The Yates Memo, One Year Later

The Yates memo hit the trade and legal press with the same kind of resounding thud that accompanied previous DoJ memos such as the Thompson memo, and indeed, more than one prosecution has resulted in the imposition of fines imposed on corporate officers as expected. However, the memo has also affected the way companies think about directors and officers liability insurance thanks in part to the potential for the Yates memo to conquer by dividing.

Deputy Attorney General Sally Quillian Yates inked the memo that bears her name in September 2015, a seven-page document that makes its aims clear in the second paragraph. Yates, whom the Senate confirmed to the position a scant four months earlier, said in the memo, “one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals” believed to have been involved in the wrongdoing.

Yates stopped short of some of the more extreme prescriptions found in the memo named for one of her predecessors, Larry Thompson, whose January 2003 memo seemed excruciatingly close to requiring that corporations leave their executives and officers without the benefit of their directors and officers (D&O) liability policies, not to mention the hazard Thompson’s memo had introduced to attorney-client privilege.

Nonetheless, the Yates memo might seem to drive a wedge between employer and employee. By some accounts, corporations must divulge any and all information about anyone who was involved in the purportedly violative conduct in order to engender any forbearance at all on the part of a federal prosecutor.

If anyone needed to see evidence of this dual individual-corporate accountability at work, the case of North American Health Care provided that evidence. The Department of Justice announced in mid-September that it and NAHC had come to terms over allegations the company had induced false claims for rehabilitation services. The company agreed to pay more than $28 million to settle the case, but two of the company’s executive staff lost a total of $1.5 million, thus demonstrating that Yates meant what she said about individual accountability.

The size of the NAHC penalty was not conspicuous, given the $1.5 billion fine paid by Abbott Labs in 2012 over the company’s promotion of Depakote for off-label indications. On the other hand, the Yates memo would seem to add a new wrinkle to the question of D&O insurance inasmuch as corporations and individuals might have a different set of incentives regarding cooperation. Depending on the circumstances, corporate officers may feel compelled to seek their own representation, particularly when documents begin to show up in a prosecutor’s briefcase.

In addition to the fact that individuals may have less incentive to cooperate than their employer, more than one director or officer could opt for independent counsel, thus raising the cost of fulfilling contractual obligations to provide counsel. In some instances, the cost of counsel for all the affected parties could quickly exhaust the policy’s liability limits.

These considerations are obviously high on the list for a candidate for an executive position with a company or a seat on the board of directors, and those in the life science industries are keenly aware of the intense government scrutiny of their activities, particularly since the FDA off-label promotion issue is as yet unresolved. One way to deal with some of these considerations might be to add a supplementary policy for directors and officers that will handle issues such as a prosecution of individuals that continues after the corporation has come to terms with federal attorneys. There are other considerations to sort through as well.

The Yates memo might not have a profound effect on the size of penalties imposed on accused companies, but adding corporate officials to the list of those who are subject to prosecution certainly raises the stakes where legal costs are concerned. Companies in the life sciences can’t afford to wait until a federal attorney comes knocking to ensure their policies cover such considerations.

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