Corporations have long relied on the ability to resolve regulatory enforcement actions by paying a monetary penalty and executing a settlement agreement in which they “neither admit nor deny” the government’s allegations. However, recent scrutiny of these settlement clauses suggests that they may be on the way out.
Through the use of “neither admit or deny” clauses, a defendant is not required to admit to the regulatory authority’s allegations of wrongdoing, but is also not permitted to deny the factual allegations set forth in the complaint. For many years, the policy was considered a win-win for everyone involved. Government agencies could enact punishment quickly and without expending significant resources, while companies protected themselves from further legal action by failing to concede they violated the law.
Courts, however, seem to be growing tired of the status quo. In a recent regulatory enforcement action, a commissioner of the Federal Trade Commission questioned whether Facebook Inc. should be allowed to resolve an FCC action while still denying that it violated its users’ privacy rights. The Facebook settlement goes beyond “neither admit nor deny” by stating Facebook “expressly denies the allegations set forth in the complaint, except for the jurisdictional facts.” Google recently brokered similar terms in a settlement related to its alleged privacy violations.
This doesn’t sit well with Commissioner J. Thomas Rosch, who pointed out in his dissents that the Federal Trade Commission Rules of Practice do not even provide for such a denial. In his Google dissent, he wrote, “[I] dissent from accepting this consent decree because it arguably cannot be concluded that the consent decree is in the public interest when it contains a denial of liability.”
Settlements with the Securities and Exchange Commission have also come under scrutiny. Judge Jed S. Rakoff famously rejected a settlement between the SEC and Citigroup earlier this year and has become one of the most vocal critics of “neither admit nor deny.” In an appeal to the Second Circuit Court of Appeals, he argued that the SEC is asking him to rubber stamp settlements without the parties providing the necessary information to determine whether the settlement is indeed fair.
While the SEC still defends its “neither admit nor deny” policy, the agency has made some changes. It now prohibits the use of the clause in settlements where a company has admitted guilt in a related criminal case. At least one SEC commissioner has indicated that the agency may consider expanding the policy to other situations, such as when a company has admitted to certain conduct to another government agency.
Of course, disallowing “neither admit nor deny” settlements will likely deter many companies from settling fraud cases, as admitting to any wrongdoing opens the door to private lawsuits. For both companies and the government, the alternative would be resolving the often-complex cases through time-consuming and costly litigation.
It will be interesting to see if these settlements continue to receive scrutiny. While they could simply be a knee jerk reaction to the corporate misdeeds of the financial crisis, they could also represent a sea change that could dramatically impact corporate liability.