• Cooperation Agreements Pose Serious Risks if Government Reneges
  • March 30, 2006
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • On March 23, 2006, the U.S. Court of Appeals for the Third Circuit reversed a lower court decision enjoining the Department of Justice from indicting Stolt-Nielsen, S.A. (Stolt) for criminal antitrust violations. The court's decision prevents defendants from using a cooperation agreement with prosecutors to avert indictment -- a move that poses serious risks for companies and individuals cooperating with a federal criminal investigation.

    In Stolt-Nielsen, S.A., et al. v. United States, the plaintiffs -- a leading supplier of parcel tanker shipping services, its subsidiary and one officer -- sued the United States to enjoin its anticipated prosecution for criminal antitrust violations. In November 2002, Stolt's former general counsel, who had resigned in March, sued the company, alleging that he had resigned because Stolt had failed to take action to stop illegal collusion with competitors. In response, Stolt conducted an internal investigation and approached the DOJ with an offer to cooperate with a then-pending criminal investigation in exchange for leniency from prosecution. The government agreed, and entered into a leniency agreement. Stolt then provided materials that enabled the government to obtain guilty pleas from co-conspirators and fines in excess of $60 million.

    Once the pleas were secured, the government -- contending that Stolt had misrepresented its action to stop any unlawful activity after discovering the conduct in question as "prompt" -- rescinded Stolt's leniency agreement and pursued prosecution.

    Stolt sued, seeking an order enjoining any prosecution as a violation of its leniency agreement. The district court issued the injunction, holding that, even if true, Stolt's alleged misrepresentation was not a valid basis to rescind the agreement.

    On appeal, the Third Circuit reversed. The court held that, absent a chilling of Constitutional rights such as freedom of expression, the federal courts lack authority to enjoin prospective federal criminal indictments. Instead, the proper method to challenge the government's claimed breach of a leniency agreement or similar arrangement is a post-indictment, pretrial motion. While not directly addressing the issue, the court hinted that denial of such a pretrial motion could not be appealed immediately -- only after conviction.

    If the government reneges on a leniency agreement, that decision cannot be challenged until after indictment -- which means plaintiffs can expect public relations damage and potential civil litigation. Moreover, if a trial judge erroneously rules that the government had the right to rescind an agreement, a defendant must go through the expense and risk of a criminal trial before obtaining appellate review. Companies and individuals who are considering entering into cooperation agreements with federal prosecutors should weigh these risks carefully.