Upsetting the Apple Cart?

Observers of federal compliance monitors are accustomed to seeing them appointed after negotiation, commonly by deferred prosecution agreements (DPAs) in criminal matters or by consent decrees in civil matters. The monitorship in the Apple e-books antitrust case is a notable exception, in that the monitor, Michael Bromwich, was appointed by injunction after trial. The litigation surrounding the Apple monitor's appointment illustrates pitfalls that can arise when monitoring relationships become adversarial, and it provides useful guidance for the future.

The Case

On July 10, 2013, following a bench trial, Judge Denise Cote of the Southern District of New York found for the plaintiffs (the Department of Justice [DOJ] and more than 30 states and territories), and concluded that Apple conspired with major book publishers to raise e-book prices collectively, in violation of Section 1 of the Sherman Act. U.S. v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013), aff'd, 791 F.3d 290 (2d Cir. 2015). Judge Cote issued a permanent injunction and appointed the external monitor, pursuant to the Master provision of Fed. R. Civ. P. 53(a).

The monitor was tasked with evaluating Apple's new antitrust polices, procedures and training program, and recommending changes to address any perceived deficiencies. In the injunction, the court required Apple to “assist” the monitor and “take no action to interfere with or to impede” the performance of his responsibilities. U.S. v. Apple, Inc., 2013 U.S. Dist. LEXIS 129727, at 24 (S.D.N.Y. 2013). The injunction also required Apple to compensate him “on reasonable and customary terms” commensurate with his expertise. Id . at 25.

The relationship between Apple and its monitor was contentious from the start, with the two at loggerheads over a number of issues. Apple recoiled at an hourly fee of $1,265 (later reduced to $1,000 during mediation), and clashed with the monitor over access to board members, executives and employees. The monitor, for his part, complained that Apple was dragging its feet and had adopted a confrontational approach.

Less than two months after the appointment, Apple sought to stay the injunction pending appeal of the judgment, and to disqualify the monitor. Apple alleged, among other things, that the monitor's hourly fee created a perverse incentive to request interviews and documents and expand his role. The plaintiffs opposed the stay application, attaching a declaration from the monitor defending his conduct. In response, Apple complained that the submission revealed that the monitor and the plaintiffs had collaborated, which, it argued, required disqualification.

The court rejected Apple's application, holding that neither Bromwich's fee nor his affidavit supporting the plaintiffs' opposition to the stay request was a basis for disqualification. U.S. v. Apple Inc., 992 F. Supp. 2d 263 (S.D.N.Y. 2014). Earlier this year, the U.S. Court of Appeals for the Second Circuit affirmed, in an opinion by Judge Dennis Jacobs. U.S. v. Apple Inc., 787 F.3d 131 (2d Cir. 2015).

Analysis

The Second Circuit's opinion is remarkable in several ways. Most significantly, while disclaiming broad jurisdiction to scrutinize the monitor's appointment and powers, Judge Jacobs seemed to go out of his way to arch his judicial eyebrow (“[S]ome of Apple's allegations against the monitor give us pause”) at interactions that, in the world of monitorships, at least, are not uncommon.

According to the DOJ's public guidance on monitors, “[a] monitor's primary responsibility is to assess and monitor a corporation's compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation's misconduct.” Memorandum from Craig S. Morford, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations, at 2 (March 7, 2008). An experienced monitor like Apple's, therefore, would expect to have easy access to personnel and documents, and would likely anticipate private contact with the appointing authority. He would also expect full cooperation from the company.

But unlike the assumption underlying the DOJ guidance, the Apple case did not involve any agreement at all, only an injunction against a well-funded defendant that chose to have outside counsel lead its interactions with a monitor that had been imposed over its objection. The clashes that followed gave the Second Circuit the rare opportunity to comment on the monitor's authority ' commentary that was not particularly pro-monitor.

For example, the court faulted the monitor for submitting a declaration in conjunction with the plaintiffs' brief ' an act the court, while not declaring it disqualifying, called “the opposite of best practice for a court-appointed monitor.” A judicial-type officer, the court explained, should file documents “independently” and “not through one party or another.” 787 F.3d at 138.

Nor did the court take kindly to the monitor's “attempts to circumvent counsel retained by Apple” by contacting company personnel directly. 787 F.3d at 140. Notwithstanding the monitor's stated concern that Apple had been using counsel as a shield, the court was clear that as an arm of the court, he should not be seeking ex parte contact with directors and employees. See 28 U.S.C. ' 455; Code of Conduct for United States Judges, Canon 3(a). Despite the fact that there is no requirement that monitors be lawyers, this one was, and therefore, he was “bound to respect the role of counsel and the adversarial system.” 787 F.3d at 140-41.

Despite the stern language, the Second Circuit ultimately declined to overturn the lower court, leaving the monitor in place. (Though in the later decision on the merits, Judge Jacobs, in dissent, made his distaste for this monitorship explicit, and ultimately sided with Apple against both the injunction and the monitor. 791 F.3d at 340-53 (Jacobs, J., dissenting)).

Lessons to Take Away

Some of the court's observations in approving the monitorship contain helpful guidance for future cases.

1. The monitored entity should afford the monitor initial latitude as to document and interview requests. Apple's fear of unnecessary billing hung over its allegations. Although monitors, of course, should limit document and interview requests to those necessary to their task, corporate counsel should also be cognizant that a monitor necessarily begins the appointment with little insight into the granular details of a company's operations.

For that reason, companies should ordinarily afford monitors some latitude to learn the basics of the company's operations and relevant processes. Here, Apple did not appear to give the monitor much room for onboarding or initial interviews and document requests, relying on a provision in the injunction that allowed the company 90 days to craft the new procedures that the monitor would be reviewing. 787 F.3d at 134-35.

A monitorship can only succeed if the company reforms what went wrong in the first place, a goal best achieved collaboratively. Alleging impropriety by the monitor is not the best strategy. Instead, counsel should consider whether the company's interests are best served by educating the monitor about company processes, while allowing him flexibility to pursue matters within his scope.

2. Cooperation with the monitor is usually in the company's best interest. The best course of action for a company that finds itself subject to a court-appointed monitorship is a good-faith effort to work with the monitor; to ensure that the monitor has timely access to records and personnel; and to make the necessary changes to deficient policies, training, or governance structure. The surest way for a corporation to get out from under a monitorship, and get back to business as usual, is to demonstrate that it has changed.

Apple, of course, was entitled to adhere to its position that it had done nothing wrong ' and, therefore, that the monitor was an unnecessary and expensive remedy. But once a monitorship has begun, the downside of maintaining an adversarial posture is obvious: By not facilitating the monitor's task in a timely fashion, an entity slows down his completion of the job. That, in turn, makes extension of the monitorship ' usually unwelcome ' more likely.

3. Monitors are entitled to reasonable compensation commensurate with their experience and comparable to other legal and consulting service providers. The Second Circuit put to bed the argument that a monitor's compensation for his services by itself creates a financial interest requiring disqualification: “Any monitor would be entitled under the terms of the injunction to receive reasonable compensation.” 787 F.3d at 140. To resolve the dispute over the fee, the District Court compared the monitor's compensation to that of similarly qualified legal or consulting service providers. When Apple first balked at the hourly fee, the district court requested that Apple disclose its fees to outside counsel to assist in revising the compliance program that the monitor was tasked with reviewing. 992 F. Supp. 2d at 285 n.14. The comparison was apt. After all, a company willing to pay $1,000 per hour or more to its own advisers is hardly in a position to complain about the monitor's fees.

Conclusion

Every monitorship is different, and generalizations in disparate situations are difficult. But it is worth noting that the Second Circuit's opinion comes in the wake of close scrutiny of negotiated corporate enforcement agreements by district courts in recent years. See U.S. v. Fokker Services, 2015 U.S. Dist. LEXIS 13941 (D.D.C. 2015) (rejecting DPA for being too lenient); U.S. v. HSBC Bank USA, N.A , 2013 U.S. Dist. LEXIS 92438 (E.D.N.Y. 2013) (approving DPA while asserting broad authority to oversee agreement); SEC v. Citigroup Global Markets, Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (rejecting SEC settlement as not in the public interest). The Apple case provides an appellate-level example of this mini-trend.

Martin J. Foncello, a former New York County Assistant District Attorney, is a Managing Consultant at Exiger, a global financial crime compliance consulting firm specializing in monitorships.

Observers of federal compliance monitors are accustomed to seeing them appointed after negotiation, commonly by deferred prosecution agreements (DPAs) in criminal matters or by consent decrees in civil matters. The monitorship in the Apple e-books antitrust case is a notable exception, in that the monitor, Michael Bromwich, was appointed by injunction after trial. The litigation surrounding the Apple monitor's appointment illustrates pitfalls that can arise when monitoring relationships become adversarial, and it provides useful guidance for the future.

The Case

On July 10, 2013, following a bench trial, Judge Denise Cote of the Southern District of New York found for the plaintiffs (the Department of Justice [DOJ] and more than 30 states and territories), and concluded that Apple conspired with major book publishers to raise e-book prices collectively, in violation of Section 1 of the Sherman Act. U.S. v. Apple, Inc. , 952 F. Supp. 2d 638 (S.D.N.Y. 2013), aff'd, 791 F.3d 290 (2d Cir. 2015). Judge Cote issued a permanent injunction and appointed the external monitor, pursuant to the Master provision of Fed. R. Civ. P. 53(a).

The monitor was tasked with evaluating Apple's new antitrust polices, procedures and training program, and recommending changes to address any perceived deficiencies. In the injunction, the court required Apple to “assist” the monitor and “take no action to interfere with or to impede” the performance of his responsibilities. U.S. v. Apple, Inc., 2013 U.S. Dist. LEXIS 129727, at 24 (S.D.N.Y. 2013). The injunction also required Apple to compensate him “on reasonable and customary terms” commensurate with his expertise. Id . at 25.

The relationship between Apple and its monitor was contentious from the start, with the two at loggerheads over a number of issues. Apple recoiled at an hourly fee of $1,265 (later reduced to $1,000 during mediation), and clashed with the monitor over access to board members, executives and employees. The monitor, for his part, complained that Apple was dragging its feet and had adopted a confrontational approach.

Less than two months after the appointment, Apple sought to stay the injunction pending appeal of the judgment, and to disqualify the monitor. Apple alleged, among other things, that the monitor's hourly fee created a perverse incentive to request interviews and documents and expand his role. The plaintiffs opposed the stay application, attaching a declaration from the monitor defending his conduct. In response, Apple complained that the submission revealed that the monitor and the plaintiffs had collaborated, which, it argued, required disqualification.

The court rejected Apple's application, holding that neither Bromwich's fee nor his affidavit supporting the plaintiffs' opposition to the stay request was a basis for disqualification. U.S. v. Apple Inc. , 992 F. Supp. 2d 263 (S.D.N.Y. 2014). Earlier this year, the U.S. Court of Appeals for the Second Circuit affirmed, in an opinion by Judge Dennis Jacobs. U.S. v. Apple Inc. , 787 F.3d 131 (2d Cir. 2015).

Analysis

The Second Circuit's opinion is remarkable in several ways. Most significantly, while disclaiming broad jurisdiction to scrutinize the monitor's appointment and powers, Judge Jacobs seemed to go out of his way to arch his judicial eyebrow (“[S]ome of Apple's allegations against the monitor give us pause”) at interactions that, in the world of monitorships, at least, are not uncommon.

According to the DOJ's public guidance on monitors, “[a] monitor's primary responsibility is to assess and monitor a corporation's compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation's misconduct.” Memorandum from Craig S. Morford, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations, at 2 (March 7, 2008). An experienced monitor like Apple's, therefore, would expect to have easy access to personnel and documents, and would likely anticipate private contact with the appointing authority. He would also expect full cooperation from the company.

But unlike the assumption underlying the DOJ guidance, the Apple case did not involve any agreement at all, only an injunction against a well-funded defendant that chose to have outside counsel lead its interactions with a monitor that had been imposed over its objection. The clashes that followed gave the Second Circuit the rare opportunity to comment on the monitor's authority ' commentary that was not particularly pro-monitor.

For example, the court faulted the monitor for submitting a declaration in conjunction with the plaintiffs' brief ' an act the court, while not declaring it disqualifying, called “the opposite of best practice for a court-appointed monitor.” A judicial-type officer, the court explained, should file documents “independently” and “not through one party or another.” 787 F.3d at 138.

Nor did the court take kindly to the monitor's “attempts to circumvent counsel retained by Apple” by contacting company personnel directly. 787 F.3d at 140. Notwithstanding the monitor's stated concern that Apple had been using counsel as a shield, the court was clear that as an arm of the court, he should not be seeking ex parte contact with directors and employees. See 28 U.S.C. ' 455; Code of Conduct for United States Judges, Canon 3(a). Despite the fact that there is no requirement that monitors be lawyers, this one was, and therefore, he was “bound to respect the role of counsel and the adversarial system.” 787 F.3d at 140-41.

Despite the stern language, the Second Circuit ultimately declined to overturn the lower court, leaving the monitor in place. (Though in the later decision on the merits, Judge Jacobs, in dissent, made his distaste for this monitorship explicit, and ultimately sided with Apple against both the injunction and the monitor. 791 F.3d at 340-53 (Jacobs, J., dissenting)).

Lessons to Take Away

Some of the court's observations in approving the monitorship contain helpful guidance for future cases.

1. The monitored entity should afford the monitor initial latitude as to document and interview requests. Apple's fear of unnecessary billing hung over its allegations. Although monitors, of course, should limit document and interview requests to those necessary to their task, corporate counsel should also be cognizant that a monitor necessarily begins the appointment with little insight into the granular details of a company's operations.

For that reason, companies should ordinarily afford monitors some latitude to learn the basics of the company's operations and relevant processes. Here, Apple did not appear to give the monitor much room for onboarding or initial interviews and document requests, relying on a provision in the injunction that allowed the company 90 days to craft the new procedures that the monitor would be reviewing. 787 F.3d at 134-35.

A monitorship can only succeed if the company reforms what went wrong in the first place, a goal best achieved collaboratively. Alleging impropriety by the monitor is not the best strategy. Instead, counsel should consider whether the company's interests are best served by educating the monitor about company processes, while allowing him flexibility to pursue matters within his scope.

2. Cooperation with the monitor is usually in the company's best interest. The best course of action for a company that finds itself subject to a court-appointed monitorship is a good-faith effort to work with the monitor; to ensure that the monitor has timely access to records and personnel; and to make the necessary changes to deficient policies, training, or governance structure. The surest way for a corporation to get out from under a monitorship, and get back to business as usual, is to demonstrate that it has changed.

Apple, of course, was entitled to adhere to its position that it had done nothing wrong ' and, therefore, that the monitor was an unnecessary and expensive remedy. But once a monitorship has begun, the downside of maintaining an adversarial posture is obvious: By not facilitating the monitor's task in a timely fashion, an entity slows down his completion of the job. That, in turn, makes extension of the monitorship ' usually unwelcome ' more likely.

3. Monitors are entitled to reasonable compensation commensurate with their experience and comparable to other legal and consulting service providers. The Second Circuit put to bed the argument that a monitor's compensation for his services by itself creates a financial interest requiring disqualification: “Any monitor would be entitled under the terms of the injunction to receive reasonable compensation.” 787 F.3d at 140. To resolve the dispute over the fee, the District Court compared the monitor's compensation to that of similarly qualified legal or consulting service providers. When Apple first balked at the hourly fee, the district court requested that Apple disclose its fees to outside counsel to assist in revising the compliance program that the monitor was tasked with reviewing. 992 F. Supp. 2d at 285 n.14. The comparison was apt. After all, a company willing to pay $1,000 per hour or more to its own advisers is hardly in a position to complain about the monitor's fees.

Conclusion

Every monitorship is different, and generalizations in disparate situations are difficult. But it is worth noting that the Second Circuit's opinion comes in the wake of close scrutiny of negotiated corporate enforcement agreements by district courts in recent years. See U.S. v. Fokker Services, 2015 U.S. Dist. LEXIS 13941 (D.D.C. 2015) (rejecting DPA for being too lenient); U.S. v. HSBC Bank USA, N.A , 2013 U.S. Dist. LEXIS 92438 (E.D.N.Y. 2013) (approving DPA while asserting broad authority to oversee agreement); SEC v. Citigroup Global Markets, Inc. , 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (rejecting SEC settlement as not in the public interest). The Apple case provides an appellate-level example of this mini-trend.

Martin J. Foncello, a former New York County Assistant District Attorney, is a Managing Consultant at Exiger, a global financial crime compliance consulting firm specializing in monitorships.