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It has been evident for some time now that the existence of an internal corporate compliance program is valuable to any company that might face criminal investigation by the federal government. A recent decision by the Delaware Chancery Court underscores the importance of such programs and reveals that they may be equally useful in defending civil claims.

The Organizational Sentencing Guidelines
In 1991 Congress implemented the Federal Sentencing Guidelines for Organizations, which were intended to accomplish the twin goals of deterrence and punishment through the imposition of mandatory restitution, substantial monetary fines, and a variety of other measures. The Organizational Sentencing Guidelines provide that the existence of an internal compliance program to prevent, detect and facilitate the reporting of criminal conduct constitutes a mitigating factor that may justify a significant reduction in the applicable fine or other penalties. The advisability of implementing and maintaining such a program, both to prevent and detect criminal conduct within the organization and as a mitigating factor for sentencing purposes, is therefore clear.

In re Caremark Int’l. Inc. Derivative Litigation
A recent ruling by the Delaware Chancery Court has rendered internal compliance programs even more valuable to corporations, by suggesting that good faith attempts to implement and monitor internal compliance programs should satisfy a director’s duty of care to oversee corporate operations. Thus, the existence of a legitimate compliance program may very well insulate directors from shareholder derivative suits. Equally significant, the Caremark decision suggests that the absence of a compliance program may increase the likelihood of a finding that the directors breached their duty of care.

In In re Caremark Int’l. Derivative Litigation, 1996 WL 549894 (Del. Ch.), certain shareholders filed actions alleging that Caremark’s directors had breached their fiduciary duties to oversee employee conduct and prevent violations of certain federal and state laws and regulations applicable to health care facilities. In approving the settlement proposed by the parties, the Court was influenced by the fact that Caremark had implemented an internal compliance program. The Organizational Sentencing Guidelines establish seven factors that, if adopted, serve as the basis for a qualifying compliance program. The corporation must have:

1. established compliance standards and procedures to be followed by its employees;
2. assigned high-level personnel the responsibility of overall compliance;
3. not delegated substantial discretion to individuals known to have a propensity for criminal conduct;
4. attempted to communicate its standards and procedures to employees;
5. taken reasonable steps to achieve compliance;
6. consistently enforced its standards through disciplinary mechanisms; and
7. taken reasonable steps to respond appropriately to a committed offense and prevent the likelihood of it recurring.

The Court found that Caremark had established an adequate internal compliance program. In so ruling, it made the following specific findings:

1. Caremark had “an internal audit plan designed to ensure compliance with business and ethics policies;”
2. Caremark provided continuing education to sales force personnel regarding compliance with relevant policies and regulations;
3. Caremark prepared and distributed an ethics manual that was revised regularly, and employees were required to participate in training sessions concerning compliance with the law.

Once an appropriate compliance program is in place, in the Court’s view the program is largely determinative on issues relating to the adequacy of the directors’ supervision and oversight of the company. “In my opinion,” the judge wrote, “only a sustained or systemic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists – will establish the lack of good faith that is a necessary condition to liability.” The directors cannot be faulted for the fact that they did not know the specifics of the activities that led to the indictments, if a program is in place which represents a good faith attempt to be informed of relevant facts.

Practice Pointer