When Your Engagement Letter’s Indemnification Clause Is a Lifesaver: The Penn State Sexual Abuse Scandal

penn stateAfter an internal investigation, the company being investigated must decide whether it wants the law firm (or investigative firm) to author a report of the investigation’s conclusions. The results of this decision may have unintended consequences for both the company and the law firm.

The latest developments in the Penn State child abuse scandal are a case in point. Louis Freeh helped the university produce an investigative report of the child abuse carried out by former assistant football coach Jerry Sandusky. In its report, Mr. Freeh’s law firm and investigative group named former university President Graham Spanier as one of Sandusky’s chief enablers.

Mr. Spanier has brought defamation and tortious interference charges against Louis Freeh, his law firm, his consulting group and the university in Pennsylvania state court.

The Risks and Rewards of a Written Report

A written report is helpful for the company’s leadership and board of directors because it summarizes the investigation’s factual findings and legal conclusions. A board that is concerned about its own liability may ask for a written report to show any doubters that it asked for a thorough investigation of allegations of wrongdoing.

Releasing a report can show the public or other stakeholders that the company is being aggressive (and transparent) in its efforts to investigate, identify and punish wrongdoing.

Drafting such a report is not without risks, though. A report can be leaked to a journalist. The government, knowing that a report exists, may request that the company waive privilege and disclose the report. (This request is rarer than it used to be, though, and requires approval higher up the chain in DOJ than a line prosecutor.) And it also could be a roadmap for plaintiffs’ attorneys to file a civil lawsuit.

A company may not only decide to request a written report from its law firm, but it may also choose to disclose the report publicly. The release may aid the entity’s public relations campaign to rehabilitate a tarnished image. There may also be pressure to release a report when the entity has a public presence such as a hospital or university.

That’s what happened in the Penn State case.

Hiring Louis Freeh

In 2011, Sandusky was brought up on more than 50 counts of sexually abusing young boys. His arrest upset Penn State’s affiliates, like the NCAA, and enraged the university’s alumni. Football was one of the cornerstones of the University’s identity.

The frightened Board of Trustees began searching for ways to resolve the crisis and, according to Mr. Spanier’s civil complaint, to effect some damage control. The board settled on hiring Freeh; his law firm, Freeh, Sporkin & Sullivan; and his consulting firm, Freeh Group International Solutions.

Mr. Freeh is a former federal judge and the former director of the FBI. His reputation no doubt influenced his hiring and, according to the complaint, he presented himself as a neutral reporter and investigator that could help organizations move on from crises.

Was Mr. Free Neutral or Prosecutorial?

Mr. Spanier alleges that Mr. Freeh approached the engagement as more of a zealous, adversarial prosecutor than a neutral investigator. The Board of Trustees paid Mr. Freeh more than $8 million for 8 months of work. In return, Mr. Spanier’s complaint claims, Freeh crafted a report that would satisfy the trustees.

The complaint alleges that Mr. Freeh prejudged the entire investigation. Because football was so important to the university, Freeh supposedly understood that the trustees wanted an investigation that would excise the corrupt parts of the football program while diverting blame away from the board itself.

To achieve these desired ends, Mr. Spanier alleges, Mr. Freeh would have to pin responsibility on prominent scapegoats in the administration like head coach Joe Paterno and Mr. Spanier.

The Findings

Mr. Freeh’s report was damning. He concluded that:

  • Spanier’s inaction gave Sandusky license to bring young boys onto the Penn State campus for the purpose of grooming them for sexual abuse.
  • Spanier knowingly allowed Sandusky to retire as a respected and beloved assistant coach instead of as a suspected child predator.
  • Spanier refused to disclose instances of sexual abuse allegations against Sandusky to the Board of Trustees.
  • By keeping silent, Mr. Spanier failed to protect children from a known sexual predator and did not adequately respond to the threat that Sandusky posed.

On the day the report was completed, the Board of Trustees issued a resolution adopting it in whole and posted a copy of the report to the university website.

Mr. Spanier’s Claim of Harm

As a result of the report and the accompanying press conference, Mr. Spanier claims, he suffered greatly. His workspace privileges at the university were revoked, and the courses he was supposed to teach were cancelled.

The NCAA and Big Ten Conference each condemned and censured him. He was even subjected to attack in news outlets like the Wall Street Journal, CNN, and the Chicago Tribune, after each republished the allegations of the report.

Finally, Mr. Spanier claims that he was denied two national security contracts and a lucrative seat on the board of a corporation because of the report.

Spanier’s Criticism of the Freeh Report

The focus of Mr. Spanier’s complaint is that some of the findings of fact were incorrect.

Freeh and [his law firm’s] defamatory statements regarding Dr. Spanier are demonstrably false. During his tenure as President of Penn State, Dr. Spanier never received any information that Sandusky had abused a child. Dr. Spanier was never provided information that would lead him to conclude that Sandusky had ever committed a criminal act directed at a child until after Sandusky’s criminal indictment.

It focuses mainly on two incidents of alleged sexual abuse, one in 1998 and one in 2001. Mr. Spanier states that he had no actual, first-hand knowledge of any sexual abuse, a crucial fact that he claims Mr. Freeh knowingly ignored.

The Defamation Lawsuit

Mr. Spanier states that he was unaware of any abuse in either 1998 or 2001, and could therefore not have been responsible for Sandusky’s abuse nor for failure to report it. Instead, the complaint suggests that the report showed a reckless disregard for the truth, thus forming the basis for a defamation claim.

As the complaint alleges:

Freeh and [his law firm] reached their predetermined “findings” and “conclusions” regarding Dr. Spanier long before their “investigation” was concluded — and long before relevant evidence had been considered. Freeh and [his law firm’s] preconceived outcome for the report is evidenced by the fact that their 267-page report was drafted and largely finalized before Freeh even interviewed Dr. Spanier.

Mr. Spanier is seeking both compensatory and punitive damages for defamation claims because he states that Mr. Freeh’s falsehoods were motivated by pecuniary gain. In addition, he has brought a tortious interference claim against Freeh and his consulting firm for the loss of his national security contracts.

Look At Your Engagement Letter

Regardless of the merits of the case and the outcome, law firms and investigators should look at this as a cautionary tale. No doubt the university asked Mr. Freeh to write the report and hold the press conference. The Board of Trustees made the decision to post the report on the school’s website. Mr. Freeh did what he was asked to do.

This is one of those times when an engagement letter is a lifesaver. Mr. Freeh’s engagement letter no doubt contained an indemnification clause, requiring the university to pay any attorney’s fees he incurred in defending against a lawsuit arising out of his work for the university. It likely also contained an indemnification clause requiring the university to pay any judgment that is ultimately entered against his firms.

That clause type of clause will protect you (and Mr. Freeh) from the financial costs of being sued. But the hassle of a lawsuit will always be there.  High profile internal investigations are lucrative (see, e.g., $8 million in fees for less than a year’s work) but also have their own risks.

Law firms beware.

This entry was posted in civil case, Uncategorized and tagged . Bookmark the permalink.

One Response to When Your Engagement Letter’s Indemnification Clause Is a Lifesaver: The Penn State Sexual Abuse Scandal

  1. Pingback: A Rough Season for Firms Involved in Internal Investigations–Defamation Cases Continue | Grand Jury Target

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