Department of Justice Settles FCPA Violation with DPC (Tianjin) DOJ’s Endorsement of Limited Waiver of Privilege May Represent New Direction

International Alert
05.27.05

On May 20, 2005, the Department of Justice (“DOJ”) filed a one-count criminal information against DPC (Tianjin) Co. Ltd., a Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation (“DPC”), charging the company with violating the Foreign Corrupt Practices Act (“FCPA”). The charges stemmed from DPC Tianjin’s practice of paying “commissions” to physicians and laboratory personnel in government-owned hospitals in the People’s Republic of China. Simultaneously, DOJ announced that it had reached a plea agreement with DPC Tianjin resolving the charges. The plea agreement includes many terms that have become common in recent FCPA dispositions. However, this agreement stands out because of its jurisdictional basis, coverage of actions beyond the applicable statute of limitations, and its provisions regarding privilege issues that may arise under the agreement.

Pursuant to the plea agreement, in which the company admitted to having violated the FCPA, the company is to pay a penalty of $2 million, adopt internal compliance measures, cooperate with ongoing criminal and Securities and Exchange Commission (“SEC”) civil investigations, and appoint an independent monitor to audit the company’s compliance program and monitor the implementation of new internal policies. Separately, the SEC ordered DPC, the parent company of DPC Tianjin, to cease and desist from violating the FCPA, appoint its own independent monitor, and to disgorge approximately $2.8 million in profits relating to DPC Tianjin’s improper payments.

DPC Tianjin is a foreign corporation and jurisdiction was premised on the fact that it was an agent of an “issuer” its parent company DPC. The complaint and plea agreement reference only limited contact (faxes, telephone calls, and emails) with the United States, but the FCPA’s jurisdictional reach over “agents” of issuers requires merely the use of interstate commerce related to some act in furtherance of an improper payment.

This is one of only a few cases to rely on this jurisdictional hook, but its use here is additional evidence of U.S. enforcement agencies’ abilities to reach the activities of foreign affiliates despite their technical exclusion from the statute’s jurisdictional reach.

Both the DPC Tianjin plea agreement and the SEC Order regarding DPC discuss payments as far back as 1991. Indeed, the disgorgement of profits equals DPC Tianjin’s total profits from 1991-2002. Thus, it appears that the government successfully punished activity that was beyond the FCPA’s five-year/eight-year statute of limitations.

The appointment of an independent monitor as part of plea agreements relating to FCPA violations has gained increasing popularity with the DOJ and SEC. Indeed, seven of the last eight FCPA dispositions have required an independent monitor. The DPC Tianjin plea agreement requires that the monitor shall review the company’s ongoing compliance with the agreement and its implementation and compliance with FCPA policies and procedures. The monitor is also required to report to the DOJ and the SEC regarding the company’s compliance and any SEC requests for information regarding the company.

However, an ongoing concern for companies entering into agreements providing for the appointment of an independent monitor is the survival (or demise) of the attorney-client privilege and work product protections when the company shares information with the monitor and when the monitor shares information with the government. Given the possible range of communications that occur between a company and its monitor, any absence of privilege potentially could open those communications to third parties, including potential litigants. In other contexts, such as voluntary disclosures, the SEC has agreed to the concept of a limited waiver, whereby the agency considers the privileges waived only to the agency, and not to any third parties. Despite most courts’ rejection of the concept of limited waiver, the SEC has continued to press companies under investigation for such waiver agreements.

Pursuant to the plea agreement, to the extent there is any claim that the attorney-client privilege or work product protection applies to communications between the company and the monitor (by its terms the agreement purports to require that no attorney-client relationship exist between DPC Tianjin and the monitor), DPC Tianjin has agreed to waive those protections “only” as to the SEC, DOJ and the U.S. Attorney’s Office. Moreover, in language not seen before in such FCPA agreements, the agreement specifically provides that: “The sharing of such [privileged] communications by the Monitor with the DOJ and the SEC is not intended to constitute a waiver of any privilege under any federal or state law that would shield from disclosure to any other third party any such communications.”

While it remains to be seen whether courts construing such agreements would uphold the concept of limited waiver as applied to third parties seeking disclosure of such information, the new willingness of the DOJ to include limited waiver language in plea agreements requiring a monitor may signal increased support for the concept of limited waiver. Given the different context in which monitors operate, it is not necessarily the case that previous court rulings rejecting the limited waiver concept will control the resolution of whether a limited waiver might have validity in the context of monitor communications. Miller & Chevalier will continue to evaluate developments in this area and issue alerts as appropriate.

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