Recent legal cases have highlighted the need for companies and law firms to exercise care when retaining external investigators. 

Graham Robinson, Managing Director of Farncombe International, the largest intellectual property investigations company in Europe and part of the Bishop Group, examines some of the legal issues that face investigators and their clients.

The problems that beset Hewlett Packard in the US as a result of investigative activities, writes Graham Robinson, led to the resignation of the company’s chairwoman and the filing of criminal charges. 

The facts have been widely reported.  However, there also have been a number of cases in the UK which, collectively, are indicative of increasing scrutiny of investigators here.  As many inquiries are now multi-jurisdictional, investigators must be aware of the significant regulatory and cultural differences between countries.

United Kingdom

Over the last few years significant legislation has been enacted in the UK that imposes restrictions on the activities of investigators.  Indeed, there have been a number of well publicized cases in which major City law firms, prominent investigative companies and tabloid journalists have been ensnared. 

One of the most far-reaching laws passed in the last few years is the Data Protection Act of 1998 (the DPA).  The Act requires that personal data—a phrase capable of wide interpretation—is gathered and handled fairly.  The Act is probably the single piece of UK legislation which most impacts on the work of investigators.

Historically, many unscrupulous investigators have obtained information by holding themselves out as police officers, Customs and Excise officials or other government officials.  There are a number of relevant laws in the UK, including the Police Act 1996 which makes impersonating a police officer a criminal offence.

“Pretexting”

The practice commonly referred to as “pretexting” is the subject of much current interest.  It is not uncommon for investigators to contact companies or individuals and invent a story in order to encourage someone to disclose information.  There is no law against lying, but the practice may become unlawful if, for example, the pretext is used to obtain personal data or if the investigator indicates that he or she is a person acting in an official government capacity.

In the Hewlett Packard case investigators allegedly impersonated board members and journalists to obtain their phone records.  Had the same techniques been used in the UK they would have clearly contravened the DPA.  There is no comparable Federal legislation in the US, but the investigators faced other criminal charges.

However, that is not to say that all pretexting is unlawful.  In gathering evidence for trade mark clearance, prosecution or litigation, investigators will often use some form of pretext when interviewing people.  The key point is that they should never use those interviews to obtain personal information.

Investigators are also employed to acquire assets anonymously in order to obtain a reasonable price or to keep the principal’s commercial intentions out of the public arena.  Such activity is particularly common in the IP world when a company wishes to acquire a trade mark, patent or domain name.  However, the investigator must be aware of the danger of making fraudulent misrepresentations which could entitle the vendor to set aside any transaction and seek damages.

Hughes v Carratu

Two recent UK court cases are worthy of mention.  The first is Hughes v Carratu.  The Information Commissioner found Carratu, an investigations company, to be in possession of Mr Hughes’ personal financial information.  Mr Hughes issued an application against Carratu seeking disclosure of all relevant documents in the company’s possession and the identity of their instructing principal. Despite an earlier request made by Mr Hughes to Carratu under the provisions of the DPA, Carratu had failed to provide any relevant documents.  The judge remarked that Carratu’s evidence was “lacking in candour” and ordered Carratu to disclose the name of the law firm which had instructed them.

The second case was widely reported and related to the prosecution of the News of the World’s Royal Editor Clive Goodman and a private investigator with whom he conspired to hack into phone messages belonging to aides to the Royal Family.  Both were handed jail sentences and the judge described their activities as a “grave, inexcusable and illegal invasion of privacy.”  The editor of the News of the World resigned as a result of the scandal.

It has become clear that neither companies nor their legal advisers can instruct investigators without heeding the methods they use.  The old attitude of “as long as you get results, we don’t care how you get them” will not wash anymore.  The Information Commissioner and the courts in the UK have sent a clear message that instructing parties do bear responsibility for the acts of their investigators.  Similar considerations apply in the US.

In the UK the government is seeking to regulate the security industry through the Private Security Industry Act 2001.  The Act already regulates security staff and wheelclampers.  It is also expected to target the investigations industry.  A framework to regulate investigation companies is planned for 2010.  The SIA is struggling to regulate a diverse industry populated by people with backgrounds that range from former police officers to lawyers and journalists.  Licensing of investigators in the US has long been a fact of life in many states.

United States

In some ways the accessibility of information in the UK and the US is diametrically opposed.  For example, in the UK companies are under an obligation file a comparatively extensive amount of information at Companies House, including details of the directors, shareholders and the company’s financial performance.  Far less information is available in the UK in relation to individuals.  In particular, criminal prosecutions are not a matter of public record.

In the US, broadly speaking the reverse is true.  While the rules change from state to state, it is generally possible to obtain quite detailed information about individuals through public records, including liens on property and whether they have a criminal record.  In New York State, for example, it is possible to discover not only an individual’s convictions but also details of the original charges.  It is also possible to determine an individual’s ownership of property by searching that person’s name.  That is not possible in the UK.

Moreover, depending on the state in which they are incorporated, privately-held corporations in the US are generally subject to far less stringent filing requirements than limited companies in the UK.  Many companies choose to incorporate in states such as Delaware because their filing requirements are minimal.

There is a cornucopia of Federal and state laws that apply to the way in which investigators operate in the US.  In fact, many states require investigators to be licensed, although the hurdles for licensing vary from state to state.  In most cases, the primary motivation for licensing is that approved investigators are permitted to carry concealed weapons.  That is not yet the case in the UK.

It is possible for investigators in some states to practice without an individual licence provided that the company has an umbrella licence.  In New York State an individual investigator must pass an exam, have at least two years’ experience in the investigative field (either in the public or private sector) and submit their fingerprints and photographic proof of identity to a state department of licensing.

Corporate Investigations - A Mature Market

The corporate investigations industry took off in the US in the 1980s as a result of hostile takeover bids.  While the market is comparatively mature, the pitfalls for those instructing investigators there are many.  A corporation or law firm can easily become liable if the investigator commits torts in the course of an investigation and an injured party can show that the client or lawyers had an obligation to exercise control over the way in which the investigation was conducted.

Even when an investigator is considered to be an independent contractor, not an agent, the client or law firm can still be subject to liability.  For example, if it can be shown that the contract was for illegal work or necessitated illegality or the client ratified the acts after the fact, that may render the client or lawyer liable.  As in the UK, ignorance is no defence.

In the Hewlett Packard case, criminal charges were filed against the company’s chairwoman and the former senior counsel and director of ethics.  These charges relate not only to the “pretexting” described earlier but also to other tactics employed by their investigators, including tracking journalists’ emails.

There have also been suggestions that HP’s lawyers did not pay enough attention to the American Bar Association’s rules covering the retention of non-lawyers.  Those rules state that any lawyer who has direct supervisory authority over a non-lawyer must make efforts to ensure that the non-lawyer’s actions are “compatible with the professional obligations of the lawyer.”  In short, a lawyer cannot instruct someone else to do what he himself is barred from doing.

Switzerland

Although the investigations industry is reasonably mature only in the US and the UK, that is not to say that other jurisdictions have neglected to create laws in relation to individuals and companies that conduct investigations.

It is widely acknowledged that Switzerland has some of the most stringent privacy laws in the world.  The Swiss legal system is similar to the US in that there are both Federal laws and laws particular to each of the 24 cantons.  Laws can vary widely between cantons.  For example, in Geneva no fiscal information relating to individuals or companies is publicly available.  In Vaud it is possible to obtain such information from the authorities for the payment of a nominal fee.

Similarly, the licensing requirements to carry on the business of investigations vary from canton to canton.  It is possible to obtain a licence in Geneva to carry out investigations and that affords the investigator some measure of protection against complaints.  However, no such licensing structure exists in the canton of Vaud. 

You may not be surprised to learn that it is possible to form companies in Switzerland with little obligation to file information about the companies, depending on the legal form adopted.  The société anonyme (SA) is one of the most popular forms, and such a company is not required to file details of its shareholders and can have nominee directors.  The controlling party is therefore completely hidden.  With the exception of publicly quoted companies, Swiss entities are not obliged to file any financial information.

The Far East

It is illegal to carry out business as an investigator in China.  The only entities that can undertake investigations are public authorities such as the Public Security Bureau.  Anyone offering investigative services in China is therefore breaking the law.

However, the laws do not reflect commercial reality and there a number of companies providing investigative services having registered with the authorities as providing “security services,” “market research” or “consulting.”

In the past five years the authorities in China have begun to accept such activities in practice.  They are aware of the need for Western companies to be able to obtain information about doing business in China and therefore tolerate investigative companies.

It is, however, still possible to step on the wrong person’s toes.  About four years ago a company operating in China was investigating a senior figure in Shanghai and that person became aware of the investigation.  Some of the investigators working for the company were imprisoned.  It is easy to tread the wrong side of the political line and companies and their lawyers need to be aware of the sensitivities.

Cultural Differences

The cultural differences between the West and East can also have significant impact upon the ways that investigations are conducted.  For example, the practice of using telephone pretexts is common in the West because of the comparatively open environment where information is constantly exchanged.  This is less true in countries in the Far East, in many of the former Soviet bloc countries and in the Middle East where cultures of secrecy have been the historical reality.  As a consequence information gathering in such places is more expensive. 

But even in the Far East there are variations from country to country.  Vietnam and China are very different environments to the Philippines, where as a general rule people are more open to “telephone talk.”  In China and Vietnam, widescale ownership of mobile phones is a relatively new development and people are generally more guarded in their interaction with strangers.  Some information is available in Hong Kong, Singapore, Thailand and Malaysia, but in Vietnam there is almost no public information.

In China, for a small fee, it is possible to obtain limited information about companies.  Depending on where the company is located (for example in Beijing, Shanghai or Guangzhou) it may be possible to conduct company searches online, but if the company is located elsewhere it is usually necessary to attend the local registration office.  A registered lawyer in China can apply to the courts to obtain company records, including details of shareholders and financial accounts, but the reason for the request must be disclosed.

Summary

It is becoming increasingly important in the West for investigators to comply with the growing number of rules that restrict their activities.  The regimes in Eastern Europe, the Middle East and the Far East are very different and investigators that conduct multi-jurisdictional enquiries need a comprehensive understanding of the jurisdictions in which they operate. 

Moreover, companies and law firms must take steps to ensure that investigators they engage act appropriately.  If they do not, then recent cases would suggest that both the investigators and their instructing principals face potential criminal and civil liability, as well as damage to their reputations and corresponding losses to shareholders.

Investigators are commonly engaged to assist with the following tasks:

1. Proactive trade mark use enquiries – prior to the launch of a new brand to determine the nature and extent of the use of third party registered rights.

2. Common law searches – again prior to the launch of a new brand to identify the use of any unregistered rights in territories of concern

3. Anonymous acquisitions – to acquire contentious or problematic IP assets such as trade marks and domain names in order to secure or protect a brand

4. Reactive trade mark use enquires – in relation to brand protection, to determine the use of a trade mark applied for or registered by a third party that conflicts with a brand owner’s existing rights

5. Corporate activity investigations – to determine the nature and scope of activities of a target company, for example one with a problematic corporate title or suspected of using a particular brand

6. Individual activity investigations – similar to the above but in relation to individuals who are suspected of potentially infringing activities

7. Test purchasing – the acquisition of goods believed to infringe a brand owner’s rights to obtain evidence of that infringement

8. Anti-counterfeiting and grey market enquiries – to obtain evidence in relation to the illicit trade in branded goods.

Graham Robinson is the Managing Director of Farncombe International Ltd, a company that specializes in IP investigative work and acts for major law firms and brand owners. The company undertakes assignments around the world. Graham is a former IP litigation solicitor.