Neither the Delaware Supreme Court, nor other Delaware state courts have “articulated a specific test” to analyze whether to stay a civil case based on the pendency of a criminal case or investigation.
Neither the Delaware Supreme Court, nor other Delaware state courts have “articulated a specific test” to analyze whether to stay a civil case based on the pendency of a criminal case or investigation. The federal courts have, however, had the opportunity to address this issue frequently. Federal courts consider a number of factors in their analysis of whether to stay a civil case during the pendency of a criminal case or investigation. In the federal multi-factor test, the two primary considerations are: (1) “the status of the criminal case, including whether the defendants have been indicted” and (2) “the extent to which the issues in the criminal and civil cases overlap.” These two “overarching” considerations enable a court to assess the imminence and severity of the threat of criminal prosecution, and whether the civil case will have the effect of undermining a defendant’s Fifth Amendment privilege against self-incrimination, or otherwise, prejudicing a defendant’s ability to defend the criminal case.
Keeping in mind the status of the criminal case and the degree of overlap, federal courts then balance five additional factors:
- “The interest of the plaintiff in proceeding expeditiously with his case and any potential prejudice it may suffer from any delay;
- The burden upon the defendants from going forward with any aspects of the proceedings, in particular any prejudice to their rights;
- The convenience of the court and the efficient management of judicial resources;
- The interest of non-parties; and
- The interest of the public in the pending civil and criminal litigation.”
In balancing these five factors, federal courts necessarily consider the length of the requested stay, and emphasize that a total stay of a civil case is an “extraordinary remedy.”
In its recent decision in A. Schulman v. Citadel Plastic Holdings, C.A. No. 12459-VCL (Del. Ch. Nov. 2, 2017), the Court of Chancery adopted the federal multi-factor test to determine whether to stay a civil case during the pendency of a criminal case or investigation. After analyzing the factors, the court held that defendants were not entitled to a stay of the civil action based on a criminal investigation still in its early stages with an unknown degree of overlap with the civil action, and in which none of the defendants had been indicted. The court explained that only a fraction of investigations ever result in indictments, and the time period from investigation to indictment can be protracted, and thus, the “routine grant of pre-indictment stays would generate many false positives and result in lengthy delays of civil litigation.”
Turing to the five-factor balancing test, the court first found that based on subpoenas for their documents in a criminal investigation, defendants were effectively seeking an indefinite stay of the civil action, in which plaintiffs had conducted a large amount of discovery in preparation for a trial that was a few months away. Thus, the first factor favored plaintiffs’ interest in proceeding expeditiously in the civil action. In the second factor, the court considers the burden on defendants in having to potentially make the difficult choice of waiving their Fifth Amendment right against self-incrimination, or asserting such right and losing the civil action. The court found that because the defendants had only been subpoenaed for documents, and had not been indicted in the criminal investigation, this concern was “substantially reduced”, but nevertheless found that the second factor favored defendants. For the third factor, the court found that an indefinite stay pre-indictment undermines a trial court’s “substantial interest in moving cases forward toward an established trial date,” resulting in an inefficient use of judicial resources. Thus, the third factor heavily favored plaintiffs. The parties did not invoke the fourth factor to consider the interest of non-parties. Lastly, for the fifth factor, the public interest favored the plaintiffs. The court found that the public has a “vital interest” in rooting out fraud alleged in the plaintiffs’ claims, and ensuring that aggrieved parties are made whole in a timely fashion. In contrast, the criminal investigation was still at an early stage, and no one knew when or even if indictments would result from the investigation. In sum, three of the five factors favored the plaintiffs, and militated against a stay of the civil action under the federal multi-factor test adopted by the Court of Chancery.
In contrast, less than a month later, the Court of Chancery, applying its new federal multi-factor test, held that defendants were entitled to a stay of the civil action because the named-individual defendants in the civil action had been indicted in a federal criminal action relating to the same underlying facts as the civil action. In re Insys Therapeutics, Inc. Deriv. Litig., C.A. No. 12696-VCMR (Del. Ch. Nov. 30, 2017). Accordingly, in Insys Therapeutics, the court found that the two “overarching considerations” in the multi-factor test: status of the criminal case (post-indictment) and the degree of overlap (federal indictment tracked the civil action) favored a stay of the civil action.
The Court of Chancery cautioned in A. Schulman v. Citadel Plastic Holdings that the public interest is undermined when defendants, who engaged in criminal conduct, are permitted to use a threatened (but not yet commenced) criminal proceeding as a shield to prevent a plaintiff from expeditiously advancing a civil suit. Therefore, defendants face an uphill battle in seeking to stay a civil suit based on a criminal investigation pre-indictment.