by the prohibition on seizure. The Federal Constitutional Court came to the conclusion that the opinion of the lower court was justifiable: In the opinion of the Munich Regional Court I, the prohibition of seizure under Section 97 of the Code of Criminal Procedure only applies within the framework of the relationship of trust between a lawyer and a defendant in the specific investigative proceedings – but VW is precisely not the latter in the investigative proceedings against Audi conducted by the Munich Public Prosecutor’s Office. A position similar to that of an accused, which entails protection against seizure, cannot be assumed if a company – as in this case – commissions an internal investigation. Rather, the initiation of proceedings against the legal entity as an addressee of an association fine or as a party to confiscation must be objectively apparent. It is not necessary that criminal or administrative fine proceedings have already been instituted against a manager of the company within the meaning of Section 30 (1) of the German Stock Corporation Act (AktG). 1 OWiG was initiated – but there must be “sufficient” suspicion of a criminal offense or breach of supervisory duty committed by a specific management person within the meaning of Section 130 OWiG. The mere possibility or probability of a violation by a management person is not sufficient (2 BvR 1405/17; 2 BvR 1780/17).

The decision of the Federal Constitutional Court outlined above is not an encouraging signal for all companies that – quite rightly – see internal investigations as an effective compliance measure and also places companies in a dilemma: On the one hand, there is the obligation to clarify compliance incidents (i.e. to collect, prepare and secure evidence, among other things) that follows from the duty of legality under company law and from Section 130 OWiG. On the other hand, the results of this clarification can be used by the criminal prosecution authorities against the company itself, group companies or employees, as long as these are not (potential) “defendants” in an investigation and, moreover, do not themselves have a client relationship with the law firm being searched. This establishes a precarious proximity to the prohibition of self-incrimination.

However, the reasoning must be appreciated against the background that the currently applicable provisions of the law on administrative offenses, which permit the imposition of fines on companies under certain conditions, contain a high degree of legal uncertainty. Statutory regulations on procedural rights of companies – such as in connection with internal investigations – are completely lacking. The now decades-old discussion on the introduction and design of a corporate criminal law has gained considerable momentum in recent years. The CDU/CSU and SPD have also recognized the need for action. In the coalition agreement of February 7, 2018, the grand coalition agreed to revise sanctions law for companies. In the course of this, legal requirements for internal investigations are to be created, particularly with regard to seized documents and search options. In addition, statutory incentives are to be provided to assist in clarification through internal investigations and subsequent disclosure of the knowledge gained from these investigations.

Corresponding regulations are contained in the currently available “Cologne Draft of an Association Sanctions Act” (VerbSG-E). § Section 18 VerbSG-E provides, among other things, for a prohibition of seizure with regard to records of internal investigations.
It remains to be seen whether the legislature will follow the Cologne draft in this respect. However, companies that have so far followed the discussion on the introduction of corporate criminal law with some concern could reconsider their position in view of the signal from Karlsruhe. This is because the planned regulation of procedural rights of companies, not least in connection with internal investigations, could be the legislature’s response to the Jones Day decision.

Demise of internal investigations as a result of the Jones Day decision?

Does this mean that internal company investigations are “dead” in the meantime? No. As explained, not investigating compliance incidents is not an option. Doing this with internal resources is often not feasible in practice, if only because the necessary know-how is lacking. Moreover, in case of doubt, the use of in-house lawyers even offers significantly less protection than the use of external lawyers.

In this respect, hiring external lawyers remains the best possible option. However, this requires profound legal expertise and tact, particularly when it comes to structuring the specific client relationship, especially in the case of corporate groups, in order to provide the individual client with the most extensive protection possible when representing him vis-à-vis investigating authorities and courts.

 

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