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January 01, 2012

Corporate Defense

Steven Taub

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To:    GyneTech In-House General Counsel

From: Steven Taub

Re:    Corporate Defense


GyneTech needs to move quickly in many different directions. Its first order of business is to get a handle on the facts concerning the drug trial, Diana Gray’s death, and its SEC disclosures. It needs to take steps to ensure that documents and data are preserved. A special committee of independent directors should be appointed to perform a thorough investigation, assisted by independent outside counsel.

GyneTech’s actions should be directed toward keeping control of its witnesses and documents for as long as possible and conducting an investigation that is protected by privilege. GyneTech certainly needs to develop the facts for the civil litigation it now is facing, but GyneTech’s immediate priority is preventing the government from executing subpoenas and search warrants.

The discrete threats faced by GyneTech need to be identified and prioritized. Some of them require immediate action; others should be put on a much slower track. Our initial discussions with GyneTech will be geared both toward developing strategies based on the possible outcomes of GyneTech’s factual investigation and toward taking preliminary protective steps. The issues to be addressed, along with the identification of the required investigations and possible resulting strategies, are discussed in order of priority, favoring the law firm's self-interest, which really means favoring the interests of the founding members of the law firm and their heirs apparent. These arrangements have become more mutual, whether we like it or not. When we lament the death of client or partner loyalty, the truth of the matter is we are lamenting the fact that we have been shaken out of our comfort zones.

1. Proxy Contests for GyneTech: GyneTech has had a really bad couple of days and, as a result, appears to be dramatically undervalued. It must take steps immediately to safeguard its shareholders’ investment. These steps may include an independent valuation, potential proxy defensive measures, possible dismissal of Hank Kauffman for conflict of interest, and an examination of the antitrust issues raised by the MedaStar bid. GyneTech should be able to control the timing of a proxy fight if one is to occur. It can move up the next annual meeting date if such a maneuver might preclude sufficient time for a proxy battle to develop, or it can delay the meeting if it perceives advantages in holding discussions with the dissidents.

2. U.S. Attorney Investigation: GyneTech should cooperate with the U.S. Attorney’s Office. More specifically, GyneTech should make a preliminary voluntary disclosure to the U.S. Attorney’s Office, describing both its upcoming investigation and the steps it already has taken to safeguard documents and data and to ensure future compliance. GyneTech also should seek an agreement that it will be allowed to complete its investigation, without government involvement, in exchange for the full disclosure of non-privileged findings as soon as the investigation is completed. It should seek a similar arrangement with the SEC.

GyneTech’s goal, of course, is to have the U.S. Attorney’s Office decide not to prosecute or to enter into an agreement to defer prosecution. But if the facts show that company employees engaged in serious criminal conduct, the company should be prepared to take action against the employees involved and enter a plea agreement to cut its losses.

3. Claims Against Bass and MedaStar: GyneTech should immediately take action to protect the company and its trade secrets. For example, depending on the terms of Michael Bass’s contract with GyneTech, GyneTech should quickly seek to enjoin Bass from competing with it. Likewise, GyneTech should immediately take steps to stop the disclosure of confidential information.

On the other hand, litigating the merits of Bass’s termination and any harm that Bass caused GyneTech while he was employed by GyneTech are at the bottom of GyneTech’s priority list. To the extent that these issues must be litigated now, GyneTech should focus its attention on the Dawn Pringle matter rather than the drug trial. In fact, GyneTech should position itself to avoid discovery regarding the drug trial in its litigation with Bass and MedaStar even if this ultimately requires voluntary dismissal of its counterclaims.

4. Shareholder Class Action: GyneTech should plan to defend this suit aggressively. The company should argue that it made no misrepresentation concerning its stock and that even if it did, the plaintiffs cannot establish that any misrepresentation caused their loss. Likewise, it should argue that it acted reasonably in ordering a private investigation before disclosing the allegations regarding the drug trials.

If the shareholder suit survives a motion to dismiss, GyneTech should challenge class certification on commonality, typicality, and numerosity grounds. GyneTech should contend that the alleged misrepresentations had an impact on only those shareholders who purchased the stock after the most recent 10-Q. That way, if a class is certified, it should be narrowly defined and sparsely populated.

5. Drug-Trial Class Action: The company’s response to this lawsuit will be tied to the results of its investigation into the drug trials. To formulate a strategy for this lawsuit, the company will have to know whether Diana Gray’s allegations were correct and, if so, the nature of the drug’s side effects. Does any side effect reduce life expectancy? If so, by how much? Does any side effect affect quality of life? How so? Did all patients experience some side effect? If not, how many participants experienced a side effect? Did it vary in severity? How long did it take the side effect to begin, and was this consistent among the drug-trial participants? Did the drug provide benefits to any patients? Did the drug benefit patients who experienced a side effect?

If Diana’s allegations are incorrect, or if the company believes that it can establish that the benefits of the treatment substantially outweighed the side effects, the company should prepare to fight. On the other hand, if the investigation substantially confirms Diana’s allegations, the company should approach this class action as an opportunity to settle and engage in damage control. Depending on the nature of any waivers provided by the drug-trial participants, GyneTech may want to take an early shot at dismissal of this lawsuit; it also should plan to contest class certification as a litigation strategy. But a class settlement prior to discovery may be the best result—if a settlement can be reached before the criminal investigation is concluded.

GyneTech also should immediately give notice to any insurance carriers whose policies might be implicated by this lawsuit.

6. Tracy Vitello’s Claims: If Tracy Vitello files suit, GyneTech should seek to stay these proceedings while the dispute about control of Diana Gray’s estate plays out between Vitello and Jared Bentz. If that is unsuccessful, GyneTech should move to dismiss Vitello’s claims. Depending on the law of the jurisdiction, GyneTech should contend that Vitello lacks standing to pursue a wrongful-death claim because her marriage to Diana is not recognized; the company also should argue that she cannot pursue unfiled whistleblower or intimidation claims. Depending on the pleading and the law that applies, GyneTech should consider raising the failure to state a claim that GyneTech caused Diana’s death. In fact, right now we know of no plausible factual allegations that support a claim that GyneTech is responsible for Diana’s death. If GyneTech’s investigation reveals that an employee is, in fact, implicated in the death of Diana Gray, the company should be prepared to build a case that the employee was acting outside the scope of his or her employment.

If Vitello’s claims survive the initial round of motions, GyneTech should consider its settlement opportunities as long as any settlement is universal—that is, it resolves any and all claims that might be made on behalf of Diana’s estate or by her children.

GyneTech’s Response to Other Parties

Unless its own factual investigation reaches devastating conclusions, GyneTech will survive. In fact, GyneTech may even come out of this mess in a strong position. 
The key for GyneTech is short term: the proxy fight and any resulting takeover battle, the government investigations, and the protection of its trade secrets. Those are the bet-the-company issues. Shareholder suits, tort suits, and wrongful-death suits are inevitable, but such suits do not threaten the company’s very existence. They can be managed, fought, and perhaps even turned to GyneTech’s advantage.

1. Proxy Contests and Potential Litigation with Bass and MedaStar: The competing proxy bids are a red herring and should be addressed fairly easily. Hank Kauffman, the independent board member, plainly is concerned about the potential class and shareholder litigation against GyneTech, and he also is worried about a federal action by GyneTech challenging the proxy disclosures. But Kauffman probably is not interested in making a difficult situation at GyneTech worse and, in the process, putting himself at risk in a criminal investigation. We therefore should try to work out a deal with Kauffman. Given current events, GyneTech is at a transitional point; it has dismissed Bass and faces an uncertain future. A change in the composition of the board to allow some additional representation of Kauffman’s views may do some good, as long as Kauffman is willing to compromise his proxy bid by accepting a minority position on the board. It appears to be in Kauffman’s interest to do so.

MedaStar’s proxy bid was more of a surprise to the GyneTech board. As its counsel likely recognizes, MedaStar’s secret ownership of a portion of one of its main competitors may open it up to an unwelcome SEC investigation; its attempt to swallow whole its main competitor will likely result in antitrust litigation and FDA involvement. We should reach out to MedaStar’s counsel and try to convince him to recommend that his client seriously rethink this strategy and back off its proxy bid.

If that does not work, GyneTech should be prepared to fight MedaStar’s proxy bid both legally and through solicitation of its shareholders. An alliance with Kauffman may be useful in defeating MedaStar’s bid. Counsel for the shareholders may support the company in this proxy fight. MedaStar should have no interest in engaging GyneTech in a fight concerning Michael Bass: It is unclear what Michael Bass brings to MedaStar except  scandal and the promise of litigation.

MedaStar likely will understand that Bass is toxic. Of course, we will not know whether any wrongdoing occurred and, if so, who was responsible, until GyneTech’s internal investigations are complete. But right now, Michael Bass appears to be a likely culprit—and perhaps from GyneTech’s perspective, a convenient one.

MedaStar also must recognize that by employing Bass, it virtually guarantees litigation with GyneTech. It is likely that Bass is obligated to GyneTech by both a confidentiality agreement and a non-competition agreement. Unless MedaStar fires Bass, GyneTech will seek to enjoin Bass from violating those agreements and will file suit against MedaStar for intentional interference with its contract with Bass. GyneTech’s protection of its trade secrets is of preeminent importance, and GyneTech will take every step necessary to protect those interests as well. Depending on how the agreement with Bass is drafted, GyneTech is likely to prevail. It would be smart for MedaStar to terminate Bass, and we should discuss this with MedaStar’s counsel now.

GyneTech’s future relationship with Bass will be more complicated. Undoubtedly, Bass’s counsel recognizes the risk associated with GyneTech and Bass going to war over GyneTech’s termination of Bass. Neither party would benefit from protracted litigation and the inevitable discovery regarding Diana Gray, the drug trials, or GyneTech’s SEC disclosures. Litigation over Bass’s termination will increase the risk of the criminal investigation for both the company and Bass.

Assuming that Bass’s employment with MedaStar terminates and Bass agrees to abide by the terms of his GyneTech contract, the company should try to reach a limited understanding with Bass. First, any litigation should be either voluntarily dismissed with a tolling agreement protecting statute of limitations issues or stayed until the completion of the criminal probe. Second, because Bass appears to have played a critical role in the saga that has engulfed the company, GyneTech should propose that in exchange for Bass’s cooperation in the company’s investigation, including a videotaped witness interview, GyneTech will make relevant documents available for review by Bass’s counsel.

2. U.S. Attorney Investigation: This investigation poses the biggest risk for GyneTech. The company may be able to reach an understanding with the U.S. Attorney to allow the company to control the investigation at the outset. But right now, we do not know the details of the drug trial or whether the company is culpable; for that reason, the outcome of that investigation and the company’s continuing ability to control the criminal probe are far from certain.

GyneTech should decline any request to provide privileged information to the government. Certainly, GyneTech wants to cooperate and get the appropriate credit for its cooperation. But GyneTech does not want, and is not required, to disclose its privileged and work-product-protected information. In fact, for its defense in the coming civil litigation, it will be critical that GyneTech not waive any of its protections.

The Attorney General’s “Principles of Federal Prosecutions of Business Organizations,” dated August 18, 2008, sets limits on what the government can require from a cooperating company. The government is entitled to the facts, but it may not require disclosure of privileged information:

The Department understands that the attorney-client privilege and attorney work product protection are essential and long-recognized components of the American legal system. What the government seeks and needs to advance its legitimate (indeed, essential) law enforcement mission is not waiver of those protections, but rather the facts known to the corporation about the putative criminal misconduct under review. In addition, while a corporation remains free to convey non-factual or “core” attorney-client communications or work product—if and only if the corporation voluntarily chooses to do so—prosecutors should not ask for such waivers and are directed not to do so.

Id. at § 9-28.710 (emphasis added).

Assuming the U.S. Attorney will accept a disclosure consistent with its own principles, GyneTech should be able to reach an understanding that it will conduct a thorough internal investigation and subsequently make an appropriate disclosure. As part of this understanding, GyneTech should seek assurances that, for the time being, the government will do no more in its own investigation than it must do to ensure that documents and evidence are preserved. Thus, although subpoenas will be served, the government will hold off on further investigation (search warrants, grand jury testimony, etc.) while GyneTech’s investigation proceeds.

GyneTech’s investigation and disclosure, if done properly, should make the U.S. Attorney’s more intrusive investigative methods permanently unnecessary. The ultimate resolution of the U.S. Attorney’s probe will be wholly dependent on the findings of GyneTech’s investigation.

3. Civil Suits by Shareholders, Drug-Trial Participants, and Tracy Vitello: With the exception of Vitello’s suit, these suits are likely to be filed fairly quickly. But until the factual record is further developed concerning Diana Gray, the drug trial, and the company’s conduct, the risk involved to the company and the nature of its defenses will be unclear.

At the outset, the company’s strategy should be to delay joining these claims on the merits and, in particular, to prevent substantive discovery from moving forward anytime soon. The U.S. Attorney plainly would like the civil litigants to do some of the investigative work for him; the company wants to prevent this from happening.

Ideally, the company will resolve the U.S. Attorney’s probe, and any other governmental investigation, before getting enmeshed in discovery in these civil cases. Toward that end, the company will file any and all appropriate motions challenging these complaints and will oppose all attempts to take substantive discovery.

With respect to the drug trial, the company would prefer a class action to a mass tort action. The company does not believe that a class action is warranted, and it will fight class certification by arguing that the typicality, commonality, and numerosity criteria are missing. But a class action offers two potential benefits to the company: (1) Class-certification proceedings are likely to delay the start of substantive discovery and, to some extent, change the focus from the company’s alleged bad acts to whether this case is appropriate for class certification; and (2) even though a class settlement would require court approval, such a settlement may well prove less expensive and easier to negotiate than multiple settlements with many lawyers representing individual plaintiffs.

Of course, the company may ultimately be able to prevail on the merits of suits brought by both the drug participants and the shareholders, but that will depend largely on the facts. Those facts are unknown right now. Nevertheless, depending on the results of the company’s investigation, GyneTech might consider a quick and cheap settlement on a class basis of both the shareholder action and the drug-trial participant action if such settlements would help the company deal with the U.S. Attorney.

The company probably will be sued on behalf of the estate of Diana Gray by someone—Vitello, Bentz, or some other representative of the children—at some time. But there will be serious questions about the estate’s standing to pursue whistleblower and intimidation claims on behalf of Diana. And right now, there is nothing more than speculation supporting the claim that the company was in some way responsible for Diana’s death. Without more, such a claim should be dismissed.

In sum, it is clear that the most pressing and serious threat facing GyneTech is the criminal probe initiated by the U.S. Attorney. GyneTech’s strategy should reflect this and focus on controlling that investigation, its documents, and its witnesses to the greatest extent possible for as long as possible. Making the criminal probe the priority also will focus GyneTech’s response in the civil suits. GyneTech no longer can change the facts concerning the drug trial; whatever was done by the company’s employees will be discovered and will come out. But it can control, to some extent, how those facts come out, to whom, and when. And by doing that, GyneTech can try to minimize its exposure in the civil suits, keep the prosecutor satisfied, and reach the best deals possible.


Steven Taub

The author is a partner at Holland & Knight LLP, Washington, DC.