In the legal realm, this summer’s silly season is filled with a heavily discussed decision of the German Constitutional Court (“Bundesverfassungsgericht“, “BVerfG“) regarding the protection of internal corporate documents from seizure by the public prosecutor. In the case underlying the decisions, the Munich public prosecutor had seized various documents relating to Audi’s involvement in the “Diesel-scandal” held in the German offices of the US-based law firm Jones Day.
Short Summary of the Facts
After the US-Department of Justice (DOJ) had initiated criminal investigations against Volkswagen AG, Audi AG and the Volkswagen Group of America, Inc. for the installation of potential defeat devices in certain diesel vehicles of the Volkswagen Group, the Volkswagen AG, in the autumn of 2015, instructed the US-based law firm Jones Day to provide advice and represent Volkswagagen vis-à-vis the US legal authorities. Jones Day then carried out group-wide internal investigations, which also referred to the sphere of Audi AG. Jones Day’s lawyers inspected numerous documents and data and conducted a large number of interviews with employees of the Volkswagen Group. Audi AG allowed the investigation in their sphere, however, gave Jones Day itself no mandate.
In January 2017, Volkswagen AG reached an agreement with the DOJ under a plea agreement to pay a fine of USD 2.8 billion. Volkswagen AG pleaded guilty that “VW” had sold diesel vehicles with impermissible exhaust control devices in the United States. In Germany, appropriate investigations are conducted because of this so-called “diesel scandal” by public prosecutors in Braunschweig and Munich.
Based on an order from the the Munich district court of 6 March 2017, the Munich prosecutor’s office searched the Jones Day offices on 15 March 2017. In total, the prosecutors seized 185 files and binders from a dedicated record room the firm had dedicated in its Internal Investigations on the “relevant facts”. The investigators also secured a large inventory of electronic data.
The constitutional complaints discussed below were directed against the search itself and should prevent an evaluation of the seized data. All three complaints failed.
The BVerfG held that neither
a) Volkswagen nor
b) the US-based law firm of Jones Day nor
c) certain German lawyers of Jones Day
could invoke an infringement of their respective constitutional rights.
a) The BVerfG denied a violation of fundamental rights of Volkswagen AG. Admittedly, VW should also be regarded as entitled as far as data is concerned which mainly or exclusively relates to transactions at subsidiaries (in the case of Audi) (para 62 of the decision). In the context of the decision, the BVerfG then extensively discusses the tensions between various protection norms of the German Criminal Procedures Act (“Strafprozessordnung“, StPO“) and concludes that due to the precedence of § 97 StPO over § 160a (1) sentence 1 StPO the conduct of searches of lawyers’ offices is not precluded, insofar as they are aimed at seizures admissible under § 97 StPO. The court goes on stating that against this background a violation of constitutional rights of the Volkswagen AG is not admissible, since in the present case no relationship (worth protecting) between defender and accused had been established. According to the court, there would, in fact, be a high potential for abuse if the protection against seizure extended to all client relationships regardless of the client’s position in the proceedigs. Evidence could be deliberately transferred to the lawyer’s sphere or only selectively issued; even the bona fide lawyer could be used as a “safe house” for traces of unseen crimes. In particular, large companies may have a particular interest in proctecting certain documents from law enforcement agencies through internal investigations.
b) The BVerfG denied any entitlement of the US-based law firm Jones Day (para 24) because it lacks a domestic legal entity within the meaning of Art. 19 (3) German Constitutional Act (“Grundgesetz“, “GG“). In a very detailed statement, the court then reveals that at least the Munich branch of Jones Day had no organizational independence from the “head office” in Ohio (para37 et seq.). In comparable cases, such “organizational independence” had already led to the protection under the constitution sought-after here.
c) Also with regard to certain individual lawyers of Jones Day, the BVerfG denied the right to appeal (para 35). According to the court, the lawyers could not rely on the fundamental right of the Art. 13 GG (inviolability of the personal apartment), because they are either not entitled as employed lawyers or not entitled as partners, at least when acting on their own, but only jointly by the partners or, as far as their legal capacity is recognized, asserted by the company as such (para 38). However, the legal capacity of Jones Day as such had been denied already. In a similar style, the BVerfG rejects the argument of violations of other fundamental rights.
The BVerfG’s decision smashes the currently US-driven German “culture” of internal investigations: After the so-called “Siemens-scandal” in which slush funds to finance corruption were discovered in the until then highly-reputed German conglomerate around 2006 (cf. for further details here), “internal investigations” literally found their way from the US to Germany. When the SEC ordered Siemens (which is listed on the NYSE) to internally investigate the scandal and share the findings with them, suddenly (German) lawyers from US firms were falling over themselves in the Siemens’ headquarters.
The current discovery process of the “diesel-scandal” is again largely US-driven while the German prosecutors are regularly accused of acting (wilfully?) slow in order to protect the German core industry. While the BVerfG in this cases decided a legal dispute between two lower German courts in favour of a “robust” approach, the decision is not without flaws:
Even taking into consideration that the differentiation of the BVerfG between rights of defendants (and its representatives) and “other legal activities” makes sense and that only in the former case the increased requirements for a seizure have to be met, the reasoning of the decision with regard to Volkswagen AG shows some deficiencies: First, the court sees the Volkswagen AG as a legitimate beneficiary regarding the protection of fundamental rights, as far as data is concerned, which mainly or exclusively relates to transactions at subsidiaries (in the case of Audi) (para 62), only to then not to extend the protection against seizure to the subsidiary, because Audi herself was not a proper client of the law firm (para 104). Furthermore, the BVerfG denies with a rather weak justification an accused-like position (“beschuldigtenähnliche Stellung“) of Volkswagen (which would trigger the protection of § 97 StPO): First, the court quotes the lower courts, which assume such a position, if “a future participation” (“Nebenbeteiligung”) can be derived from objective points of view with “sufficient certainty”(para 93), only to deny precisely this position to Volkswagen AG thereafter, because VW only “feared “such a future procedure against itself (para 94). With a view to the “strong initial suspicion” of the prosecution authorities against Volkswagen AG, based on the signing of the plea agreement as stated in para 109, this explanation is already more than tenuous. In view of the later arrest of the CEO of Audi, Rupert Stadler, on 18 June 2018 (see here), the arguments of the BVerfG seem to be more or less artificial.
Furthermore, from the point of view of client protection, it is questionable that the BVerfG rejects the protection of the lawyers’ offices who are undoubtedly lawfully admitted in Germany, because employed lawyers are not entitled to this fundamental right and partners can only assert this right jointly. As a result, the client protection is too far outweighed, because “a lawyer is a lawyer is a lawyer”. Hence, even in an employed relationship, the law firm might ony restrict the individual lawyer’s powers in a very limited way. Also, in general, the client is not able to differentiate between the employment or corporate law position of the lawyer – which is exactly why the courts have extended the liability for so-called “apparent partners” infinitely (to protect the clients!). Hence, the afore discussed argumentation of the BVerfG is – with regard to the coordination with other areas (keyword: “consistency of the jurisprudence”) – rather inconsistent.
Had the BVerfG at least affirmed “a future participation” of Volkswagen AG (or Audi) , then at least the correspondence between Jones Day and Audi would probably have been protected against seizure.
Key take away – ride on the razor’s edge?
The question is, however, whether a decision of the BVerfG, which at least had respected the aforementiond points of criticism, would have led to a different result: On the one hand, the public prosecutor’s office probably applied for the search / seizure because it did not trust Jones Day’s representations and / or had the suspicion that the VW Group could indeed use Jones Day as a “safe house” regarding the German investigation.
In such a case – even if a search / seizure would not have been permissible – the later decision on the corporate fine against VW would probably be significantly higher, because the VW group could not rely on a new ruling of the German Supreme Court (“Bundesgerichtshof, BGH”), according to which a functioning compliance system has a (reducing) effect on the amount of the fine (cf. here). Because the so-called “compliance of compliance”, ie. the review of compliance violations, would not be fulfilled. In this context, it should also be noted that, contrary to the claim in a well-known German legal journal, that it is “a stone-carved lawyer privilege in the US protects any communication between lawyer and client […]” (here), such protection does not apply in the case here: Quite rightly the colleague Stempfle in an article for another German law journal (January 2016, here) indicates that there are crucial differences between the so-called “Attorney Client Privilege” in the US and the German “ban on seizure”. The simple transfer of the US principle to questions of German seizure law jumps too short. In addition, a total waiver of this privilege is assumed even in the US, if the accused, in cooperation with US judicial authorities, submits a report on the internal investigations to the competent authority (see instructive note of the law firm Mayer Brown Rowe & Maw (here, p.5) and the Skadden website (here) VW issued a “Statement of Facts” in the US, which was the basis of the Plea Agreement (see para 5 of the BVerfG decision concerning Volkswagen). Such reports will probably also be made available to German authorities, and if such a report reveals undiscovered criminal offenses in Germany, the question of avoiding prosecution (a crime under German law!) should also arise. Such findings would obviously endanger any cooperation with the German enforcement authorities.
In addition to these substantive arguments, companies are also faced with the question as to which law firms would even be considered as potential “internal investigators” after these decisions. At least for companies affected by SEC investigations in the US, however, it would make little sense to focus on German, partner-oriented, law firms. The acceptance of a German law firm, which is not subject to US jurisdiction, by the SEC is difficult to imagine. Thus, the US law firms are likely to be forced, at least for Germany and / or for the investigations to establish separate German entities that can rely on the corresponding German fundamental rights. For other cases, it probably makes sense to examine (also against the background of the GDPR) whether investigators domiciled in Germany are preferable.
The organisational particularities of such cases as well as the intended scope of cooperation with the (German and foreign) judicial authorities – which are crucial right at the beginning of the mandate – represent the ingredients for the above mentioned advisor’s “ride on the razor blade”. It remains to be seem whether the German legislator – should he actually create a “corporate criminal law” – also provides for “legal incentives for cooperation through internal investigations” and “the subsequent disclosure of the knowledge gained from this”, “especially with regard to confiscated documents and search options, in order to provide legal certainty for all parties involved”, as provided by the current coalition agreement (see here).