Earlier this month, the Supreme Court agreed to resolve a circuit split over when the costs of an internal investigation can be recovered under the Mandatory Victims Restitution Act (MVRA). The MVRA, which requires convicted criminals to reimburse their victims, can play a meaningful role in helping corporations defray some of the costs incurred to respond to criminal conduct.

Internal investigations are an integral part of modern corporate security. When confronted by potential wrongdoing – whether by employees, vendors, or customers – companies often launch internal investigations. In many cases, especially in complex, highly regulated industries, these investigations must be handled by outside counsel in conjunction with external auditors or consultants. Costs of such investigations can mount quickly. And when an internal investigation does uncover wrongdoing, there are additional costs associated with reporting to and cooperating with the appropriate governmental authorities.

Enter the MVRA. Under this statute, federal courts must order persons convicted of crimes to reimburse victims for their financial losses. Moreover, the convicted person must also “reimburse the victim for . . . expenses incurred during the participation in the investigation or prosecution of the offense.” The circuits have been divided, however, over how broadly to interpret this provision in the context of internal investigations. The D.C. Circuit has drawn the line most narrowly, authorizing reimbursement only when the internal investigation was requested or required by the government. Other circuits have been far more expansive, allowing corporations to recover any “foreseeable” cost associated with the criminal activity, regardless of its connection to a law enforcement investigation.

In the case before the Supreme Court, Lagos v. United States, the CEO of a freight company pled guilty to falsifying the company’s books to secure lines of credit. After the company declared bankruptcy, its lender launched an internal investigation that uncovered the fraud and information eventually used to prosecute the CEO. At sentencing, the district court ordered the CEO to pay nearly $5 million to the lender to compensate it for the costs of its internal investigation. The court issued an additional award of $787,000 as reimbursement for legal fees expended during the bankruptcy proceeding. The Fifth Circuit upheld the award. But in a concurring opinion, one judge expressed concern that, while circuit precedent dictated the result, the court had read the MVRA too broadly.

The Supreme Court appears poised to provide clarity on this issue. Should the Supreme Court side with the DC Circuit, corporations across the country will need to think about engaging with law enforcement sooner in cases of suspected wrongdoing to ensure that their investigations are considered to be requested or required by law enforcement.