protecting the corporate attorney-client...
TRANSCRIPT
Protecting the Corporate Attorney Client Privilege and Related Ethical
Considerations
Presented by the Committee on Business and Corporate Litigation
August 11, 2008
Panelists
Kurt M. Heyman, Proctor Heyman LLP [email protected]
Susan J. Hackett, Association of Corporate Counsel
Melinda Hardy, Securities and Exchange Commission [email protected]
Denise Seastone Kraft, Edwards Angell Palmer & Dodge LLP
The Honorable Donald F. Parsons, Jr., Delaware Court of Chancery
TABLE OF CONTENTS
I. Summaries of Relevant Case Law
A. Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. Nov. 13, 2002)
B. In re Qwest Comm’ns Int’l, 450 F.3d 1179 (10th Cir. 2006)
C. In re Teleglobe Comm’ns Corp. v. BCE, Inc., 493 F.3d 345 (3d
Cir. 2007)
D. Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007)
II. Protecting the Privilege in Litigation Involving Former D&Os: Keeping It in the Family
A. Teachers’ Retirement System of Louisiana v. Greenberg, C.A. No.
20106-VCS (July 11, 2007) (ORDER)
III. The Federal/State Divide Over “Selective Waiver” and Assertion of Privilege
A. Attorney-Client Privilege Protection Act of 2007, S. 186, 110th
Cong. (2007) B. S. 2450, 110th Cong. (2008)
C. Attorney-Client Privilege Protection Act of 2007, H.R. 3013, 110th
Cong. (2007)
ABA Presentation By
Kurt Heyman [email protected]
Patricia Enerio [email protected]
Jill Agro [email protected]
PROCTOR HEYMAN LLP
Protecting the Privilege in Litigation Involving Former D&Os: Keeping It in the Family
Vice Chancellor Strine’s AIG Order
Vice Chancellor Strine’s AIG Order: No Waiver When Materials
“Kept in the Family”
WHEREAS, during argument held on June 13, 2007, the Court noted that, under Delaware law, as former directors of AIG, the Individual Defendants were “essentially within the AIG family” for purposes of the Motion (Tr. at 139:23-24) and that, as such, the sharing of certain privileged materials with the Individual Defendants would not constitute a waiver of AIG’s privilege and should not be construed as such by the Individual Defendants, or by any other individual or entity seeking to utilize AIG’s disclosure of privileged materials as evidence of waiver in this or any other proceeding;
Vice Chancellor Strine’s AIG Order: Directors’ Rights to Access Under § 141(e)
WHEREAS, the Court also recognized that the sharing of certain privileged materials with former AIG directors arises out of their substantive right under Delaware law to rely on advice of counsel as set forth in 8 Del. C. § 141(e) (“Section 141(e)”) (Tr. at 95-96);
8 Del. C. § 141(e) A member of the board of directors, or a member of
any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.
8 Del. C. § 141(e) Covers Legal Advice See, e.g., Perlegos v. Atmel Corp., 2007 WL 475453, *20 n.149 (Del. Ch. Feb. 8,
2007).
Desimone v. Barrows, 924 A.2d 908, 936-37 (Del. Ch. 2007) (contrasting likely non-liability of directors who approved backdated options in the belief the action was proper based on advice from corporation’s general counsel and management with risk faced by directors who were aware their actions were improper yet decided to proceed).
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1142 (Del. Ch. 1994) (“Indeed, it is arguable that the board’s good faith reliance on this legal testimony may provide an independent basis for finding the directors not liable for approving the sale . . . .”) (subsequent history omitted).
Vice Chancellor Strine’s AIG Order: Shareholders’ Rights to Access Under Garner
WHEREAS, the Court also noted that the fact that this case was a derivative action brought on behalf of AIG also had relevance, insofar as there is a community of interest among the plaintiffs as derivative plaintiffs and AIG, which might justify disclosure of privileged materials to the derivative plaintiffs, see Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), and its progeny, and that such disclosure under Garner and its progeny would not waive the privilege as to plaintiffs or prosecuting authorities in other types of cases with interests not aligned with AIG;
Garner v. Wolfinbarger “The attorney-client privilege still has viability for the
corporate client. The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders. But where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.”
Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970).
Garner Followed in Delaware In re Fuqua Industries, Inc., 2002 WL 991666, *3 (Del. Ch. May 2, 2002) (citing Garner, 430 F.2d at 1103-04) (footnotes omitted):
“The Court in Garner v. Wolfinbarger explained that in the face of an assertion of attorney-client privilege by a corporation, a shareholder who is bringing a derivative action may be able to demonstrate good cause why that privilege should not apply. Garner identified a non-exclusive list of factors that a court may consider in determining whether good cause has been shown to permit discovery of documents to which the attorney-client privilege would otherwise attach. These factors are:
[1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders’ claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders' claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6] whether the communication related to past or to prospective actions; [7] whether the communication is of advice concerning the litigation itself; [8] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; [and 9] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
In re Freeport McMoran Sulphur, Inc., 2005 WL 225040, *4 (Del. Ch. Jan. 26, 2005) (Vice Chancellor Lamb applied the Garner test and granted plaintiffs’ motion to compel certain documents relating to litigation involving Freeport’s parent company, in part because “the documents requested are unavailable from other sources because they are communications between the defendants and their counsel.”).
But see Valente v. Pepsico, Inc., 68 F.R.D. 361, 367 (D. Del. 1975) (“The rule of Garner . . . is of some relevance here, but is not controlling since we deal here with the application where a minority shareholder seeks information not from his own corporation, but from a separate corporation which was a controlling shareholder in his.”). “Although neither the Garner nor Valente case is binding on this Court, Delaware courts have consistently followed Garner and declined to
broadly apply Valente.” Deutsch v. Cogan, 580 A.2d 100, 105 (Del. Ch. 1990).
Vice Chancellor Strine’s AIG Order: Directors’ Entitlement to Materials
from Time of Service
WHEREAS, the production of documents by AIG to the Individual Defendants pursuant to this Order shall not constitute a waiver of AIG’s attorney-client privilege, because, under Delaware law, the Individual Defendants, as former directors of AIG, are entitled to access to certain of AIG’s privileged documents generated during their tenure as directors of AIG by virtue of their status as former directors and/or to support their Section 141(e) defense;
Directors’ Entitlement to Materials from Time of Service
Moore Business Forms, Inc. v. Cordant Holdings Corp., 1996 WL 307444, *4 (Del. Ch. June 4, 1996) (“a corporation cannot assert privilege to deny a director access to legal advice furnished to the board during the director’s tenure”) (citations omitted), appeal refused, 682 A.2d 625 (Del. 1996).
AOC Ltd. P’ship v. Horsham Corp., 1992 WL 97220, *1 (Del. Ch. May 5, 1992) (“Plaintiff, in effect, is a member of Clark Oil’s board since its two constituents are members of its board. Therefore, plaintiff is just as much the ‘client’ of Mayer as the defendants are. Thus they should have access to the same information to which the defendants have access with respect to legal advice given to Clark Oil.”).
Kirby v. Kirby, 1987 WL 14862, *7 (Del. Ch. July 29, 1987) (directors who are responsible for corporate management ought to be treated as a “‘joint client’ when legal advice is rendered to the corporation” and be allowed access to those documents that the director would have had access to while serving the corporation).
Glidden Co. v. Jandernoa, 173 F.R.D. 459, 471 (W.D. Mich. 1997) (applying Delaware law and holding that “directors have a right to access attorney communications of the company relating to the time that they served as directors”).
Limitation on Entitlement But see SBC Interactive, Inc. v. Corporate Media Partners, 1997 WL 770715 (Del. Ch. Dec. 9, 1997) (held that a former director
could not access privileged communications once his interests were adverse to the corporation with respect to the matter for which advice was given).
WatchMark Corp. v. Argo Global Capital, LLC, C.A. No. 711-N, Tr. at 18 (Del. Ch. Oct. 19, 2004) (“I think it’s pretty clear under SBC you’re going to be entitled to documents before the parties became adverse and began taking their litigation positions. . . . “).
Vice Chancellor Strine’s AIG Order
AIG was the first case to apply this line of cases to a public company.
Vice Chancellor Strine’s AIG Order: Specific Materials Ordered to be Produced
Vice Chancellor Strine’s AIG Order: Procedural Matters
2. Within 20 days of the entry of this Order, counsel for the Individual Defendants will participate in a meet-and-confer with counsel for AIG wherein counsel for the Individual Defendants will set forth, for each Individual Defendant, a “reasoned articulation” of the “legitimate basis” for the “scope” of the Individual Defendants’ Section 141(e) defense. (Tr. at 133:1-14). The substance of the discussions to be had and documents exchanged during the meet-and-confer shall be designated “Confidential” pursuant to the Confidentiality Order in this action.
3. Within 10 days following the meet-and-confer described in paragraph 2 above, AIG shall produce any privileged documents that fall within the scope of the Individual Defendants’ Section 141(e) defense, whether or not such documents are identified on AIG’s privilege log, to the extent that such documents were not already produced pursuant to paragraph 1 above. To the extent that AIG locates any additional privileged documents in the future that fall within the scope of the Individual Defendants’ Section 141(e) defense, they shall promptly be produced to counsel for the Individual Defendants.
4. If there are disagreements between the parties regarding the scope of the Individual Defendants’ Section 141(e) defense (as set forth in paragraph 2 above) or the scope of the documents to be produced by AIG consistent with the Individual Defendants’ Section 141(e) defense (as set forth in paragraph 3 above), then the parties may seek relief from the Court, and documents subject to any dispute shall be submitted to the Court for in camera review, to the extent the Court wants to conduct such a review.
Vice Chancellor Strine’s AIG Order: Safeguards and Plaintiff’s Rights to Access
5. Any production of privileged documents pursuant to this Order shall be limited to those documents generated during the time period the Individual Defendants served on the Board. Any documents produced pursuant to this Order shall only be disclosed to the Individual Defendants who were members of the Board at the time the documents were generated. After AIG has produced all privileged documents required to be produced by this Order, and after the Individual Defendants have identified to AIG the privileged documents upon which they intend to rely for purposes of their Section 141(e) defense, the Individual Defendants shall confer about the production of such documents to Plaintiff’s counsel. The Individual Defendants shall not disclose the privileged materials produced pursuant to this Order to any other party to this proceeding, including Plaintiff or Defendant C.V. Starr & Co., Inc., without the consent of AIG or further Order of the Court. The Individual Defendants may, with five (5) days advance notice to AIG to provide AIG the opportunity to object, use any privileged materials produced pursuant to this Order at the deposition or during the trial testimony of any person who, on the face of such documents, appears to have prepared or received the documents.
Vice Chancellor Strine’s AIG Order: No Waiver
7. For the reasons set forth in the transcript of the June 13, 2007 argument and ruling, the fact of production of any privileged documents by AIG to the Individual Defendants in this action pursuant to this Order will not constitute a waiver of the privilege as it attaches to these documents in question, or be used by the Individual Defendants to argue that AIG has waived its privilege with respect to any privileged materials in this or any other proceeding.
New York v. Greenberg: Follows Strine’s Ruling
New York v. Greenberg, 50 A.D.3d 195 (N.Y. App. Div. 2008)
“[A] former director may still have a qualified right to inspect the books and records covering a period of his directorship whenever in the discretion of the trial court he can make a proper showing by appropriate evidence that such inspection is necessary to protect his personal responsibility interest as well as the interest of the stockholders.” Id. at 199.
“In analyzing the issue of whether former directors are entitled to any privileged documents generated or created during their tenure at the corporation, the attorney-client communications here should be separated into two categories: general business matters and the four transactions at the heart of this action. When analyzed in this manner, we find that the laws of New York and Delaware are substantively similar.” Id. at 200 (citations omitted; emphasis in original).
“Although in New York, unlike Delaware, the corporation and its current board of directors control the attorney-client privilege with regard to confidential communications arising out of general business matters, a former director is not absolutely barred from an inspection of all confidential documents generated during his tenure, and upon a proper showing that an inspection of the corporate books and records covering the period of the directorship is necessary to protect the personal responsibility interest of the former director as well as the interest of the board, the former director may have a qualified right to an inspection of such documents. The qualification of that right of inspection clearly means that former directors must make a showing that the records sought are necessary to protect their personal responsibility interests.” Id. at 200-01 (citations omitted; emphasis in original).
“Under both New York and Delaware laws, the fact that Greenberg and Smith are no longer directors is not fatal to their motion to compel, since their conduct while directors has been called into question and the inspection is needed to prepare their defenses.” Id. at 201.
“[A] Delaware court recently addressed the same question presented in this case and held squarely in favor of Greenberg and Smith. In an unpublished order issued in related litigation, Teachers' Retirement Sys. of La. v Greenberg (C.A. No. 20106 [July 11, 2007]), Vice Chancellor Strine directed AIG to produce otherwise privileged documents to Greenberg, Smith and another former director, and explained that the production of the documents would not constitute a waiver of the privilege "because, under Delaware law, the . . . former directors . . . are entitled to access to certain of AIG's privileged documents generated during their tenure as directors of AIG by virtue of their status as former directors and/or to support their Section 141 (e) defense. . . . Moreover, as is clear from the Delaware cases, and as Vice Chancellor Strine expressly stated in Teachers' Retirement System, this right is a "substantive right." It does not spring into being only when a plaintiff of a particular kind sues a former director.
Barr v. Harrah’s Entertainment, Inc. Barr v. Harrah’s Entertainment, Inc., 2008 WL 906351 (D. N.J. Mar. 31, 2008).
The Court applied Delaware law and concluded that “the Supreme Court of Delaware would find that a former officer or director serving as a class representative in a class action lawsuit asserting a breach of contract claim does not have the right to review privileged documents of the corporation solely based upon the officer or director’s prior access to such documents during his tenure as a former officer or director with the corporation.” Id. at *7.
The court parenthetically cited New York v. Greenberg, 851 N.Y.S.2d 196, 201-02 (N.Y. App. Div.2008) “(under New York and Delaware law that former directors ‘are within the circle of persons entitled to view privileged materials without causing a waiver of the attorney-client privilege,’ noting that because directors and officers were privy to and participated in legal consultations while they were directors and officers, corporation ‘failed to sustain its burden of establishing that the privilege is assertable’ to former directors and officers).” Id. at *5.
In re Qwest Comm’ns Int’l, 450 F.3d 1179 (10th Cir. 2006) By Melinda Hardy1
In Qwest, the Tenth Circuit considered the doctrine of selective waiver and addressed
whether Qwest waived its attorney-client privilege and work-product protection when it produced
over 220,000 pages of protected documents to the Securities and Exchange Commission (“SEC”)
and the Department of Justice (“DOJ”) in response to subpoenas.
The Court initially reviewed the existing case law and concluded that “there is almost
unanimous rejection of selective waiver.” Id. at 1186. The court then summarized its conclusion
that it should reject selective waiver as to both the attorney-client privilege and work-product
protection:
Qwest advocates a rule that would preserve the protection of materials disclosed to federal agencies under agreements which purport to maintain the attorney-client privilege and work-product protection but do little to limit further disclosure by the government. The record does not establish a need for a rule of selective waiver to assure cooperation with law enforcement, to further the purposes of the attorney-client privilege or work-product doctrine, or to avoid unfairness to the disclosing party. Rather than a mere exception to the general rules of waiver, one could argue that Qwest seeks the substantial equivalent of an entirely new privilege, i.e., a government-investigation privilege.
Id. at 1192.
The Court expanded on several of the themes included in that conclusion. With respect to
the argument that selective waiver would encourage cooperation with the government, the court
noted that Qwest had disclosed 220,000 pages of protected materials without any clear assurance in
law that any privileges and protections would not be waived. The Court also noted that the
government did not file a brief claiming selective waiver was essential to government operations in
this case. Id. at 1193. 1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
With respect to the confidentiality agreements, the Court noted that while some courts have
indicated that the presence of a confidentiality agreement could justify adopting selective waiver,
the agreements here did not in fact promise confidentiality. They did little to restrict the agencies’
use of documents, and the agencies did in fact use some of the documents. Id. at 1194.
The Court also addressed an alleged “culture of waiver” in which companies being
investigated feel pressure to disclose privileged and protected information to avoid being deemed
uncooperative. The Court found that there was not a sufficient basis in the record for finding a
“culture of waiver” and without a clear record, these claims could not justify recognition of the
selective waiver doctrine. Id. at 1199.
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Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. Nov. 13, 2002) By Melinda Hardy1
In Saito, the Delaware Court of Chancery considered the principle of selective waiver, that is,
whether a company being investigated by the Securities and Exchange Commission (“SEC”) waived
work-product protection in a suit by private plaintiffs by producing work product to the SEC pursuant
to a confidentiality agreement. The Court initially explained that under Delaware law “waivers are
rarely granted . . . because of their harsh result.” Id. at *3. Under the law, disclosure of work product
does not waive work product protection unless the disclosure is inconsistent with preventing disclosure
to an adversary. Id. at *4.
In its opinion, the Court addressed two theories that have been put forward to justify a holding
of no waiver. First, the Court considered whether McKesson and the SEC had “common interests” and
came within the common interest exception which allows disclosure of work product to persons with
parallel and non-adverse interests. The Court held that the common interest exception did not apply.
McKesson and the SEC were adversaries because the SEC was investigating McKesson; the fact that
McKesson wanted to “weed out the wrongdoers in the corporation” was not sufficient to create a
common interest. Id. at *4-5.
The Court next considered whether the confidentiality agreement could prevent waiver and
focused on whether public policy supported allowing disclosure without finding a waiver. The Court
addressed several factors. First, the Court found that “disclosure to one adversary does not prejudice a
subsequent adversary any more than it would have if the initial disclosure had never been made.” Id. at
*6. Second, the Court found that McKesson had a reasonable expectation of privacy because it could
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
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assume that the SEC would not reveal its confidential disclosures to other adversaries. Central to this
conclusion was the Court’s determination that only two cases had held that work-product protection
was waived even when disclosure was subject to a confidentiality agreement. Id. at *6-7. Third, a
finding of waiver would cause more companies to refuse to disclose privileged materials to the SEC,
which would have adverse effects on the SEC’s ability to conduct efficient and expeditious
investigations and to protect investors. Id. at *8. Fourth, the private plaintiffs seeking the work product
did not provide a justification for receiving the work product of an opponent. Id. In light of these
factors, the Court concluded that McKesson had not waived work product protection. The Court
summarized its conclusion saying,
[B]ecause I find that it is in the best interests of the shareholders to encourage corporate compliance, and because the law enforcement agencies are designed by our legislature as the first line of defense for such shareholders, I adopt a selective waiver rule for disclosures made to law enforcement agencies pursuant to a confidentiality agreement. . . . The selective waiver rule encourages cooperation with law enforcement agencies without any negative cost to society or to private plaintiffs.
Id. at *11.
In re Teleglobe Comm’ns Corp. v. BCE, Inc., 493 F.3d 345 (3d Cir. 2007) By Jill Agro
In re Teleglobe Comm’ns Corp. v. BCE Inc., 493 F.3d 345 (3d Cir. 2007), has emerged as
one of the authoritative cases on corporate privilege for in-house counsel. In what the court
termed “a twist on a classic corporate divorce story,” this case confronts important attorney-
client issues involved when parent and subsidiary companies share corporate counsel. Id. at 352.
The case’s namesake, Teleglobe Communications Corp. (“Teleglobe”), is a former
subsidiary of Bell Canada Enterprises, Inc. (“BCE”), one of Canada’s most prominent
telecommunications corporations. Id. at 353. Canada-based Teleglobe was the parent of several
U.S. subsidiaries (the subsidiaries are herein referred to as the “Debtors”), most of which were
organized under the laws of Delaware. Id. During the technology boom of 2000, BCE acquired
Teleglobe with the promise of providing financial support to build out a $6 billion global
fiberoptic data network. Id. Based on BCE’s promises of financial support, Teleglobe and the
Debtors borrowed $2.4 billion to fund the project. Id. Two years later, when the tech bubble
burst, BCE was forced to discontinue funding for Teleglobe’s build-out, causing Teleglobe and
the Debtors to file for bankruptcy. Id. at 354. Teleglobe’s creditors, in turn, sued BCE. Id.
The Debtors, on behalf of their creditors, asserted claims for breach of contract, breach of
fiduciary duty, estoppel and misrepresentation against BCE in the U.S. Bankruptcy Court, but
the case was referred to the U.S. District Court of the District of Delaware. Id. Soon after the
suit was initiated, the parties became embroiled in discovery disputes involving documents
related to BCE’s abandonment of Teleglobe and the Debtors that BCE claimed were subject to
the attorney-client privilege. Id. The Debtors argued that the disputed materials fell under the
“joint-client” exemption to the privilege since Teleglobe and the Debtors relied on BCE’s in-
house lawyers for its legal advice concerning the refinancing/restructuring while BCE was
considering terminating funding for its subsidiaries. Id. As part of their argument, the Debtors
asserted that, as Teleglobe subsidiaries, they were members of the corporate family and could
rightfully assert the exemption. Id. On the other hand, BCE claimed that the documents were
protected from discovery because “BCE attorneys consulted with attorneys, officers, or
employees of Teleglobe, Inc. or its subsidiaries to discuss or provide legal advice in matters
where BCE and Teleglobe, Inc. (or its subsidiaries) shared a common legal interest.” Id. at 354.
It was not clear, however, whether BCE was invoking the joint-client privilege or the
community-of-interest privilege. Id. at 354 n.7. BCE ultimately turned over some of the
documents created by BCE’s in-house counsel on the subject of Teleglobe’s financing and
restructuring for which it had asserted privilege, but continued to assert the privilege with respect
to documents it claimed “were intended as advice solely to it and not as part of any joint
representation.” Id. at 354-55.
The Debtors were not satisfied with BCE’s limited production and continued to litigate
the discovery issues. The primary issue before the Court was whether BCE’s in-house counsel,
which had provided advice to both BCE and Teleglobe, could provide separate advice solely to
BCE in a related matter, and keep that advice privileged when the two later became adverse in
the bankruptcy proceeding. Id. at 375. After referring the discovery issues to a Special Master
for resolution, the District Court ultimately directed BCE to turn over the disputed documents to
the Debtors. Id. at 355, 357. BCE immediately appealed and the action was stayed pending
appellate review.
On appeal, the Third Circuit conducted an in-depth analysis of the attorney-client
privilege in the context of the corporate family environment, and provided some clarification
between the joint-client privilege and the common-interest privilege. See id. § IV. The Court
explained that the joint-client privilege applies where the same attorney represents two clients on
matters of common interest, such that “[t]he keys to deciding the scope of a joint representation
are the parties’ intent and expectations,” and the common-interest privilege applies when
separate attorneys represent clients involved in the same legal matter. Id. at 363-64. Further, the
Court emphasized that the joint-client privilege protects communications from disclosure to
parties outside the joint representation, unless an exception was applicable. Id. at 366-67.
The Court focused on the pitfalls relating to in-house counsel representing a parent
company and its subsidiary, and provided advice to avoid any problems:
[I]t is important for in-house counsel in the first instance to be clear about the scope of parent-subsidiary joint representations. By properly defining the scope, they can leave themselves free to counsel the parent alone on the substance and ramifications of important transactions without risking giving up the privilege in subsequent adverse litigation.
Id. at 383.
The Court then explained that, where documents are prepared by outside counsel and
reviewed by in-house counsel for both a parent and its subsidiary, whether a privilege is waived
depends upon “the scope of any joint representation: documents within the scope are
discoverable; documents outside it are not, irrespective of whether they were improperly
funneled through joint attorneys.” Id. at 387. The Court of Appeals held that the District Court
had misconstrued the law on attorney-client privilege when it ordered BCE to produce
documents on the grounds that the communications between BCE and Teleglobe regarding the
discontinuation of Teleglobe’s funding were subject to a common-interest privilege that included
the Debtors. Indeed, the common-interest privilege, which applies only where several parties are
represented by different attorneys on matters of common interest to the parties, was not
applicable to the facts presented. Id. at 380-81. In remanding the case, the Court of Appeals
instructed the District Court “to determine whether any attorneys jointly represented BCE and
the Debtors on a matter of common interest. If they did, then any documents within the scope of
that joint representation are discoverable.” Id. at 383.
Ultimately, the Third Circuit concluded that the documents at issue might be privileged,
but that a further factual finding was required to determine whether the Debtors and BCE were
parties to a joint representation. Id. at 380. However, the Court was hard-pressed to hold that
even though Teleglobe and BCE may have been jointly represented, the Debtors would be
entitled to the same privilege as Teleglobe. Id. at 380-81. The Court flatly stated that Teleglobe
could not unilaterally waive the joint-client privilege regarding BCE’s documents based on its
joint representation with BCE. Id. at 387. Further, although it was poor judgment for BCE’s in-
house counsel to review documents prepared by outside counsel once the interests of Teleglobe
and BCE became divergent, it was reasonable for BCE to expect its communications with
outside counsel to remain privileged. Id. at 383. So as not to punish BCE for its in-house
counsel’s error, the case was remanded back to the District Court for further factual development
on whether counsel jointly represented the Debtors and BCE on a matter of common interest.
Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007) By Jill Agro
This action began as a derivative suit brought on behalf of Maxim Integrated Products
(“Maxim” or the “Company”), wherein the plaintiff shareholders alleged breaches of fiduciary
duties and unjust enrichment against the directors of the Company based on several instances of
options backdating. This case quickly evolved into a trilogy (Ryan v. Gifford, 935 A.2d 258
(Del. Ch.) (“Ryan I”) (motions to dismiss); Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov.
30, 2007) (“Ryan II”) (discovery ruling); and Ryan v. Gifford, 2008 WL 43699 (Del. Ch. Jan. 2,
2008) (“Ryan III”) (motion for order certifying an interlocutory appeal of discovery ruling);
however, Ryan II makes this line of cases noteworthy for its thorough discussion of the attorney-
client privilege – specifically in the context of communications between a special committee and
its counsel.
This action was filed in June 2006, prompted by Merrill Lynch’s famous (or infamous)
report on the apparent practice of backdating stock options at several public companies,
including Maxim. Ryan III, at *1. The complaint alleged breaches of fiduciary duties and unjust
enrichment against several of Maxim’s then-current directors. Id. Just days after the suit against
Maxim was filed, the Company formed a special committee to investigate the Company’s stock
option grants and practices (the “Special Committee”). Id. The Special Committee was
comprised of one member, director Peter De Roetth, to whom the board delegated investigatory
powers, but denied the power to act without the consent of the other members of the board. Id.
De Roetth retained the law firm of Orrick Herrington & Sutcliffe LLP (“Orrick”) to conduct the
investigation and to act as legal counsel to the Special Committee. Id.
The Special Committee’s advisors reviewed over 300,000 documents and conducted 32
interviews during the investigation. Id. Once the investigation was completed, the Special
Committee and Orrick presented their final report, in oral form only, to the Company’s entire
board of directors, several attorneys from Orrick, and attorneys from Quinn Emanuel, who were
representing the director defendants and other directors and officers in the derivative litigation.
Id. at *2. No written report of the Special Committee’s findings “was ever prepared, submitted
or published,” but the Company publicly announced that the Special Committee had identified
instances of stock options backdating, but found no wrongdoing by the directors, or by any one
individual. Id. Maxim, however, provided a non-public report to NASDAQ in which the
Special Committee clearly indicated that executive officers John Gifford, Maxim’s CEO, and
Carl Jasper, Maxim’s CFO, “had knowledge of and participated in the selection of grant dates for
director, rank and file and new hire employee option grants from 1999 through 2005 either with
hindsight or prior to completion of the formal grant-approval process.” Id. at *3. Both Gifford
and Jasper (neither of whom were directors) were terminated from Maxim following the Special
Committee’s investigation, but there were no other significant remedial actions. Id.
The defendants moved to dismiss the claims against them, but based on the foregoing
facts, the Court denied the motions to dismiss the complaint, and scheduled the litigation to
proceed. See Ryan I. During summary judgment briefing, the parties became embroiled in a
discovery dispute. Ryan II, at *2. The plaintiffs moved to compel the production of “the
communications between Orrick and the Special Committee that occurred throughout the course
of the Special Committee’s investigation and . . . Orrick’s presentation of the final report to the
Special Committee and Maxim’s board of directors.” Id. In response to the plaintiffs’ motion to
compel, both Maxim and the Special Committee asserted the attorney-client privilege. Id. at *3.
The plaintiffs, in turn, argued that Maxim was not entitled to invoke the privilege since the
privilege belonged to the Special Committee, and further, that the Special Committee could not
assert the attorney-client privilege because the privilege had been waived under the rule of
Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir.1970), which allows shareholders to access a
corporation’s privileged information in certain circumstances. Ryan II, at *3. The Court agreed
with the plaintiffs. Id.
Prior to setting forth its reasoning, the Court stated that it was “worthwhile to note that
the Special Committee formed here to investigate the stock option backdating appears to lack
power to assert claims on behalf of Maxim and so is not [a special litigation committee] formed
under the framework of Zapata v. Maldonado, 430 A.2d 779 (Del. 1981). Such a committee
would certainly possess its own independent privilege.” Ryan II, at *3, n.2. The Court,
however, decided to forego an arduous analysis of joint privilege and instead opined that
plaintiffs made a good cause showing to vitiate any potential assertion of privilege by showing
that the Special Committee was not “wholly separate from and independent of Maxim.” Id. In
its opinion, the Court applied the factors set forth in Garner v. Wolfinbarger and Sealy Mattress
Co. of New Jersey, Inc. v. Sealy, Inc., 1987 WL 12500 (Del. Ch. June 19, 1987), and held that
“no privilege has attached to the communications between Maxim and Orrick regarding the
investigation and report.” Id. at *3. Specifically, the plaintiffs were able to demonstrate “(1) a
colorable claim; (2) the unavailability of information from other sources, including the lack of
written final report, the inability to depose witnesses regarding the report or investigation
because of assertions of privilege, and the unavailability of witnesses due to invocation of the
Fifth Amendment privilege not to testify; and (3) the specificity with which the information is
identified.” Id.
Next, the Court clarified that even if a joint privilege were to exist such that the
communications between Orrick and the Special Committee were protected, they waived any
privilege by the presentation of the report to the director defendants and their counsel. Id.
Elucidating on the law of waiver, the Court explained that:
The presentation of the report constitutes a waiver of privilege because the client, the Special Committee, disclosed its communications concerning the investigation and final report to third parties-the individual director defendants and Quinn Emmanuel-whose interests are not common with the client, precluding application of the common interest exception to protect the disclosed communications.
Id. Although the report was only considered a partial waiver of the privilege, the “partial waiver
operates as a complete waiver for all communications regarding this subject matter.” Id.
In response, the director defendants asserted that they attended the meeting at which the
report of the Special Committee was delivered in a “fiduciary-not individual-capacity.” Id. The
Court again disagreed, observing that the director defendants, who were – as a majority of the
board – controlling the derivative litigation, were attempting to manipulate the discovery process
by using the attorney-client privilege as both a sword and a shield. Ryan III, at *3. In so stating,
the Court pointedly recognized that the Special Committee and Maxim’s board left almost no
paper trail in conducting and reviewing the investigation, and then refused to produce any
documents supporting the findings of the investigation while, at the same time, relying on those
findings in their defenses. Id. at *2.
The Court stated:
[A]s I have previously concluded, the director defendants in this case have specifically made use of the Special Committee's findings and conclusions for their personal benefit and have argued to this Court that the Special Committee's exoneration of them should be accorded deference. The director defendants have made these arguments in a brief, opposing plaintiffs' motion to amend the complaint, in which coincidentally Maxim has expressly joined. Further, the director defendants have extensively relied upon the Special Committee's findings both in opposing plaintiffs' motion for summary judgment and in support of their own motion for summary judgment. At the time of the November 30 decision [Ryan II], in their unamended summary judgment brief, the director defendants explicitly rely upon the unwritten “findings” of the Special Committee that purport to absolve the director defendants of liability. In further support of their
motion, the director defendants laud “the Special Committee's comprehensive investigation,” which included “32 individual interviews.” Interestingly, however, these same director defendants, who clearly control Maxim's litigation position, have refused to produce to plaintiffs (who prosecute this action on behalf of Maxim) materials related to the Special Committee's investigation. Even more interestingly, since the November 30 decision, the director defendants have submitted an amended brief in support of their motion for summary judgment that purports to disavow reliance on the Special Committee's findings, despite their explicit reliance thereon in the first brief in support of their motion.
Ryan III, at *3. Not surprisingly, the Court then went on to deny Maxim’s request for an interlocutory
appeal to the Supreme Court on the issue. See Ryan III.
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY TEACHERS’ RETIREMENT SYSTEM OF : LOUISIANA, : : Plaintiff, : : v. : C.A. No. 20106-VCS : MAURICE R. GREENBERG, EDWARD E. : MATTHEWS, HOWARD I. SMITH and : C.V. STARR & CO., INC., : : Defendants, : : and : : AMERICAN INTERNATIONAL GROUP, INC., : a Delaware corporation, : : Nominal Defendant. :
ORDER
WHEREAS, on March 30, 2007, Nominal Defendant American International
Group, Inc. (“AIG”) produced a log identifying documents withheld from its document
production on privilege grounds in response to discovery requests served in the above-captioned
action;
WHEREAS, on April 30, 2007, Defendant Howard I. Smith moved to compel the
production of certain documents designated as privileged by AIG (the “Motion”) and Defendants
Maurice R. Greenberg and Edward E. Matthews (together with Smith, the “Individual
Defendants”) joined in the Motion;
WHEREAS, during argument held on June 13, 2007, the Court noted that, under
Delaware law, as former directors of AIG, the Individual Defendants were “essentially within the
GRANTED
2
AIG family” for purposes of the Motion (Tr. at 139:23-24) and that, as such, the sharing of
certain privileged materials with the Individual Defendants would not constitute a waiver of
AIG’s privilege and should not be construed as such by the Individual Defendants, or by any
other individual or entity seeking to utilize AIG’s disclosure of privileged materials as evidence
of waiver in this or any other proceeding;
WHEREAS, the Court also recognized that the sharing of certain privileged
materials with former AIG directors arises out of their substantive right under Delaware law to
rely on advice of counsel as set forth in 8 Del. C. § 141(e) (“Section 141(e)”) (Tr. at 95-96);
WHEREAS, the Court also noted that the fact that this case was a derivative
action brought on behalf of AIG also had relevance, insofar as there is a community of interest
among the plaintiffs as derivative plaintiffs and AIG, which might justify disclosure of privileged
materials to the derivative plaintiffs, see Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970),
and its progeny, and that such disclosure under Garner and its progeny would not waive the
privilege as to plaintiffs or prosecuting authorities in other types of cases with interests not
aligned with AIG;
WHEREAS, the Court further stated that there exist “legitimate concerns about
waiver and confidentiality” (Tr. at 139:16-17) and since the Court was “conscious of the need to
protect the Company’s privilege and to limit [the Individual Defendants’] access” to privileged
materials (Tr. at 133:10-11), the Court delineated numerous “limitations that are designed to
ensure . . . AIG’s privilege” is protected from any future arguments of waiver in this proceeding,
any collateral proceeding or any other proceeding in which the parties may be involved (Tr. at
139:21-22); and
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WHEREAS, the production of documents by AIG to the Individual Defendants
pursuant to this Order shall not constitute a waiver of AIG’s attorney-client privilege, because,
under Delaware law, the Individual Defendants, as former directors of AIG, are entitled to access
to certain of AIG’s privileged documents generated during their tenure as directors of AIG by
virtue of their status as former directors and/or to support their Section 141(e) defense;
IT IS HEREBY ORDERED that the Motion is GRANTED as follows:
1. Within 5 days of the entry of this Order, AIG shall produce to counsel for the
Individual Defendants the following documents:
(a) All documents from or to outside or in-house counsel for AIG concerning
legal advice provided to AIG that, on their face, appear to have been directed or provided to, or
generated by, the Individual Defendants, including the documents listed on AIG’s privilege log
as P-6, P-9, P-13, P-26, P-27, P-36, P-58, P-66, P-68, P-89, P-433, P-440, P-445, P-446, P-461,
P-635, P-650, P-653, P-657 and P-808.
(b) All documents from or to outside or in-house counsel for AIG concerning
legal advice provided to AIG that, on their face, appear to have been directed or provided to
members of the Board of Directors of AIG (the “Board”) other than the Individual Defendants,
including the documents listed on AIG’s privilege log as P-50, P-652, P-655, P-656 and P-700.
(c) All documents from or to outside or in-house counsel for AIG that, on
their face, directly concern this action or the related investigation of the Special Litigation
Committee, including the documents listed on AIG’s privilege log as P-16, P-17, P-37, P-50, P-
359, P-360, P-652, P-655, P-656, P-661 and P-700.
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(d) All documents identified on AIG’s privilege log that request or reflect
legal advice from outside or in-house counsel for AIG concerning protocols for handling the
types of transactions or business relationships being challenged in this litigation.
(e) All documents identified on AIG’s privilege log that reflect or request
legal advice from outside or in-house counsel for AIG concerning the transactions or business
relationships being challenged in this litigation, to the extent that such documents fairly indicate
on their faces, in substance or context, that any of the Individual Defendants (or the Board) may
have directly or indirectly relied upon, and/or that it was intended that any of the Individual
Defendants (or the Board) would directly or indirectly rely upon, the legal advice reflected or
requested therein.
(f) To the extent that any documents on AIG’s privilege log not specifically
identified above fall within the above categories, or to the extent that AIG has withheld from
production any additional documents that fall within the above categories but has not yet
identified them on its privilege log, any such documents shall likewise be produced in
accordance with this paragraph. To the extent that AIG locates any additional documents in the
future that fall within the above categories, they shall promptly be produced to counsel for the
Individual Defendants.
(g) AIG shall produce a supplemental privilege log reflecting any additional
privileged documents it has located to date but not yet identified within 5 days of the entry of this
Order.
2. Within 20 days of the entry of this Order, counsel for the Individual Defendants
will participate in a meet-and-confer with counsel for AIG wherein counsel for the Individual
Defendants will set forth, for each Individual Defendant, a “reasoned articulation” of the
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“legitimate basis” for the “scope” of the Individual Defendants’ Section 141(e) defense. (Tr. at
133:1-14). The substance of the discussions to be had and documents exchanged during the
meet-and-confer shall be designated “Confidential” pursuant to the Confidentiality Order in this
action.
3. Within 10 days following the meet-and-confer described in paragraph 2 above,
AIG shall produce any privileged documents that fall within the scope of the Individual
Defendants’ Section 141(e) defense, whether or not such documents are identified on AIG’s
privilege log, to the extent that such documents were not already produced pursuant to paragraph
1 above. To the extent that AIG locates any additional privileged documents in the future that
fall within the scope of the Individual Defendants’ Section 141(e) defense, they shall promptly
be produced to counsel for the Individual Defendants.
4. If there are disagreements between the parties regarding the scope of the
Individual Defendants’ Section 141(e) defense (as set forth in paragraph 2 above) or the scope of
the documents to be produced by AIG consistent with the Individual Defendants’ Section 141(e)
defense (as set forth in paragraph 3 above), then the parties may seek relief from the Court, and
documents subject to any dispute shall be submitted to the Court for in camera review, to the
extent the Court wants to conduct such a review.
5. Any production of privileged documents pursuant to this Order shall be limited to
those documents generated during the time period the Individual Defendants served on the
Board. Any documents produced pursuant to this Order shall only be disclosed to the Individual
Defendants who were members of the Board at the time the documents were generated. After
AIG has produced all privileged documents required to be produced by this Order, and after the
Individual Defendants have identified to AIG the privileged documents upon which they intend
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to rely for purposes of their Section 141(e) defense, the Individual Defendants shall confer about
the production of such documents to Plaintiff’s counsel. The Individual Defendants shall not
disclose the privileged materials produced pursuant to this Order to any other party to this
proceeding, including Plaintiff or Defendant C.V. Starr & Co., Inc., without the consent of AIG
or further Order of the Court. The Individual Defendants may, with five (5) days advance notice
to AIG to provide AIG the opportunity to object, use any privileged materials produced pursuant
to this Order at the deposition or during the trial testimony of any person who, on the face of
such documents, appears to have prepared or received the documents.
6. The documents produced to the Individual Defendants pursuant to this Order shall
be designated “Confidential” vis-à-vis the Individual Defendants pursuant to the Confidentiality
Order.
7. For the reasons set forth in the transcript of the June 13, 2007 argument and
ruling, the fact of production of any privileged documents by AIG to the Individual Defendants
in this action pursuant to this Order will not constitute a waiver of the privilege as it attaches to
these documents in question, or be used by the Individual Defendants to argue that AIG has
waived its privilege with respect to any privileged materials in this or any other proceeding.
8. C.V. Starr & Co., Inc., Starr International Company, Inc., as well as the Individual
Defendants and any entity they control or with which they are affiliated, may not use the
production of these privileged documents as the basis for an argument of waiver in any other
proceeding.
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9. The Individual Defendants are prohibited from utilizing any of the privileged
documents produced by AIG pursuant to this Order in any other proceeding, unless such
documents are also ordered to be produced in the other proceeding.
__________________________________________ Vice Chancellor
Court: DE Court of Chancery
Judge: Strine, Leo E
File & Serve reviewed Transaction ID: 15526303
Current date: 7/11/2007
Case number: 20106-VCS
Case name: CONF ORD AND PROTECT ORDER Teachers Retirement System of Louisiana vs American International Group
I have considered the concern raised about the Starr revision proposed by Mr. Bouchard. The approach taken by Mr. Bouchard is entirely reasonable and fairly implements the concern expressed by AIG.
/s/ Judge Leo E Strine
THE FEDERAL/STATE DIVIDE OVER “SELECTIVE WAIVER” AND ASSERTION OF PRIVILEGE
By Denise Seastone Kraft, Esquire Protecting the corporate attorney-client privilege is a thorny issue when dealing with
investigations by governmental entities, whether state or federal. As an initial matter, corporations generally assert the “attorney-client privilege” and “work-product immunity” when confronted with disclosing internal investigation and related information to governmental entities. However, the assertion of these historical privileges created a particular problem after the January 2003 release by the U.S. Department of Justice (“DOJ”) of the Thompson Memorandum and the subsequent release of the McNulty Memorandum in December 2006.
Thompson and McNulty Memoranda
The Thompson Memorandum outlined factors the DOJ considers when determining
whether to prosecute a corporation that is the target of a government investigation. One of the factors delineated in the Thompson Memorandum was a corporation’s willingness to waive corporate attorney-client privilege and disclosure of attorney work product. The Thompson Memorandum specifically required the “timely and voluntary disclosure of wrongdoing” by the corporation. In other words, if a corporation was willing to waive the attorney-client privilege and produce materials considered attorney work-product, then a corporation was viewed as cooperative. Any perceived reluctance by the corporation to produce such privileged communications and materials was not viewed favorably by federal prosecutors and the “non-cooperating” corporation faced potential indictment. The Thompson Memorandum created much heated discussion and debate in legal circles.
As a result of the legal criticism lodged against the Thompson Memorandum’s virtual
requirements of corporate privilege waiver, the DOJ released the McNulty Memorandum in 2006. Compared to the Thompson Memorandum’s “hard-line” position, the McNulty Memorandum set forth a more limited approach that only allowed federal prosecutors to seek a corporate privilege waiver in limited circumstances, and only then with high-level DOJ approval. However, the McNulty Memorandum did not entirely retract the DOJ’s position on seeking corporate privilege waivers and continued to include language indicating that corporations voluntarily waiving corporate privilege would receive favorable consideration in determining whether the corporation should ultimately be prosecuted.
As intended, the Thompson and McNulty Memoranda exerted extreme pressure on
corporations to “voluntarily” waive their privileges. In a herculean effort to cooperate with the government in exchange for favorable treatment, while at the same time also seeking to protect the privileged information from being deemed waived as to all third parties, corporations sought to enter into confidentiality agreements with the government agencies before handing over their privileged information. When challenged by a third party on waiver issues, the corporation would then assert that the voluntary privilege waiver was a “selective waiver” as to the government entity only and not as to third parties.
Development of the Selective Waiver of Privilege Doctrine
In order to understand the development of the selective waiver doctrine, it is helpful to understand the elements of the underlying historical privileges of attorney-client privilege and work-product immunity. The attorney-client privilege consists of: (a) a communication; (b) between client and counsel; (c) with expectation of confidentiality; and (d) for the purpose of obtaining or giving legal advice (and not in a business capacity). The client holds the attorney-client privilege.
The work-product immunity is applicable where there are: (a) materials; (b) prepared in
anticipation of litigation or for a trial; (c) relating to mental impressions, conclusions, opinions, or legal theories; (d) prepared by an attorney or other representative of a party relating to the litigation. There are two types of work-product: opinion work-product and fact work-product. The ability to invoke the work-product immunity usually belongs to the attorney (particularly in the case of opinion work-product). The work product immunity from production is not actually a privilege to refuse to produce (like the attorney-client privilege is), and therefore, in the absence of a waiver, it is generally easier to obtain work-product materials of the opposing side (particularly fact work-product) than it is to obtain materials protected by the attorney-client privilege. Nevertheless, both the attorney-client privilege and the work-product immunity are commonly referred to as “privileges.”
The attorney-client privilege and work-product immunity generally may both be waived
in the same manner through: (a) voluntary waiver; or (b) waiver through a third-party communication. It is through the mechanism of the waiver of the privileges that the issue of “selective waiver” arises. The question becomes: Can a corporation voluntarily and selectively waive its privileges under the threat of prosecution as to one party-the government-while at the same time retain its privileges in all other respects as to other parties and other litigation? This is the question that various federal circuit courts and state courts have been asked to answer against the backdrop of the conundrum facing corporations seeking to avoid criminal prosecution under the Thompson and McNulty Memoranda through voluntary waiver of corporate privileges, while at the same time attempting to prohibit access to the same sensitive information in the context of civil actions brought by shareholders or other corporate litigation activists.
In the current legal environment, the pressure to waive corporate privileges in an effort to
avoid criminal prosecution must be balanced carefully against the danger of waiving the privileges as to third parties in other litigation, and this balance may be struck differently depending on whether the other litigation is pending in federal or state court. First, selective waiver recognition varies among the federal circuit courts, with the majority rejecting selective waiver. Second, each of the states apply their own substantive law when dealing with the issue of selective waiver.
Is Federal or State Privilege Law Applicable?
As an initial matter when considering selective waiver issues, a corporation should
determine whether federal or state law privilege is applicable to any particular case or potential case. In a federal court case, F.R.E. 501 governs whether federal or state privilege, or both,
2
apply. Generally, if a federal question is involved, federal common law applies. If a diversity matter is before the federal court, then the court will look to the applicable state law. States each have their own privilege laws that are usually codified by statute. Although, the forum state may apply another state’s privilege laws if the other state has a greater interest or more significant relationship. Other factors governing which state law to apply involve choice of law provisions, location of the communication and/or where any asserted waiver of the privilege occurred.
Federal Circuit Courts’ Treatment of Selective Waiver
At this time, the majority of federal circuit courts hold the view that a corporation that
has voluntarily and selectively waived its privileges as to the government in an effort to avoid indictment has also waived its privileges as to other interested third parties. Further, the presence of a confidentiality agreement does not help a corporation claiming selective waiver protection in most cases. The practice has created a practical problem for corporations because of the divide among the circuit courts in applying selective waiver, as outlined in In re Qwest Communications International Inc., 450 F.3d 1179 (10th Cir. 2006). To further complicate the issue, the circuit courts have considered the attorney-client privilege and the work product immunity separately on the issue of selective waiver.
As set forth in Qwest, only one circuit, the Eighth Circuit, recognizes selective waiver of
the attorney-client privilege (Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 23 Fed. R. Serv. 2d 1473, 24 Fed. R. Serv. 2d 1201 (8th Cir. 1977)). The D.C. Circuit, First Circuit, Second Circuit, Third Circuit, Fourth Circuit, Sixth Circuit, Tenth Circuit and Federal Circuit have all rejected selective waiver of the attorney-client privilege. The Seventh Circuit has rejected selective waiver of the attorney-client privilege in a single case based on its particular facts but has not rejected the concept entirely.
The Fourth Circuit has partially adopted selective waiver upon the assertion of the work-
product immunity by approving the use of selective waiver for opinion work product (In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988) (approving “selective waiver” for opinion work product but rejecting use for non-opinion work product.) The Third Circuit, Fourth Circuit (as to non-opinion work product), Sixth Circuit, Eighth Circuit and Tenth Circuit have all rejected selective waiver based upon the work-product immunity. The D.C. Circuit has rejected the concept in specific cases based on their particular facts of no confidentiality agreement in place but has not rejected the concept entirely. The Second Circuit has rejected the concept in specific cases based on their particular facts but has not rejected the concept entirely.
State Court Treatment of Selective Waiver
State court decisions have generally followed the federal courts in not recognizing selective
waiver, with some exceptions, such as Delaware and Arizona: Delaware--Saito v. McKesson HBOC, Inc, 2002 WL 31657622 (Del. Ch. Nov. 13, 2002) (“[B]ecause I find that it is in the best interests of the shareholders to encourage corporate compliance, and because the law enforcement agencies are designed by our legislature as the first line of defense for such shareholders, I adopt a selective waiver rule for disclosures made to
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law enforcement agencies pursuant to a confidentiality agreement. . . . The selective waiver rule encourages cooperation with law enforcement agencies without any negative cost to society or to private plaintiffs.” Id. at *11.) The Saito case is significant because most of the Fortune 500 companies are incorporated in Delaware and engage in litigation in Delaware. Accordingly, Delaware offers state selective waiver protection for Delaware corporations and other Delaware entities that are not provided in other states. Arizona-- Danielson v. Superior Court, 157 Ariz. 41, 754 P.2d 1145 (1988) (selective waiver of physician-patient privilege allowed.) Although selective waiver has been recognized as a concept, there is no indication that Arizona would recognize selective waiver involving a government entity. Other state courts have specifically rejected selective waiver: California--McKesson HBOC, Inc. v. Superior Court, 115 Cal.App.4th 1229, 9 Cal.Rptr.3d 812, 819, 821 (2004) (rejecting selective waiver of attorney-client privilege and work-product protection, despite a confidentiality agreement with the SEC and United States Attorney and the government testifying that the corporation did not intend to waive privilege generally). Ironically, this case involved the same transaction as the Saito case in Delaware in which the selective waiver doctrine was upheld. Georgia--See McKesson Corp. v. Green, 279 Ga. 95, 610 S.E.2d 54, 56 (2005) (rejecting selective waiver of work-product protection, despite a confidentiality agreement). This is yet another case involving the same transaction as the Saito case in Delaware. Minnesota--State v. Thompson, 306 N.W.2d 841, 843 (Minn. 1981) (rejecting selective waiver where the attorney-client privilege was deemed waived by disclosure of investigation reports, notes, and statement to attorney-general.)
Selective waiver still remains a minority view in the common law of attorney-client privilege and the work-product immunity in both state and federal courts.
Pending Federal Legislation
In response to the conundrum created by the directives in the Thompson and McNulty Memoranda and the federal circuit courts’ majority view of not recognizing “selective waiver,” federal legislation has been introduced to halt the perceived erosion of the attorney-client privilege through governmental investigations that encourage or require “voluntary” waiver of privilege. Senate Bill 2450: “Attorney-Client Privilege and Work Product; Limitations on Waiver”--The bill was introduced to amend the Federal Rules of Evidence to address the waiver of attorney-client privilege and the work-product doctrine when such documents are inadvertently disclosed. Under the bill, Rule 502 would be added to the Federal Rules of Evidence and provide that upon an inadvertent disclosure in a federal proceeding, there would be no waiver in a subsequent federal or state proceeding if, upon discovery of the inadvertent disclosure,
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reasonable steps are taken to rectify the problem. The bill passed the Senate on February 27, 2008 and was referred to the House Committee on the Judiciary.
The most significant language of the original bill is the language that now lies on the
cutting-room floor. As initially proposed, Rule 502(c) would have codified the selective waiver provision. That section of the bill was deleted after the public comment period that ended in February 2007. The public comments, hearings and witnesses made it clear that public opinion was deeply divided on the selective waiver provision of 502(c) as originally drafted. Accordingly, in May 2007, the advisory committee to the Standing Committee on Rules of Practice and Procedure recommended approval of Rule 502, without the selective waiver language of 502(c).
Senate Bill 186: “The Attorney-Client Privilege Protection Act of 2007”--After the Thompson Memorandum was released (but prior to the release of the McNulty Memorandum), Senator Arlen Specter proposed Senate Bill 186, “The Attorney-Client Privilege Protection Act of 2007.” The Senate bill is a bi-partisan bill with H.R. 3013 (which passed the House last fall) and seeks to provide appropriate protection to attorney-client privilege communications and attorney work-product. Under the bill, the government continues to maintain the burden of proof in pursing corporate prosecutions. Further, governmental entities would be prohibited from engaging in punitive behavior if a corporation refuses to waive attorney-client privilege or if it undertakes the payment of legal fees of employees who are under investigation. The bill is an attempt to legislate away the thorny issues raised by a corporation when trying to both protect its privileges from inadvertent waiver and also cooperate with government authorities.
The last major action taken on the bill was on September 18, 2007, when the Senate Committee on the Judiciary held hearings. Since that time, no further action has been taken. In late June 2008, a bi-partisan consortium of 32 former U.S. Attorneys sent a letter to the Senate Judiciary Committee requesting that they vote on the bill. The bi-partisan group believes that the practice of government entities requiring corporate waiver of privileges in return for favorable treatment has led to the erosion of the traditional corporate attorney-client privilege. Those opposed to the bill believe that it will hamper their efforts to detect corporate fraud and other wrongful acts. As of June 2008, Attorney General Michael Mukasey was on the record stating that he believed current Justice Department practices are working, and in any event, there are very few requests for corporate attorney-client privilege waiver.
Practical Application of the Selective Waiver Split
It is important to consider the Federal and State divide over the selective waiver issue and how it may affect a corporation before making the following disclosing attorney–client privilege and work-product materials in the following contexts:
1. News Media
2. Auditor/Accountant
3. Insurer
4. Government Investigations
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5. SEC Filings
6. Other Public Filings
7. Communications with counsel representing other parties
A well-researched and crafted plan to deal with inadvertent and selective waiver issues will assist both in-house and outside counsel in making informed decisions as to where to allocate waiver “risk” in the current legal environment. In any event, whether it ultimately prevents a waiver or not, obtaining a confidentiality agreement is always a good practice when a corporation decides to make a voluntary disclosure of attorney–client and work-product information.
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Attorney-Client Privilege Erosion in the In-House Context
1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036-5425 tel 202.293.4103 fax 202.293.4701 www.ACC.COM
(Last Updated 6/08)
Supplemental Material Provided by Susan Hackett
This bibliography can be found (and is regularly updated) online at http://acc.com/public/article/attyclient/acc-ac-biblio.pdf
General Information: ACC’s Attorney-Client Privilege homepage: (offers articles, resources, testimony, links, etc.) http://www.acc.com/php/cms/index.php?id=84 ACC’s Pragmatic Practices in Privilege Protection: http://www.acc.com/public/attyclientpriv/pragpract.pdf ACC’s Attorney-Client Privilege InfoPAK (a manual summarizing the privilege): http://www.acc.com/resource/v6327 “Wither” Attorney-Client Privilege An ACC Docket article by ACC’s General Counsel, Susan Hackett, on Privilege in the In-house Context Post-Enron: http://www.acca.com/protected/pubs/docket/sept05/wither.pdf ACC Acts to Protect the Privilege: Attorney Client Privilege Protection Act of 2007/08 (endorsed by ACC and its coalition partners): The same legislation introduced in December of 2006 was reintroduced in 2007 by Senator Specter as S.186: identical legislation was introduced on July 12, 2007, in the House as H.R. 3013: http://acc.com/public/s186.pdf or http://www.acc.com/public/attyclientpriv/hr3013.pdf and passed the House on voice vote. The current iteration of the bill is in the Senate Judiciary Committee, and New legislation was reintroduced by Senator Specter in June of 2008 as S. 3217: http://www.acc.com/resource/v9856. ACC Statement: Senator Specter Re-introduces S. 186 as S. 3217, an amended bill: http://www.acc.com/public/pr/praccpa2008.pdf ACC Statement: US House Adopts HR 3013 - Attorney-Client Privilege Protection Act of 2007 http://acc.com/php/cms/index.php?id=34&action=item&item_id=20071113_7537
ACC’s 2005 survey: Is the Privilege Under Attack? http://www.acca.com/Surveys/attyclient.pdf ACC’s 2006 survey: The Decline of the Attorney-Client Privilege in the Corporate Context http://www.acca.com/Surveys/attyclient2.pdf The Veasey Report – ACC’s 2007 member survey pipelining privilege and prosecutorial abuse stories relayed by respected neutral Former Chief Justice of Delaware E. Norman Veasey. http://acc.com/public/veasey.pdf. ACC and its Coalition’s Executive Summary of Why Congress Should Act to Protect the Attorney-Client Privilege: http://www.acc.com/public/policy/attyclient/attyclientcoalitionmcnultyrebuttal.pdf ACC and its Coalition partners’ testimony before the US Senate’s Judiciary Committee hearings, September 18, 2007 - Coalition to Protect the Attorney-Client Privilege's statement on the hearings (ACC’s statement): http://acc.com/public/coalition-statement.pdf- Statement of former Attorney General Dick Thornburgh http://acc.com/public/thornburgh-testimony.pdf - Statement of Andrew Weissmann, former head of the DOJ’s Enron Task Force http://acc.com/public/senatejudiciary.pdf - ABA written submission to the Senate for the hearings: http://acc.com/public/aba-testimony.pdf ACC and its Coalition partners’ testimony before the US House Judiciary Committee’s Subcommittee on Crime, Terrorism and Homeland Security, March 12, 2007: - Testimony of ACC Board Chairman Richard T. White: http://www.acc.com/public/policy/attyclient/richardwhitemcnultytestimony.pdf - Testimony of Andrew Weissmann, former DOJ Enron Task Force Chairman: http://www.acc.com/public/policy/attyclient/weissmanhousetestimony.pdf - Testimony of ABA President Karen Mathis: http://www.acc.com/public/policy/attyclient/abatestimonytohousejudsubcomm.pdf - Testimony of William Sullivan, Partner, Winston & Strawn: http://judiciary.house.gov/media/pdfs/Sullivan070308.pdf - Testimony of Barry Sabin, US Department of Justice: http://judiciary.house.gov/media/pdfs/Sabin070308.pdf ACC and its Coalition partners’ testimony before the US Senate Judiciary Committee, September 12, 2006: http://www.acca.com/public/attyclientpriv/coalitionsenjudtestimony.pdf Testimony and Statements made at the Senate Hearings (Sept. 12, 2006): http://www.acca.com/public/attyclientpriv/writtentestimonyussenate.pdf ACC and its Coalition partners’ testimony before the US House of Representatives Judiciary Subcommittee on Crime, Terrorism and Homeland Security, March 7, 2006: http://www.acca.com/public/accapolicy/coalitionstatement030706.pdf Letter to Sen. Leahy from former US Attorneys supporting S. 186 (6/2008): http://www.acc.com/resource/v9833 Letter from former DOJ officials re the need for action on legislation (2007):
http://acc.com/public/attyclientprivissue.pdf Letter from former senior DOJ officials criticizing the Thompson Memo (2006): http://www.acca.com/public/attyclientpriv/agsept52006.pdf Letter from former senior DOJ officials - US Sentencing Commission (re Thompson) (2005): http://www.acca.com/public/policy/attyclient/doj.pdf ACC Policies and Comments/Testimony on Attorney-Client Privilege Issues: http://www.acca.com/public/article/attyclient/debate.pdf http://www.acca.com/public/comments/attyclient/privilege.pdf http://www.acca.com/public/accapolicy/corpresponspolicy.pdf http://www.acca.com/public/accapolicy/attyclient.pdf ACC’s Comparison “Chart” The Thompson and McNulty Memos and S. 186/H.R. 3013: http://www.acc.com/public/attyclientpriv/mcnultychart.pdf ABA Attorney-Client Privilege Task Force homepage: This page contains the reports of the Task Force to the ABA House of Delegates, which are law review type articles that give a great outline of privilege issues, including the two most recent resolutions on privilege passed by the ABA House in August of 2006, focusing on privilege erosion in the context of audits and problems associated with employee or individual rights (a la the KPMG issues; it also has a resources section on which collected material resides, and info on Task Force activities. ACC is a member of the Task Force and supports their efforts. http://www.abanet.org/buslaw/attorneyclient/home.shtml Department of Justice/Prosecutorial Practices Eroding the Attorney-Client Privilege DOJ Charging Policies Used to Assess Corporate Cooperation – Chronological Order The DOJ’s Holder Memorandum (1999) is at: http://www.usdoj.gov/criminal/fraud/policy/Chargingcorps.html Establishment of the DOJ’s Corporate Fraud Task Force (2002) (Executive Order 13271): http://www.usdoj.gov/dag/cftf/execorder.htm The DOJ’s Thompson Memorandum (2003) is at: http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm The DOJ’s response to the ABA regarding proposals to amend the Thompson Memo: http://www.acca.com/public/attyclientpriv/dojresponsetoaba.pdf “Then-US Attorney Jim Comey’s Guidance on Interpretation of the Thompson Memo, and other DOJ discussions of the government’s Corporate Crime/Fraud Task Force (2003)” http://www.justice.gov/usao/eousa/foia_reading_room/usab5106.pdf The DOJ’s McCallum (2005) Memorandum is at: http://www.acca.com/public/attyclntprvlg/mccallumwaivermemo.pdf The McNulty Memo (2006) (amending the Thompson Memo):
http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf - Deputy AG McNulty’s prepared remarks on release of the Memo: http://www.usdoj.gov/dag/speech/2006/dag_speech_061212.htm - DOJ Executive Summary of the McNulty Memo: http://www.acc.com/public/policy/attyclient/dojexecsummary.pdf
The “Morford” Memo on DPAs and NPAs / Monitors (3/08) http://www.acc.com/resource/v9595 Info on the DOJ’s Corporate Fraud Task Force http://www.usdoj.gov/dag/cftf/ Review Significant Criminal Cases and Charging Documents of the DOJ against corporate targets http://www.usdoj.gov/dag/cftf/cases.htm DOJ’s Fact Sheet report on the Corporate Fraud Task Force Fifth Anniversary http://www.usdoj.gov/opa/pr/2007/July/07_odag_507.html Securities and Exchange Commission Practices Eroding the Privilege SEC’s Seaboard Report [the internal document setting policy on (non-) “recognition” of privilege]: http://www.sec.gov/litigation/investreport/34-44969.htm SEC Proceedings Against In-House Counsel http://www.acca.com/protected/article/ethics/seccrimproceed.pdf SEC speeches particularly informative to the attorney-client privilege and gatekeeper debate:
SEC’s general counsel explains the 307 rules and their context: http://www.sec.gov/news/speech/spch040304gpp.htm
SEC’s director of enforcement speaks on lawyers’ responsibilities as gatekeepers of client conduct and shareholder interests: http://www.sec.gov/news/speech/spch092004smc.htm
SEC Commission Atkin’s Remarks before the Federalist Society (see about page 6): http://www.sec.gov/litigation/investreport/34-44969.htm
Privilege in the Audit Process
ACC’s Interim Report of the Working Group to Improve the Relationship Between Lawyers and Auditors: http://www.acc.com/php/cms/index.php?id=368
ACC’s Comments to the FASB on proposed FAS 5 (Summer 2008): to be added.
ACC and the Courts: Privilege as a Court-Protected Doctrine Conference of Chief Justices Statement Supporting the Attorney-Client Privilege (and instructing States’s Courts to Create Commissions to examine erosion issues):
http://ccj.ncsc.dni.us/resol9StateCommitteesOnAttorneyClientPrivilege.html ACC’s Comments to the Federal Courts’ study committee examining proposed FRE 502 and its limited waiver provisions: June of 2006: http://www.acca.com/resource/v7465 January of 2007: http://www.acc.com/public/policy/attyclient/accfre502comments.pdf All ACC Amicus (listing and links) on privilege-related issues: http://www.acc.com/php/cms/index.php?id=291 ACC’s amicus in U.S. v. Textron, supporting privilege in the audit process and encouraging the court to rule that documents divulged to auditors in the course of assuring financial integrity should not be deemed as waived to the government or third parties. http://www.acc.com/resource/v9669 ACC’s Amicus in a Texas Supreme Court case regarding the confidentiality of privileged documents produced to an auditor by a client during the regular audit process and then sought in discovery by a third party in litigation against the client. http://www.acca.com/public/amicus/txamicus.pdf ACC’s amicus brief on limited waiver concerns: (QWEST) http://www.acca.com/public/amicus/qwest.pdf ACC’s amicus briefs on the issue of government pressure on companies to deny employees’ indemnification and fee advancement under corporate policies:
in the US v. Stein/KPMG case (3 amicus on related issues as requested by Judge Kaplan): http://www.acc.com/public/amicus/steinbrief.pdf http://www.acca.com/public/amicus/acckpmgamicusbrief.pdf and http://www.acca.com/public/attyclientpriv/suppl-us-stein.pdf
Judge Kaplan’s decision in KPMG finding the Thompsom Memo
unconstitutional: http://www.acc.com/public/attyclientpriv/kpmg_decision.pdf
Judge Kaplan’s dismissal of the charges against 13 of the 16 KPMG defendants: http://www.acc.com/public/amicus/opiniondismissingcase.pdf
in the Lake/Wittig case: http://www.acca.com/public/amicus/lakewittig.pdf
ACC’s amicus in Teleglobe v. BCE case, in which privilege rights of the employer-entity of an in-house legal team that provided advice for both the employer entity and affiliates in the corporate family are discussed: http://www.acc.com/feature.php?fid=1238) Amicus of five Canadian corporations interested in the Teleglobe v. BCE case: http://www.acc.com/resource/v7485 Opinion of the Third Circuit in Teleglobe v. BCE – Judge Ambro (citing to ACC’s brief, amongst others): http://www.acc.com/resource/v8582 Other Related Issues:
ACC’s Gatekeeper/Liability homepage: http://www.acc.com/php/cms/index.php?id=371 ACC Reports: Corporate Counsel in the Liability Crosshairs (2007) http://acc.com/resource/v8918 ACC’s “Paradise Tarnished: Today’s Sources of Liability Exposure for Corporate Counsel” (2006) http://www.acc.com/resource/getfile.php?id=4960 Corporate Counsel: Caught in the Crosshairs (2005 - Lamberth) http://www.acca.com/protected/article/attyclient/crosshair.pdf ACC’s Leading Practices Profile: Indemnification and Insurance Coverage for In-House Lawyers http://www.acc.com/resource/getfile.php?id=6300 ACC’s Sarbox 307 – Part 205 Rules homepage: This is the site of a significant number of primary and commentary resources on the SEC’s new attorney conduct rules promulgated under the authority given in Sarbanes-Oxley Section 307, and codified at 17 CFR Part 205. http://www.acca.com/legres/corpresponsibility/attorney.php Lawyers as Whistleblowers: The Emerging Law of Retaliatory Discharge of In-house Counsel http://www.acca.com/protected/article/governance/wrong_discharge.pdf The appendix to this article contains the ABA Model Rules of Professional Conduct 1.6 (Confidentiality) and 1.13 (Organization as Client), which are most relevant to this discussion. The issue of lawyers as whistleblowers raises privilege questions in the context of privileged attorney-client conversations and information that the plaintiff lawyer would wish to introduce in order to make his or her case for retaliatory discharge. Responsive Measures for Government Investigations (Warin) http://www.acca.com/protected/policy/compliance/respond.pdf ACC’s InfoPAK on Responding to a Government Investigation: http://www.acc.com/resource/v4738 ACC’s InfoPAK on Conducting an Internal Investigation: http://www.acc.com/resource/v4737 If you are an in-house counsel and not an ACC member, and therefore need a temporary password to access some of these documents, please contact Susan Hackett at [email protected].
“Pragmatic Practices for Protecting Privilege”
Prepared for the ACC 2006 Annual Meeting
CLO Executive Leadership Series Program by the Same Name
October 23, 2006
Interviews Conducted and Research Compiled on behalf of the Association of Corporate Counsel
by:
W. Stephen Cannon Todd Anderson
Michael Burchstead CONSTANTINE | CANNON
Washington, D.C.
1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036-5425 tel 202.293.4103 fax 202.293.4701 www.ACCA.COM
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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Table of Contents
I. Introduction 2 II. General Overview 4 III. Audit Process 10 IV. Internal Investigations 19 V. Individual Rights of Employees 25 VI. Document Retention Policies 31 VII. Limited Waiver 34 VIII. Prosecution Agreements and Corporate Monitorships 37
I. Introduction: Need for focus on practical resources and suggested responses to problems involving the erosion of attorney-client privilege The continued vitality of the attorney-client privilege1 is threatened by a number of governmental policies – foremost among them those of the U.S. Department of Justice. Because of these policies, companies that have been accused of wrongdoing or that are engaged in voluntary self-evaluation or self-reporting are often forced to waive their attorney-client privileges in order to be judged as “cooperating” with prosecutors or enforcement officials. Erosion of the attorney-client privilege has a negative and concrete impact: executives and directors who would like to consult with corporate counsel about the most sensitive issues are confused about whether the corporate attorney-client privilege will apply to their conversations with counsel and thus their communications with lawyers are “chilled”; lawyers investigating allegations of wrongdoing are worried about how their honest attempts to unearth and correct serious problems may be used against the company’s interests in the future; and line employees who lack the sophistication or means to protect themselves can be deprived of their Constitutional rights and left without the protections we would guarantee to any other person whose actions are under scrutiny as a result of a government investigation.
1 Although the “attorney-client privilege” (maintaining the confidentiality of communications between an attorney and client) is distinct from the “work product doctrine” (precluding adversaries from discovering the work product of attorneys developed in anticipation of litigation), these protections are closely related. Except where specifically noted, for ease of exposition in this document the terms “attorney-client privilege” and “privilege” are used to refer collectively to both protections.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
3
The practice of forcing waivers of the attorney-client privilege has the unintended consequence of negatively impacting aggressive self-policing by corporations, which we should encourage in order promote a compliant and reliable economic marketplace. Policies and practices of the government that undercut the lawyer-client relationship in the corporate context have the effect of deflating responsible corporate compliance efforts and ethical leadership by making it more likely that industrious executives in fast-paced businesses will simply forego consultation with lawyers with whom no predictable presumption of confidential communications exists. Much of the public discourse focuses primarily on documenting the existence of this erosion of the attorney-client privilege and arguing its merits, and not on how to address its ramifications (such as offering practical applications that corporate counsel and clients should consider adopting). So even as we continue to work to address abusive practices and protect corporate assertion of the privilege ACC wants to move , and with this document is delving into pragmatic practices that will work to address privilege erosion, seek to prevent wavier problems, and provide strategies for pushing back against inappropriate demands to divulge attorney client confidences. The best way to collect such ideas? Benchmark the folks in the trench who’ve already thought about this issue and have implemented responses. ACC asked Steve Cannon, our privilege counsel and the former CLO of a Fortune 200 company (now at Constantine Cannon PC) to reach out to the in-house counsel community to identify the key issues ACC members face and to catalogue the various approaches employed to address those issues. Constantine Cannon interviewed a significant number of CLOs (as well as in-house compliance, litigation and governance counsel), at corporations of various sizes in a wide range of industries (including consumer goods, retail, manufacturing, high tech, financial services, insurance, pharmaceuticals, and telecommunications). They also interviewed a number of outside counsel to these corporations, as well as current and former government officials responsible for investigating and prosecuting allegations of corporate wrongdoing, in order to garner any additional thoughts they could share.
The resulting research shows that privilege erosion problems generally fall into one (or more) of the following categories: audit process, internal investigations, individual rights of employees, document retention policies, limited waiver issues, and prosecution agreements and corporate monitorships.
Thus, this primer starts with an overview of privilege erosion issues for those would like to get more familiar with the topic before diving into suggested practices. This overview is followed by six sections corresponding to the above-listed categories. To bypass the overview and go directly to the research results and practical applications benchmarks, proceed to Section III, at page 10. For more information on ACC’s efforts to change privilege practices in the prosecutorial and regulatory community, or for additional research material on this topic, go to ACC’s privilege homepages at http://www.acca.com/php/cms/index.php?id=84. Please note that some of ACC’s online resources offered on our privilege homepages or in the subsequent pages are password-protected documents, available to ACC members only. Questions, comments, or additional ideas for additions to this resource can be directed to ACC’s General Counsel, Susan Hackett, at 202/203-4103, ext. 318 or [email protected].
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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II. General Overview: Erosion of privilege in the corporate criminal context A. Importance of the attorney-client privilege
Attorney-client confidentiality is the foundation of the relationship between a lawyer and client. The attorney-client privilege is an evidentiary/procedural right governed by a court when one party to an adversarial matter wishes to exclude from the other party’s discovery requests or questioning that material which includes attorney-client communications or confidences. What can be excluded from an adversary’s request as attorney-client privileged is actually quite narrow in scope: the privilege does not protect facts, nor does it protect information that has been previously divulged to parties who aren’t part of the confidential lawyer-client relationship.2 Since it thus only protects the client’s requests for legal advice and the actual advice or work product of the legal counselor responding to that request, there is rarely a reason to assume that withholding such information from an adversary will leave the adversary without the ability to discover the facts needed to make its case.
While lawyers are generally bound by rules of professional ethics3 to preserve their clients’ confidences, it is the attorney-client privilege that allows a client to assert its rights to the confidentiality of its conversations with counsel and the non-disclose-able nature of the work lawyers do for the client in anticipation of possible or pending litigation. The U.S. Supreme Court confirmed that corporations are entitled to the protections of the privilege as clients of lawyers they retain or employ in the landmark Supreme Court case of Upjohn Co. v. United States.4 Likewise, the Supreme Court addressed the issue of related work product doctrine protections that can be asserted by the lawyer whose work in “in anticipation of litigation” against the corporate client contains attorney thought processes, defense strategies, and other indicators which would show the opposing side the client’s legal strategy or what they think is relevant.5
The Upjohn decision is clear: privilege should be respected and promoted in the corporate context because it operates in the public’s best interest by encouraging executives and managers in companies to seek out legal advice in order to ensure compliant conduct in their daily work. The Court reasoned that protecting client confidences also helps to facilitate timely reporting of problems so that they can be quickly addressed and remedied. The Supreme Court was clearly concerned that without predictable and enforceable confidentiality in lawyer-client communications, employees of a company would be unwilling to put corporate concerns ahead of their own personal interests in
2 It also should be noted that some exceptions to the privilege exist, which make it impossible for a client to assert privilege rights against another party. The most important exception is what is called the crime-fraud exception. Under this well-recognized doctrine, a client cannot claim and a court cannot apply privilege protections regarding conversations or advice which result in the lawyer’s services being used in furtherance of the commission of a crime or fraud. 3 See, for example, ABA Model Rule of Professional Conduct 1.6, and its counterpart rule in every state’s code of professional responsibility. (http://www.acca.com/resource/index.php?key=6296) 4 See Upjohn Co. v. U.S., 449 U.S. 383 (1981). 5 Hickman v. Taylor, 329 U.S. 495 (1947).
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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staying out of the spotlight when trouble might be brewing inside the company. The Court endorsed the concept of rewarding – not penalizing – employees for consulting a lawyer about a complex, sensitive, or troubling matter; to do so encourages well-informed and responsible corporate actions.
B. What has changed? What is causing concern?
For hundreds of years, the courts have acted as guardians of clients’ privilege rights, but increasingly, demands to waive the attorney-client privilege are being made outside the courthouse and without the oversight of an impartial judge. And so, the concern today is not that the courts are somehow incorrectly making decisions that improperly erode privilege protections: rather, the concern is that government agencies (such as the Department of Justice) are unilaterally making their own decisions about whether privilege rights and protections should or should not be afforded to those they plan to prosecute or, worse yet, against those against whom they have no case, but hope to enlist in collecting information that can be used against the real targets of their investigations. When prosecutors feel entitled to unilaterally force companies to waive their attorney-client privileges in order to receive fair treatment, courts are no longer the impartial arbiters of the privilege rights: rather, they simply are not present when privilege waiver demands are being made during pre-charging conversations between prosecutors and targets, and therefore they are no longer properly positioned to adjudicate privilege confidentiality disputes.
ACC surveys document an alarming increase in the number of instances in which privilege waiver demands are unilaterally made by prosecutors, enforcement officials, auditors and third-party plaintiffs.6 Those demanding a waiver of the corporation’s privileges regularly presume that they need to review everything and anything that may assist them in investigating potential misconduct or problems at the company, even if the information would be protected were a court of law overseeing the parties, and even if there is no showing that this most intrusive and extreme method of gathering information is necessary because other avenues of investigation or fact-finding are not available.
In the enforcement or prosecutorial context, privilege waiver demands are often made at the earliest stages of the charging process. According to their own policy statements, in order for the Department of Justice or the Securities and Exchange Commission to deem a potential “targeted” company as cooperative, they may in their own discretion require a waiver of the corporation’s privilege rights, well before charges have been filed or even a determination of the relevant facts is complete. ACC surveys suggest that an increasing number of these “requests” are made at the first meeting between the targeted company and the prosecutors – before any facts are in or any investigations have been done: indeed, often before there is a confirmation that an allegation of wrongdoing has any merit at all.
6 ACC has developed and published two surveys that help document the actual practices and experiences of corporate lawyers and their clients regarding privilege waiver and the practical effect of government prosecutorial policies and practices. See http://www.acca.com/Surveys/attyclient.pdf, and http://www.acca.com/Surveys/attyclient2.pdf. The results of these surveys are discussed in detail in Appendix A, but it is worth noting here that the assertions regarding privilege waiver practices of the government are based upon the documentation of the actual experiences of hundreds of corporations through these surveys.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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When privilege waivers are demanded and secured unrelated to any pre-determined need for the specific information that constitutes the attorney-client communication, the only real beneficiaries are future third-party plaintiffs who can then demand access to privileged information that the company was forced to waive to the government. Some companies engage in a last-ditch effort to protect themselves against third party plaintiffs by executing a confidentiality agreement (otherwise known as a limited waiver) that they hope will have the effect of allowing them to put privileged documents provided in the context of an investigation “back into the box” of confidential material. DOJ and enforcement officials often suggest limited waiver agreements to reticent targets as an incentive to believe that the future distribution of privileged material that they wish to review can be controlled. While there is a split between the circuits regarding the enforceability of such confidentiality or limited waiver agreements when challenged by third party plaintiffs, the majority of courts have held that, once waived as to one party, the privilege is waived as to all future parties as well, regardless of what the parties may agree amongst themselves to protect.7
C. Privilege in the post-Sarbanes-Oxley environment
While nothing has technically changed in the laws governing the application of the privilege in the corporate context in recent years, past corporate accounting scandals have raised concerns about the need for corporations to operate in a more transparent and accountable fashion, and have put pressure on prosecutors and enforcement officials to find and punish both culpable organizations and individuals. But the fact that the number of opportunities for prosecutions has increased does not infer that the tools needed by a prosecutor in order to obtain a conviction have changed. Indeed, as noted by an array of former top DOJ officials from past administrations (both Democrat and Republican), privilege waivers are not necessary for the DOJ to do its job. These former attorneys general and senior enforcement officials state that they are disappointed that current leadership at DOJ suggest that privilege waivers are a necessary and appropriate tool to ensuring a successful prosecution.8 They make a compelling case against these tactics, arguing that weakening the attorney-client privilege will be counterproductive to the ultimate goals of promoting corporate accountability, transparency, self-reporting, and preventive compliance. They join us in arguing that increased corporate transparency is not connected to the elimination of confidential legal counseling; indeed, without a right to engage in confidential counseling, corporate transparency will suffer.
According to the ACC surveys, privilege is essential to successfully counseling officers, directors, and employees on legal compliance issues that arise in the daily conduct of business. Though it is clear 7 For example, see the recent holding of the 10th Circuit Court of Appeals, in In re: QWEST Communications International, Inc., (No. 06-1070, decided in June of 2006), in which the Court refused to provide relief to QWEST from demands made by third party plaintiffs for documents produced to the SEC at the government’s demand. Even though QWEST waived its privileges to satisfy the SEC requirements, it did so pursuant to the government’s promise that a limited waiver agreement would protect the company from third party requests of just this type. The Court held that much as they might like, the SEC and QWEST could not contract around privilege waiver doctrine. As a result, the SEC received the full benefit of the bargain it struck; QWEST was painted into a waiver corner by the SEC, and then denied the protections of the bargain that was their only comfort and upon which they had reasonably relied. ACC (joined by the U.S. Chamber of Commerce) filed an amicus brief in this case, available at: http://www.acca.com/public/amicus/qwest.pdf. 8 See, Letter of Former DOJ officials to Attorney General Alberto Gonzales, September 5, 2006: available at http://www.acca.com/public/attyclientpriv/agsept52006.pdf. Another letter (2005) from a group of the same former DOJ leaders was addressed to the US Sentencing Commission: http://www.acca.com/public/policy/attyclient/doj.pdf.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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that corporate counsel’s client is the entity and not any one of the entity’s individual officers, directors or employees, in order to fulfill their fiduciary duties, corporate leaders must be able to include lawyers in every aspect of the business’ work so that they are present when managers are making decisions about how to proceed with even seemingly routine tasks. The success of corporate counsel’s efforts requires that they gain the trust of employees and are able to encourage these employees in their role as agents of the entity to seek and follow legal advice in an increasingly fast-paced, competitive, complex and highly-regulated business environment. Corporate counsel know that many of the employees they counsel believe their jobs would be easier if they didn’t have to take time out to consult a lawyer in the first place; if the confidentiality of corporate communications with the lawyer is attacked as well, a relationship that is hard enough to encourage is further chilled, and the lawyer’s pro-active role as a gatekeeper in the company is nearly impossible to fulfill.
In sum, the attorney-client privilege is an important incentive encouraging those with relevant information or concerns about possible wrongdoing to report what they know, rather than simply sitting on (or affirmatively burying) troubling facts. Knowing that a sensitive conversation about a potential problem is confidential allows an employee or executive to feel more confident about sharing these issues with their company counsel, who can then advise them as to whether there is indeed a problem (rather than a misunderstanding) and how to react. If employees believe that the attorney-client privilege will not protect the confidentiality of these kinds of conversations (knowing that the privilege is not the employee’s but the entity’s to waive or protect), then these conversations will likely not occur. As the Supreme Court declared in the Upjohn case, “An uncertain privilege . . . is little better than no privilege at all.”9
D. Government prosecutorial practices are the leading cause of privilege erosion In recent years, particularly at the federal level, criminal law enforcement and regulatory authorities have adopted policies and employed practices and procedures promising that if corporations disclose documents and information that are protected by the corporate attorney-client privilege and work-product doctrine, they may receive credit for “cooperation.”10 While this sounds like an option that a company can choose to exercise or not in its discretion, the reality is that corporations have no practical choice but to waive their attorney-client privilege when they are offered this “choice” because they are under investigation by the government. In federal criminal cases against companies, U.S. Attorneys cite the “authority” granted them to consider privilege waiver as a necessary component in assessing a targeted company’s cooperation by both the Justice Department’s internal policy guideline on charging corporations (the Thompson
9 Upjohn, supra note 2,449 U.S. at 393. 10 Former leaders of the Department of Justice have testified that the aggressive practices occurring today were not the norm during their tenures, and are not only unnecessary to accomplishing the Department’s goals, but deplorable and inappropriate. See, e.g., the testimony of former Attorney General Dick Thornburgh before the US Sentencing Commission at http://www.ussc.gov/corp/11_15_05/Thornburgh.pdf; and the submitted statement of a number of former senior DOJ officials, including former Attorneys General, Deputy Attorneys General and Solicitors General at http://www.acca.com/public/policy/attyclient/doj.pdf. These former DOJ officials sent an additional letter to the Senate Judiciary Committee in advance of that committee’s September 12, 2006 hearing.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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Memorandum11), as well as a (now proposed for elimination) provision of the Federal Sentencing Guidelines12, both of which suggest that prosecutors can demand waiver of privilege if they feel that it is important to making their case. Companies that refuse to waive can be deemed uncooperative and thus may forfeit the ability to engage in settlement discussions, smaller (remunerative) fines or damages (as opposed to punitive penalties), or deferred or non-prosecution agreements. SEC enforcement officials who are targeting companies suspected of wrongdoing and who seek privilege waiver rely on the precedent set by the SEC in the so-called “Seaboard Report,” as well as their well-asserted need for lawyers to act as “gatekeepers” in their entity clients.13 Furthermore, other
11 Deputy Attorney General Larry Thompson issued a 2003 memorandum that addressed the principles of federal prosecution of business organizations. (Memorandum from Deputy Attorney General Larry Thompson to Heads of Department Components and U.S. Attorneys, “Principles of Federal Prosecution of Business Organizations” (Jan. 20, 2003) (http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm). The Thompson Memorandum (which updates the “Holder Memorandum,” originated by one of his predecessors, Deputy AG Eric Holder, who served during the Clinton Administration) lists nine factors that federal prosecutors should consider when charging companies. One of the factors is the corporation’s “timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protections.” This provision in practice is interpreted to require that companies routinely identify and hand over damaging documents, disclose the results of internal investigations, furnish the text and results of interviews with company officers and employees, and agree to waive attorney-client and work product protections in order to be deemed cooperative; such demands are often made without regard to whether privilege wavier is in fact necessary to the government getting all the facts it needs to undertake its investigation or prosecution, and before any meaningful assessment or investigation into the allegations suggesting that the company or any of its employees were engaged in any wrongdoing or negligent failures. 12 Amendments made to the US Sentencing Guidelines, which became effective in November of 2004, state that in order to qualify for a reduction in sentence for providing assistance to a government investigation, a corporation is required to waive confidentiality protections if “such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.” (U.S. Sentencing Guidelines Manual § 8C2.5 (2004) (available at http://www.ussc.gov/2004guid/8c2_5.htm). The Coalition to Preserve the Attorney-Client Privilege, and a number of its members and other interested organizations such as the American Bar Association, petitioned the US Sentencing Commission to overturn their recent amendments and we are pleased to note that this year’s amendment cycle, currently before Congress for authorization purposes, include a proposal to remove the privilege waiver language from § 8C2.5. The Coalition’s testimony to the Sentencing Commission can be found at http://www.acca.com/public/attyclntprvlg/coalitionussctestiony031506.pdf, and the Sentencing Commission’s amendment proposals for 2006 can be found at 71 Federal Register 28063-28073, available at http://www.ussc.gov/FEDREG/2006finalnot.pdf. 13 Federal regulators, and particularly the SEC, have begun to adopt policies and practices mirroring those of the Department of Justice, which while discussing “cooperation credit,” mention disclosures of protected confidential information. See, e.g., the Seaboard Report, [“Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions,” Exch. Act Rel. No. 44969 (Oct. 23, 2001)]; in the Seaboard Report, the SEC outlined some of the criteria that it considers when assessing the extent to which a company’s self-policing and cooperation efforts will influence its decision to bring an enforcement action against a company for federal securities law violations. The concern that waiver of the attorney-client privilege and work-product protections are now viewed as necessary elements evidencing a company’s cooperation is bolstered by public remarks made by former SEC enforcement chief Stephen Cutler, in his remarks made during a program discussing the changing role of lawyers in remedying corporate wrongdoing during a presentation at UCLA’s Law School in the Fall of 2004 (“The Themes of Sarbanes-Oxley as reflected in the Commission’s Enforcement Program,” (September 20, 2004) (transcript available at http://www.sec.gov/news/speech/spch092004smc.htm.)
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This document is available online in ACC’s privilege libraries at www.acca.com.
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enforcement officials at agencies such as the IRS, the DOL, the FTC, the EPA, the FEC and others are imitating the SEC’s strategies.14 Formerly, a company could evidence its cooperation with prosecutors by providing insight and access to both relevant information and to the company’s workplace and employees. The definition of a company’s “cooperation” did not entail production of legally privileged communications and attorneys’ litigation work product. Nor did it entail the need for the company to become the unofficial deputy of the prosecutor in implicating employees who may or may not be culpable for underlying failures or criminal activities. Now, however, in order to convince the prosecutor or regulator that the company is cooperating with the investigation, and indeed to avoid being accused of engaging in obstructionist behavior, companies are told directly or indirectly to waive their privileges and help prosecutors cut targeted employees off from any ability to defend themselves from the government’s accusations. Neither requirement is tenable or appropriate for the government to impose on a company; neither requirement serves the public’s interest in assuring that culpable wrongdoers will be prosecuted and convicted, or that our system of justice will be better served. So why do government officials continue to argue that privilege waiver is an appropriate requirement to prove that a company is cooperating or is necessary to successfully prosecute a corporate wrongdoer? The Justice Department does not seem to have an answer to this question. Worse yet, in October of 2005, in what is now referred to as the McCallum Memorandum (named for its author, Associate Attorney General Robert McCallum),15 the DOJ instructed its field offices regarding the issue of waiver by requesting that each establish or review their own office’s policies for privilege waiver requests and report them back to DOJ Main. Mr. McCallum specifically notes in this memo that it is fine if field office policies differ from office to office based on local needs and circumstances. Thus, DOJ does not seem interested in either justifying or reigning in abusive practices, but in encouraging each field office to make its own procedural decisions, ensuring further chaos for clients unsure about whether or how they can push back against inappropriate privilege waiver demands made in each of the 94 offices of the U.S. Attorneys across the country. And so the DOJ continues to deny that there is a problem, even in the face of combined support from all of the nation’s leading bars, business groups, and civil liberties organizations, two national surveys on the subject detailing abusive practices, extensive media criticism of DOJ waiver policies, a House Judiciary Committee hearing that decried prosecutorial practices (on March 7, 2006), a ruling by Judge Kaplan in KPMG that provisions in the Thompson Memorandum are clearly unconstitutional, a statement from the Conference of Chief Justices (made up of the chief justices of each state’s court system) that DOJ waiver policies and practices are inappropriate and must be stopped16, and a Senate Judiciary Committee hearing at which there was bipartisan criticism of these
14 See, e.g., “Statement of the Coalition to Protect the Attorney-Client Privilege,” Submission to the U.S. Senate Judiciary Committee (September 12, 2006): http://www.acca.com/public/attyclientpriv/coalitionsenjudtestimony.pdf. 15 A copy of the McCallum Memo can be found at http://www.acca.com/public/attyclntprvlg/mccallumwaivermemo.pdf. 16 Resolution of the Conference of Chief Justices, adopted on August 2, 2006, and reprinted at http://ccj.ncsc.dni.us/resol9StateCommitteesOnAttorneyClientPrivilege.html.
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government policies (on September 12, 2006). It seems that no one other than the DOJ thinks that the Thompson Memo sets good or appropriate policies or engenders appropriate prosecutorial practices regarding privilege waivers. (To be fair, there are some field offices of the DOJ where we have not noted the level of complaint regarding these practices – while these offices are few in number, there are in some important districts, and we do not wish to suggest that every prosecutor in every office of the US Attorneys is engaged in coercive and inappropriate behaviors.)
Thus, erosion of privilege continues. Accordingly, corporate counsel must address the ramifications of this ongoing erosion on a daily basis. While the ACC will continue to fight for reforms and wide-scale changes in the manner in which prosecutorial or enforcement actions are pursued, in-house counsel must act (hopefully in concert with their outside lawyers) to individually protect their clients’ interests: from relationships with auditors to the development of better document retention and labeling policies, there is much that can be done now to address privilege concerns and improve your client’s chances of being able to assert its rights.
III. The Audit Context
A. Introduction In the last few years, corporate scandals and policymakers’ reactions to those scandals changed the nature of the auditors’ interactions with their corporate clients. Especially subsequent to passage of the Sarbanes-Oxley Act and the demise of Arthur Andersen following the Enron debacle, auditors are more aggressive; they know they are the marketplace’s independent watchdog and their actions are under heightened scrutiny when vouching for companies’ financial representations. As a result, auditors are demanding more information from corporations, including documents otherwise entitled to attorney-client or work product protections. In turn, this creates a “Hobson’s choice” for in-house counsel as they go through their regular outside auditing process: either resist the request for privileged documents and risk a negative or qualified audit opinion which could badly damage the company or, alternatively, turn over the privileged documents and risk waiving all confidentiality rights as to potential third party litigants in the future. While some think that only public companies are affected by the outside auditor issue, think again: because these standards are now the regular practice and codified in the internal operations policies for the largest accounting companies, these standards will be applied equally to private company clients who need to provide certification of their books (whether for investors, insurers, in order to gain financing from a bank, or to work with public companies that want to verify the private company’s integrity and solidity). So just because you work for a private company doesn’t mean that you’re in the clear. The following “Background” section sketches this recent evolution of privilege issues in the audit context. The subsequent “Discussion Topics” section (page 17) presents a range of both actual and suggested practices employed by companies to address their auditors’ requests for otherwise privileged information.
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B. Background
The Securities and Exchange Commission (“SEC”) has long required that public companies file a form 10K, which must include a financial statement certified by an independent auditor. In fulfilling its professional duties, an auditor must determine if the company’s financial statements fairly represent its financial condition and adherence to generally accepted accounting principles.17 Traditionally, attorneys and auditors dealt with privilege concerns by following the guidelines of the ABA/AICPA “Treaty” (see below); if you understood how to navigate the Treaty, you could generally give your auditors assurances that were sufficient for them to forego production of privileged source documents requested in a review. Those we interviewed about the audit process tell us that for all intents and purposes, the Treaty is dead. In the last few years, major corporate scandals as well as passage of Sarbanes-Oxley, adoption of new rules and regulations by the SEC, and creation of the Public Company Accounting Oversight Board (PCAOB) altered the overall relationship between auditors and corporate counsel. Pressure has grown for “transparency” in companies, which seems to translate in the audit context to auditor demands for all information they can possibly gather. Examples of what auditors now regularly request before certifying their reports include assessments of litigation reserves or accruals prepared by both outside and in-house counsel, tax opinions prepared by outside counsel, and results of internal investigations.18
If a company gives in to auditor demands, then it risks waiver of otherwise privileged information. As described below, disclosure of attorney-client communications to auditors generally waives privilege, and disclosure of attorney work product may waive those protections as well. 1. The “Treaty” and audit letters For many years, if an attorney followed the ABA/AICPA “Treaty” in responding to an audit inquiry, an expectation would arise that the response would not waive any privilege. The “Treaty” consists of two documents, the ABA Statement of Policy Regarding Lawyers' Responses to Auditors' Request for Information and the AICPA Statement of Auditing Standards No. 12. It was a compromise between the two groups reached in December 1975 and January 1976, dealing with an auditor’s respect for privilege and willingness to cooperate with attorneys in seeking information on issues otherwise privileged. One common application of the Treaty has been in the context of “audit letters.”19 According to the Treaty, in an audit letter the lawyer should “normally refrain from expressing judgments as to the
17 Douglas R. Richmond, “The Attorney-Client Privilege and Associated Concerns in the Post-Enron Era.” 110 Penn St. L. Rev. 381. 18 Susan Hackett, “Whither Attorney-Client Privilege?” ACC Docket 23, no. 8 (September 2005): 132-143. 19 One issue auditors address is whether a company’s legal reserves are adequate for pending claims against the company and whether there are any material claims known against the company that have not been asserted. To address this issue, an auditor typically requests from in-house counsel a written description of claims against the company and evaluation or quantification such claims. These written descriptions are called “audit letters” or “FASB 5 letters.” The auditor has an
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outcome [of litigation] except in those relatively few cases where it appears to the lawyer that an unfavorable outcome is either ‘probable’ or ‘remote.’” The definitions for these exceptions were very narrow. An outcome is “probable” if “the prospects of the claimant not succeeding are judged to be extremely doubtful and the prospects for success by the client in its defense are judged to be slight.” An outcome is “remote” if “the prospects for the client not succeeding in its defense are judged to be extremely doubtful and the prospects of success by the claimant are judged to be slight.”20 In sum, many audit letters under the “Treaty” guidelines did not provide any evaluations of the substance of claims because they are deemed to be too “remote” or not “probable,” and it was uncommon for there to be estimates about potential loss.21 Enactment of Sarbanes-Oxley Section 303 and adoption of SEC Rule 13b2-2, however, has changed the landscape dramatically.
2. Sarbanes Oxley Section 303 and SEC Rule 13b2-2 The Sarbanes-Oxley Act was enacted to raise the standards of transparency and accountability of public corporations to their shareholders.22 Section 303, in particular, was intended to correct perceived abuses in public companies misleading their auditors.23 While the language of this provision is rather innocuous on its face, Congress also gave the SEC the authority to promulgate rules and regulations under that section. By issuing issued Rule 13b2-2 on May 20, 2003, the SEC made two subtle changes which resulted in substantially broadening the definition of prohibited conduct. First, while the statute outlawed actions that “fraudulently influence, coerce, manipulate or mislead…[an auditor],” the regulation outlaws actions that “coerce, manipulate or mislead or fraudulently influence …[an auditor]” (emphasis supplied). By rearranging the verbs, the SEC very deftly takes the intent out of “coercing,” “manipulating” or “misleading,” so as to vastly expand the statute’s reach. The
important interest in wanting to accurately assess a company’s liability that cuts against the corporation’s interest in maintaining this privileged information. Unfortunately, however, if the audit letter contains the substance of the evaluation of a claim, there is an argument that the company has waived attorney-client privilege and/or work product protection. See, e.g., John K. Villa, “Audit Letter Responses in the Wake of Sarbanes-Oxley,” ACC Docket 21, no. 9 (October 2003): 164-169, 165. 20 ABA Statement at ¶ 5. Also, the ABA Statement says “it is appropriate for the lawyer to provide an estimate of the amount of range of potential loss (if the outcome should be unfavorable) only if he believes that the probability of inaccuracy of the estimate of the amount or range of potential loss is slight.” It should be noted, however, that the AICPA component of the “Treaty” (SAS 12) does not define “probable” or “remote” quite as narrowly. 21 Villa at 166. 22 While the terms of the statute exclusively refer to public companies, its principles are being applied by the marketplace to both private companies and non-profits. Byron F. Egan, “Communicating with Auditors After the Sarbanes-Oxley Act,” Tex. J. Bus. L. 131 (Fall 2005): 131, 134-135. 23 17 C.F.R. § 240.13a-1, et seq., “[i]t shall be unlawful…for any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.”
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“fraudulently” now only attaches to the word “influence.” Moreover, while it can be argued that the words “coerce” and “manipulate” inherently suggest deception, the same is not true for “mislead.” One can mislead another without having any intention to do so. Importantly, this is not an overly-labored interpretation. In the official comments for this rule, the SEC explicitly stated that it intended “fraudulently” to only modify “influence.”24 Secondly, the statute prohibits an action if the conduct was done “for the purpose” of making a statement materially misleading. The new rule uses the higher standard, in effect “if the person knew or should have known that such an action, if successful, could result in rendering the issuer’s financial statements materially misleading” (emphasis supplied). Not only is the statute transformed from a specific intent provision to a negligence standard, but also the “could result” language makes this statute incredibly broad.25 As a result of this new Rule 13b2-2, in-house counsel must weigh very seriously the question of whether to decline to evaluate a claim or quantify its value. And if counsel does evaluate a claim, then he or she risks waiving attorney client privilege and/or work product protection.
3. Section 307 of Sarbanes-Oxley and internal investigations. Another section of Sarbanes-Oxley relevant to the evolution of privilege issues in the audit context is Section 307 (and the SEC regulations implementing it).26 Under Section 307, attorneys must report “evidence of a material violation of securities law, or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or chief executive officer of the company.”27 These rules apply to all attorneys “appearing and practicing” before the SEC, whether in-house or outside counsel. As a result, a corporate attorney has an affirmative duty to run any evidence of misconduct up the proverbial corporate flagpole and to ensure satisfactorily that the company has taken appropriate (when warranted) remedial action.28 This is similar to an auditor’s duty under Section 10A of the Exchange Act.29 Such a process inevitably will give rise to internal investigations, which generate privileged attorney-client communications and attorney work product. This is yet another example
24 See Final Rule: Improper Influence on Conduct of Audits, S.E.C. Rel. No. 34-47890, May 20, 2003, at http://www.sec.gov/rules/final/34-47890.htm. 25 Villa at 168. 26 See Implementation of Standards of Professional Conduct for Attorneys, S.E.C. Rel. No. 33-8185, January 29, 2003, at http://www.sec.gov/rules/final/33-8185.htm, now codified at 17 CFR Part 205. ACC has a full line of Sarbox 307 resources online at http://www.acca.com/php/cms/index.php?id=316. 27 The “SOX § 307 Rules” constitute a new Part 205 to 17 CFR, Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission, 17 C.F.R. § 205.1-205.7 (2005). 28 Id. 29 Egan, 155.
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of Sarbanes-Oxley leading auditors to require disclosure of privileged information, including whether legal counsel has found any material violations of the law in the underlying investigation.
4. The Public Company Accounting Oversight Board
One of the major goals of Sarbanes-Oxley was to make auditors more independent in general. As with many aspects of Sarbanes-Oxley, the goal is laudable, but in practice it can lead to some unintended consequences. As part of this overall goal, the PCAOB was formed in order to inspect, investigate and discipline auditors in their audits of public companies.30 Section 105 directs this body to “establish fair procedures for the investigation and disciplining of registered public accounting firms and associated persons of such firms.”31 The PCAOB has taken such an aggressive tact with the auditors that the auditors have in turn been forced to be far more aggressive in seeking privileged documents. SEC Deputy Chief Accountant, Scott Taub, recently explicitly suggested that auditors should seek out privileged information in relation to audits of litigation loss and tax contingency accruals under FAS 5,32 warning that the PCAOB inspection teams will be closely scrutinizing the auditors’ work. Three months later, on August 26, 2004, the PCAOB released some very harsh limited inspection reports on each of the four major accounting firms.33 Among other things, the report criticized two firms for not having documentation for contingent liabilities, including analysis of counsel.34 Section 105 (b)(5) does provide a blanket evidentiary privilege for all information shared with the PCAOB or prepared in connection with their limited inspections and investigations of the company’s auditing firms. This provision, however, does not help protect against the waiver problem that arises when a company’s auditors obtain privileged information. No one will be able
30 The Sarbanes Oxley Act, Sections 101-105, 15 U.S.C. §§ 7211-15. Latham and Watkins LLP, “The Auditor’s Need for Its Client’s Detailed Information vs The Client’s Need to Preserve the Attorney-Client Privilege and Work Product Protection: The Debate, The Problems, and Proposed Solutions.” (Corp. Couns. Consortium 2004; available online at http://www.acca.com/public/article/attyclient/debate.pdf.) 31 See PCAOB Rulemaking: Public Company Accounting Oversight Board; Order Approving Proposed Rules Relating to Investigations and Adjudications, S.E.C. Rel. No. 34-49704, May 14, 2004, at http://www.sec.gov/rules/pcaob/34-49704.htm. 32 “If a company’s outside counsel is unwilling or unable to provide its expert views, the auditor should consider whether sufficient alternate procedures can actually be performed to allow the audit to be completed.” SEC Deputy Chief Accountant Scott A. Taub, Remarks at the University of Southern California Leventhal School of Accounting SEC and Financial Reporting Conference (May 27, 2004). (transcript available at http://www.sec.gov/news/speech/spch052704sat.htm). 33 Latham & Watkins, 4-5. 34 PCAOB, Report on 2003 Limited Inspection of Deloitte & Touche LLP (Aug. 26, 2004) at 19-20, available at http://www.pcaobus.org/documents/Inspections/2004/Public_Reports/Deloitte_Touche.pdf; PCAOB, Report on 2003 Limited Inspection of KPMG LLP (Aug. 26, 2004) at 19, n.4, available at http://www.pcaobus.org/documents/Inspections/2004/Public_Reports/KPMG.pdf.
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to take discovery from the PCAOB, but both the company and its auditors may still be subject to discovery demands by the company’s third party adversaries.35 5. Case law regarding waiver of privilege in the audit context36
(a) In general, disclosure of attorney-client communications to auditors will waive the privilege.37
Because attorney-client privilege exists solely to protect the confidentiality of communications between attorneys and their clients, almost any disclosure of such communications to an outsider constitutes waiver. This includes disclosure to auditors, although there are state laws in fifteen states that recognize an accountant-client privilege. Only seven of the fifteen, however, have expressly extended the privilege to independent auditors under theories that suggest that sharing information with an auditor who can is considered to carry common interests with the client does not constitute waiver.38 Federal courts, as well as 35 other states, have never recognized any type of accountant-client privilege. Earlier this year, the Association of Corporate Counsel advocated for an accountant-client privilege in its amicus brief for a writ of mandamus to the Texas Supreme Court in In Re Stone & Webster, Inc., The Shaw Group Inc., and Ernst and Young LLP.39 In the case, a dispute between Shaw and AES led AES to request documents from Shaw’s auditors, Ernst & Young. AES subpoenaed these documents, even though Shaw and the auditor were based in Louisiana, which has a law recognizing accountant-client privilege. The trial court judge ordered Ernst & Young to comply with the discovery request, notwithstanding the existence of the privilege. Although Shaw was not ultimately successful in its fight for judicial recognition of a privilege, it is likely this is a fight will continue on in other jurisdictions. (b) Disclosure to auditors may waive attorney work product protections.
35 Latham & Watkins, 14-15. 36 Although this subsection focuses on U.S. law, there are interesting developments in other jurisdictions, as well. For example, in September 2006, the Canadian Supreme Court recognized the doctrine of limited waiver specifically for auditors in Minister of Justice v. Blank, 2003 FCT 462, rev’d 2004 FCA 287, appeal dismissed 2006 SCC 39. 37 See, e.g., Gutter v. E.I DuPont De Nemours and Co., 1998 WL 2017926, at 3 ( S.D. Fla. May 18, 1998), ("[d]isclosure to outside accountants waives the attorney-client privilege") 38 The seven states that have expressly extended the privilege to independent auditors are Colorado, Georgia, Illinois, Kansas, Maryland, Michigan, and New Mexico. The other eight states recognizing some sort of accountant-client privilege are Arizona, Florida, Idaho, Indiana, Louisiana, Missouri, Pennsylvania and Tennessee. 39 2005 WL 1654875 (Tex.App.-Fort Worth Jul 12, 2005) (NO. 2-05-189-CV), mandamus denied (Mar 03, 2006), rehearing of motion for mandamus overruled (Apr 28, 2006). (http://www.acca.com/public/amicus/txamicus.pdf)
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The “common interest” concept derives from authorities holding that co-parties or allies may share work product without waiving any protection. In today’s post-Enron environment, however, it is becoming harder to argue that independent auditors and their clients share a “common interest.” Compared to the uniformity regarding attorney-client privilege, courts are more divided on the effect of disclosure of work product to auditors. In general, disclosure to auditors does not waive the work product protection in relation to the client's litigation adversaries. 40 This is because the real rationale behind work product protection is to prevent disclosure to these litigation adversaries, unlike the attorney-client privilege, which exists to protect the confidentiality of the communication. Auditors are not seen as such adversaries, or conduits to the adversaries, and thus the protection still stands.41 For example, in In re Pfizer Inc. Sec. Litig .,42 securities class action plaintiffs wanted to discover individual litigation case reserves that the company had set after consulting with counsel. The court found the reserves protected work product despite disclosure to the company's auditors. The auditors shared a common interest with the company, and could not reasonably be "viewed as a conduit to a potential adversary."43 In contrast, in Medinol, Ltd. v. Boston Scientific Corp.,44 Boston Scientific engaged counsel to perform an investigation and report the results to a Special Litigation Committee (SLC) of the Board. Minutes of the SLC meeting reflecting this investigation was provided to defendant's auditors, Ernst & Young. The court held that this disclosure waived the work product protection, ruling that Boston Scientific and Ernst & Young did not share "common interests" in litigation. Medinol found that the auditor client relationship did not fit neatly into that category, and therefore there was a waiver because Boston Scientific's disclosure to Ernst & Young did not serve the privacy interests that the work product doctrine was intended to protect.
40 See Southern Scrap Material Co. v. Fleming , 2003 WL 21474516, at 9 (E.D. La. June 18, 2003) (finding no waiver because disclosure of legal analysis to auditors was not like "one of those cases where a party deliberately disclosed work product in order to obtain a tactical advantage or where a party made testimonial use of work product and then attempted to invoke the work product doctrine to avoid cross-examination.") 41 Additionally, some courts have refused to compel third party discovery on evidentiary grounds, without reaching the question of waiver. Arguments are that legal analysis of loss contingencies are not relevant or that any probative value is outweighed by unfair prejudice and public interest concerns. See Tronitech, Inc. v. NCR Corp ., 108 F.R.D. 655, 655-656 ( S.D. Ind. 1985) (attorney letter to auditors was not discoverable under Fed R. Civ. Proc. 26(b)(1) because it was not legally relevant or reasonably calculated to lead to the discovery of admissible evidence). The minority view is that any evaluation of litigation risk and loss exposure in response to an audit inquiry is not work product at all because it was prepared for a business purpose, as opposed to “in anticipation of litigation or for trial." But most courts say that litigation analysis prepared for auditors is in fact work product, due to its being prepared "because of" actual or potential litigation. 42 1993 WL 561125 (S.D.N.Y. 1993). 43 Id. at 6. 44 214 F.R.D. 113 (S.D.N.Y. 2002).
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Subsequently, in Merrill Lynch & Co., Inc. v. Alleghany Energy, Inc.,45 the same court rejected the approach in Medinol, holding that disclosure to an outside auditor did not waive the work product protection. In that case, Alleghany tried to compel production of two internal investigation reports prepared by Merrill Lynch attorneys in response to a federal investigation into a particular transaction. Deloitte and Touche had used these two reports to evaluate Merrill Lynch's internal control, accounting and auditing issues. Though the court stressed the need for auditors to be independent, it did not see the auditor-corporation relationship as an adversarial one by nature. Also, from a public policy standpoint, the court feared that a "blanket rule of waiver" would chill corporations from performing necessary internal controls and "sharing the fruits of such inquiry" with their auditors.46 Thus, there is a near certainty that disclosure of otherwise privileged attorney-client communications to an auditor constitutes waiver in most jurisdictions and a chance that disclosure of attorney work product to an auditor waives any existing protections. In short, whenever otherwise privileged material is disclosed to an outside auditor the company risks waiver.
C. Discussion topics: Practices to address evolving privilege issues in the audit context
The combination of waiver jurisprudence and auditors’ increasing demands for protected material puts companies in a difficult situation. As noted above, in the post-Enron era auditors are more risk averse and less sensitive to their clients’ attorney-client and work product protections. For example, at least one major audit firm has a written FASB 109 policy requiring access to underlying documents even if they are privileged or subject to work product protections:
When a company has obtained a written opinion or analysis issued by a third-party with respect to a potentially material tax matter, we need to obtain the opinion or analysis notwithstanding potential concerns regarding attorney-client privilege. There is no substitute for having complete access to the opinion or analysis in lieu of reviewing in its entirety the actual written opinion or analysis. Furthermore, a company cannot avoid providing access to a third-party opinion or analysis by claiming that the company’s accounting treatment is not based on the opinion or analysis. Nor can we perform additional analysis of our own in lieu of reviewing the adviser’s written analysis or opinion. Anything less than complete access to written third-party tax advice may constitute a scope limitation. We should obtain written representation from company management that they have made us aware of and provided us access to all third-party opinions or analyses relating to tax positions taken by the company.”47
45 229 F.R.D. 441 (S.D.N.Y. 2004). 46 Id. at 449. 47 PriceWaterhouseCooper, “Important Reminders When Auditing a Client’s Accounting for Income Taxes.”
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Another development in the evolving audit environment is that auditors are increasingly likely to include privileged communications in their work papers, including even oral comments containing privileged information. Additionally, some companies are concerned that broad certifications or representations by their CLO could constitute waiver of protection for all underlying documents relied upon – an issue not yet addressed by the courts. Ultimately, the evolution of these and other related privilege issues in the audit context could call into question the extent to which the traditional assumption of a “common interest” between companies and their auditors remains valid. During this evolution, therefore, it is critical that every company carefully consider how to handle their relationship with their auditor. In order to protect themselves, companies commonly include standard terms in their engagement letter with the auditor. One such term is an acknowledgement by the auditor of the confidentiality of the information received from the company during the audit and that such information will be used solely for the purposes of the engagement. Another standard term requires the auditor to give the company notice before responding to any request for this the company’s information by a third party. Beyond these provisions in their engagement letters, however, companies employ a range of practices to deal with their auditors’ requests for otherwise privileged information, including the following:
• Negotiate the terms of requesting/producing information in advance so there are clear “rules of the road” to address sensitive issues that arise during the course of an audit. By negotiating in advance, the company and its auditor can avoid addressing each information request on a case-by-case basis. This will save time, minimize conflict between the company and its auditor, promote consistent treatment of information from all sources, and dissuade auditors from seeking special treatment for any particular pieces of information. In certain cases, however, auditors may deem certain information so crucial to their work that they demand an exception to pre-negotiated “rules of the road.”
• Work with auditors to identify what information they really need and try to find a way to provide it without giving them access to privileged documents. When possible, this approach will give both the company and its auditors what they want. If counsel does not affirmatively work to understand the auditors specific needs and propose possible solutions, however, it is unlikely that auditors will stop asking for the privileged information. While this practice is not always feasible in the eyes of the auditor, sometimes initial resistance from the auditor can be overcome by the company escalating the issue to the audit firm’s relationship partner or national office.
• Give auditors the same information given to the board’s audit committee. This practice has the advantage of using information that already has been created and carefully reviewed. This information, however, may be subject to attorney-client or work product protections. If so, the company may be waiving those protections by giving it to the auditors.
• Allow auditors to review quarterly litigation summaries prepared for management. As with the previous practice, this approach has the advantage of using previously created and reviewed information, but the disadvantage of possibly waiving those protections. To the extent waiver is an issue, companies cannot prevent it simply by sharing the protected information orally or by letting auditors see documents without giving them copies to keep.
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• Tell auditors to either accept the corporate lawyer’s representations or hire their own outside lawyer to conduct an investigation, but either way there is no need for the business organization to turn over privileged documents. Obviously, this is a more aggressive approach to the auditor relationship. It is unlikely to engender good will with the auditor, but may be effective in protecting information that the company views to be particularly sensitive.
• Make clear that if privileged information given to the auditor is used in litigation against the business organization that business organization will make the auditor a third party defendant and seek indemnification. This is an even more aggressive practice, although it does provide the auditor with the privileged information requested. One likely result of this approach is that it will force the auditor to carefully consider whether the requested information is truly necessary.
IV. Internal Investigations
A. Overview While necessary, internal investigations by business organizations are unsettling because what starts out as a good faith effort to get to the root of a corporate problem (so it can be remedied) can end up leading to civil or criminal liability of a corporation or its employees. Moreover, as a practical matter, the investigation process creates challenging issues for corporate counsel on numerous fronts, including: deciding whether to conduct an investigation in the first place, deciding who should conduct it, and interviewing corporate employees as part of the investigation. As noted in Section IV.C., the erosion of the attorney-client privilege has complicated the analysis relevant to addressing these issues.
B. Background 1. Determining whether to conduct an investigation The decision whether or not to conduct an internal investigation typically is triggered by allegations of misconduct. There are many reasons to launch an investigation. First, an investigation will help the company fully understand and eliminate behavior detrimental to corporate performance, consistent with the fiduciary duty directors owe the shareholders. Second, an investigation gives the corporation the ability to respond proactively to any potential litigation, by identifying the relevant information and controlling its flow. Third, an investigation may put the company in a position to negotiate more lenient treatment with government investigators or prosecutors. On the other hand, there are many potential pitfalls associated with launching an investigation. One is that an investigation can draw the attention of government investigators even if no wrongdoing is uncovered. Another is that internal investigations may lead to putting privileged documents in the hands of third party adversaries that could provide a road map for establishing criminal or civil liability of a corporation or its employees. An initial goal for in-house counsel is to assess the allegation at issue. Often the allegation will be vague, with insufficient information for the attorney to determine the likelihood of a serious
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problem or to determine what information is going to likely satisfy the investigator. In making the decision to investigate on their own or with outside counsel or another agent, in-house counsel should consider the complaint’s source, its form, and its substance. With respect to the source of the allegation, did it come from within, from a government agency, from a competitor or from an anonymous source? Is there any evidence of bias or self-interest? With respect to form, was it an anonymous communication or a public news story? Is the allegation documented? With respect to the substance of the allegation, counsel has to make a judgment regarding the scope and potential seriousness of the allegation and the likelihood that the allegation has merit. Sometimes an initial investigation may be warranted solely to make a determination as to whether a more formal investigation should be conducted. If a formal investigation is conducted, however, all information received in the initial investigation should be passed along to the formal investigation team.48 In the end, decisions regarding whether or not to conduct internal investigations frequently are based upon challenging judgment calls, but corporate counsel usually has a great deal of latitude in making them.49 It is worth noting, however, that this latitude is more limited where the corporation faces self-reporting obligations. Typically arising in the context of the financial services industry, securities issues, and stock exchange rules, self-reporting obligations may put additional pressure on corporate counsel to launch investigations even where the allegations otherwise wouldn’t warrant such an approach.
2. Determining who should conduct an investigation Once the decision is made to investigate, one of the first questions an in-house counsel has to face is who should conduct the investigation. A threshold question is whether a lawyer needs to be involved or if it can be handled by non-lawyers in the corporate compliance or human resources departments. Although privilege will not attach to any aspect of investigations conducted entirely by non-lawyers, depending upon the allegation being investigated this may not matter. Moreover, the sheer volume of investigations at many large corporations makes it impractical for lawyers to conduct more that a fraction of them. In those situations, in-house counsel can develop screening procedures to identify the most sensitive cases that should be handled by a lawyer. If a lawyer should be involved, the next question is whether to retain outside counsel to conduct the investigation. This may be appropriate for investigations of particularly serious allegations as well as when the targets of an investigation are high-level corporate executives. Although there can be substantial costs associated with retaining outside counsel to conduct investigations, the benefit is the perception that the results will be more arm’s-length and objective than if conducted by in-house counsel.50 In certain situations, this perception may make a difference in negotiating with government investigators and prosecutors. Another advantage of retaining outside counsel to conduct an investigation is that sometimes there can be a question regarding whether in-house counsel is performing a business or legal function.51 Non-lawyers may also be hired or enlisted to 48 Deborah J. Edwards, et al, “What to Do When the Whistle Blows,” ACC Docket 22, no. 5 (May 2004). 49 Id. 50 Id.
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conduct the investigation, including vendor-investigation firms, or personnel from the company’s internal audit or compliance functions. These workers will be agents of the in-house counsel for purposes of privilege protection, but if the point was to get outside counsel to help preserve the privilege, that benefit is likely lost when taking this course.
3. Issuing Miranda or Upjohn warnings in employee interviews A crucial part of any internal investigation is interviewing employees who potentially have knowledge relevant to the alleged improper conduct. If an attorney is conducting an interview, privilege may attach to the communications and related work product, but any such privilege belongs to the corporation, not the employee. This is where Upjohn warnings, sometimes referred to as “corporate Miranda” warnings, come into play. Such warnings are crucial both to preserve a corporation’s privilege and to avoid the possibility of the interviewing attorney subsequently misleading the employee re who the lawyer’s real client is (and thus being deemed to have established a relationship as the employee’s counsel) and being disqualified from representing the corporation on that matter. The basic message that counsel needs to communicate to an employee in an Upjohn warning before the interview commences is: (1) counsel represents the company, not the employee being interviewed;52 (2) the information learned during the interview is privileged to the company, and it is the company’s decision alone whether to disclose or waive the information to the government or other parties; (3) the information in the interview is to be kept confidential so that the company’s privilege can be preserved.53 Additional statements may be appropriate, based on whether the employee needs to be told that he or she is entitled to counsel, whether joint defense options are available, whether fee reimbursement will be offered and under what terms, and so on.54 A recent Fourth Circuit case demonstrates the importance of adequate Upjohn warnings and the potential consequences that can arise if an employee gets the mistaken belief that investigating counsel represents him or her, rather than the company. In In Re Grand Jury Subpoena,55 outside counsel conducted an internal investigation for AOL Time Warner (AOL) regarding its dealings with PurchasePro. Having reason to believe some of its employees had engaged in illegal conduct, AOL interviewed a number of employees to decide quickly if any wrongdoing occurred, and 51 The leading case on this issue, Diversified Industries v. Meredith.572 F.2d 596 (8th Cir. 1977), indicates that an investigator’s status as an in-house attorney is prima facie evidence that privilege should attach. Even so, attorneys with additional business obligations are still subject to challenge. 52 The new ethical rules for attorneys based on ABA Model Rules of Professional Conduct Rule 4.3 places an affirmative duty on attorneys to “make reasonable efforts to correct” a misunderstanding of the attorney role of someone who is not represented by counsel (i.e. an interviewed employee) if the attorney “knows or reasonably should know” of this misunderstanding. 53 Some business organizations have confidentiality obligations in employment contracts or corporate code of conduct. 54 See the treatment on issuing such warnings contained in ACC’s “Responsive Measures for Government Investigations,” available at http://www.acca.com/protected/policy/compliance/respond.pdf. 55 415 F.3d 333 (4th Cir 2005)
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whether to disclose it to the government. Unfortunately, counsel’s Upjohn warnings in some of these interviews were far from perfect. For example, in one interview counsel stated that they “could” represent the employee “as long as no conflict appeared.”56 In another interview an employee asked if he needed personal counsel, and the investigating attorney said he did not recommend it, but would tell the company not to be concerned if outside counsel was retained.57 When the SEC began a criminal investigation, AOL agreed to waive the attorney-client privilege and turn over memoranda generated by outside counsel containing summaries of the interviews. The employees moved to quash the subpoenas on the grounds that each attorney had an individual relationship with in-house counsel. The trial court refused to quash these subpoenas, and the Fourth Circuit affirmed. In its decision, the circuit court found: (1) there was no evidence that outside counsel told employees that they represented them, or that employees asked to be represented by them. (2) the employees were each advised that the information could be disclosed at the discretion of the company. (3) there was no evidence that employees ever sought legal advice, nor that any such advice was rendered.58 This case demonstrates the need for interviewing counsel to be absolutely clear in warning the employees. Although the warnings at issue in In Re Grand Jury Subpoena ultimately were found to be sufficient, one lesson is that there are things lawyers should not tell an employee in an interview. First, the interviewing lawyer should be absolutely sure that the company’s and employee’s interests will never diverge before telling the employee that the in-house counsel “can,” could,” or “might” represent them if the circumstances become right. That’s a standard that will almost never be met. Consistent with this approach, lawyers should not give any legal advice other than that it might be advisable for the employee to secure their own counsel. Secondly, lawyers should not tell an employee that anything is “off the record.” Sometimes an employee will say something that seems tangential at the time, but is appreciated as relevant only after conclusion of the interview. Before knowing what the employee has to say, a lawyer should never promise confidentiality. Finally, an interviewing lawyer must be straightforward with employees. He or she can decline to answer an employee’s question, but should not say anything to mislead an employee.59
56 Id. at 336. 57 Id. 58 Id. at 340. 59 Douglas R. Richmond, “Organizational Miranda Warnings.” For the Defense (September 2006): 71-72. With respect to misleading statements in employee interviews, the recent Computer Associates case raises a different issue -- an employee can be indicted for lying to his or her own company’s lawyers. This issue arose in the context of a joint investigation between prosecutors in Brooklyn, New York and the SEC into accounting irregularities at the software firm. Three former executives plead guilty to obstruction of justice for lying to outside counsel the Computer Associates hired to investigate the charges against itself. Because outside counsel passed the information along to the government, the government claimed that the targeted employees indirectly misled the government. Later, the government unsealed the indictment and charged two other executives, Kumar and Richards, on the same grounds. Both moved to dismiss the obstruction counts because of an insufficient "nexus" between their statements to the company's attorneys and an official proceeding required under the obstruction statute. This past February, the district court denied the defendants' motions, calling it sufficient that Kumar and Richards "knew" their statements "would have the effect of obstructing and impeding Government investigations," and therefore a challenge would have to await a trial. The two plead guilty two
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There are also two important limitations on the Upjohn Court’s holding that privilege attaches to communication between the counsel and a company’s lower level employees (rejecting a “control group” test that would limit the attorney-client privilege to “communications between counsel and upper-echelon … management”).60 First, this holding is not binding on state courts. Only fourteen states have adopted some version of the Upjohn rule, while eight have adopted the more restrictive “control group” test, and the rest have not decided one way or the other.61 Further, because this holding is a privilege grounded in federal common law, it also may not apply in diversity cases where the federal court is obligated to use state privilege law. Second, this holding may not apply to former employees and consultants. With respect to former employees, courts are split on whether the privilege should be upheld.62 As for consultants, for there to be privilege the consultant must “improve the comprehension of the communications between attorney and client”63 and the communications must “be made in confidence for the purpose of obtaining legal advice from the lawyer.”64
C. Discussion Topics: Practices to address evolving privilege issues in the context of internal investigations
To approach these issues regarding internal investigations in the face of the erosion of privilege, corporations have adopted a variety of practices, including the following:
• Conduct only bare bones internal investigations, or none at all if possible, to minimize creation of privileged material that may be subject to waiver. While perhaps a “cautious” approach in terms of preventing the possible waiver of privileged materials, such a policy may ultimately reduce the ability of in-house counsel to provide important legal advice to corporate officers and directors. Specifically, practices such as less comprehensive investigations (or none at all), less candid assessments of issues raised in investigations, limited retention of investigation materials,
months later. See Order Denying Motion to Dismiss Counts Six and Seven of the Superseding Indictment as to Sanjay Kumar, Stephen Richards, U.S. v. Kumar, No. 04-cr-846, slip op. (E.D.N.Y. Feb. 21, 2006). 60 449 U.S. 383 (1981) at 391. “While in the case of the individual client the provider of information and the person who acts on the lawyer’s advice are one and the same, in the corporate context it will frequently be employees beyond the control group…who will possess the information needed by the corporation’s lawyers.” 61 The fourteen states adopting some version of the Upjohn test are Alabama, Arizona, Arkansas, California, Colorado, Florida, Kentucky, Louisiana, Mississippi, Nevada, Oregon, Texas, Utah and Vermont. The eight states adopting the control group standard are Alaska, Hawaii, Illinois, Maine, New Hampshire, North Dakota, Oklahoma, and South Dakota. See Thomas R. Mulroy, “The Internal Corporate Investigation.” 1 DePaul Bus. & Com. L.J. 49, nt. 34 (2002). 62 See, e.g., In Re Allen, 106 F.3d 582, 605 (4th Cir. 1997)(upholding the privilege for a former employee); Clark Equip. Co. v. Lifts Parts Mfg. Co., 1985 WL 2917 (N.D. Ill. Oct. 1, 1985) (refusing to apply the privilege to a former employee). 63 United States v. Ackert, 169 F.3d 136, 139-140 (2nd Cir. 1999). 64 United States v. Kovel, 296 F.2d 918, 922 (2nd Cir. 1961).
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and providing only oral advice to management all constrain the ability corporate lawyers to provide effective legal counsel.
• Use non-lawyers from corporate compliance or human resources departments as default investigators and use attorney only when necessary. This is a practical response to the combination of limited legal resources and large volume of investigations common at many large corporations. While many investigations can be handled effectively by non-lawyers outside the legal department, there needs to be a sound process in place to identify sensitive investigations that should to be conducted by a lawyer. The companies most comfortable with this approach use rigorous screening procedures before investigations are commenced, and schedule frequent communications between the legal department and non-lawyers screening/conducting investigations.
• Set up a “privilege database” with lawyers-only access. This can be a useful tool to segregate information that the corporation believes is protected, and especially helpful in avoiding inadvertent disclosure of these materials. Ultimately, however, even use of this database will not protect materials if a court disagrees with the decision to designate them privileged or if a prosecutor coerces the company to waive privilege.
• Conduct investigation on behalf of government regulators. Companies in highly-regulated industries often are effectively forced to deputize their in-house counsel to perform investigations designed by the regulators.65 While this coerced “deputization” is always improper and often burdensome, it may avoid the need to waive privilege with respect to internal investigations that the company does not wish to share. Moreover, this conscription of in-house lawyers is less invasive than having government lawyers on the premises conducting exactly the same investigation in a scorched earth fashion, often terrorizing or de-moralizing employees.
• Balance the need to memorialize the Upjohn warning with desire to avoid employee from claming up. Counsel wants to elicit as much information as possible out of the interviewee, but the strongest or inartful applications of an Upjohn warning can undermine this effort. Ideas shared about best practices in delivering this warning include having a witness in the room when the lawyer gives the warning, putting the warning in writing, transcribing the communication of the warning, having the employee affirmatively state that he or she understands the warning, and requiring the employee to acknowledge the warning in writing. The best approach depends upon the circumstances and requires a case-by-case determination. The more you “formalize” the warning, the more likely it is that the employee may not wish to offer the information that counsel needs to conduct the investigation as their worry grows that this is more than a simple interview to get at the facts, but rather a sticky legal mess they’re personally being caught up in.
• Include obligation to cooperate with internal investigations in all employment contracts or manuals with termination a possible penalty. This obligation does not eliminate individual employees’ right to counsel, but requires them to cooperate in an investigation if they want to remain employed at the company. Of course, this policy does not provide much incentive to
65 Note that a recently passed piece of legislation [The Regulatory Relief bill, passed in October of 2006 in Section 607, amending Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828)] creates some welcome relief from this forced waiver situation for counsel to financial services industry clients. The act creates a statutory limited waiver for information that banks must produce to their regulators under federal law, thus protecting it from production demands made by third parties. Since no privilege existed under law for these clients, this institutionalization of a limited waiver is actually a welcome step forward.
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cooperate to the most culpable employees who realize that their employment at the company will terminate regardless of whether or not they cooperate. And it puts corporate counsel into the position of placing all employees between a rock and a hard place: of choosing between their livelihood and professional standing, or waiving their Constitutional rights that protect them from self-incrimination.
• Include confidentiality obligations in employment contracts or corporate code of conduct. Although similar to the preceding practice, this is relevant more for ex-employees and legal adversaries of the corporation. Specifically, parties approaching ex-employees of an adverse business organization may have an obligation to give warnings regarding the ex-employees’ confidentiality obligations.
V. Individual Rights of Employees
A. Overview As noted above, in addition to coercing corporations to waive privilege, current government policies also may infringe on the rights of individual employees. Specifically, government investigators and prosecutors are putting pressure on corporations in order to manipulate the corporation’s relationship with employees. This can happen in the context of advancement of legal fees, joint defense agreements, sharing relevant information, and termination: the Thompson Memorandum of the DOJ, for instance, makes whether the corporation has cooperated in these fashions with employees relevant to the decision of the government as to whether the corporation is properly cooperating with the government, or is adjudged as obstructing justice. Interference of the government in this manner (by infringing on employees’ individual rights), however, has not gone unnoticed by the courts. In particular, the bar is still waiting to determine the ramifications of Judge Kaplan’s recent opinions in U.S. v. Stein, discussed more fully below, accusing federal prosecutors of misconduct in this area.
B. Background
1. There are four major “bundles” of employee/individual rights affected by the Thompson Memorandum’s policies.
The Thompson Memorandum, described in detail in Section II, instructs prosecutors in assessing a corporation’s cooperation in an investigation to see whether it “appears to be protecting culpable employees and agents.” The four issues implicated by this instruction are discussed immediately below. (a) Advancement of legal fees Many states permit business organizations to indemnify their directors, officers, and employees for legal fees incurred as a result of their employment. In turn, corporations frequently have bylaws or policies to indemnify or advance legal fees to at least a subset of such individuals “to the fullest extent allowed under applicable law.” Such policies regarding the advancement of legal fees are a well-established corporate practice, not only because it is commonly considered the ‘right thing to do,’ but also because it is necessary to attract highly qualified executives. Individual legal fees in most
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litigation in the corporate context are so large that denying employees indemnification is effectively denying them the assistance of counsel. Prosecutors following current government policies, however, sometimes pressure business organization to refrain from supporting “culpable employees and agents . . . through the advancing of attorney’s fees.”66 For those employees who cannot afford to hire their own defense counsel, such government policies may have the effect of depriving employees of counsel altogether, even though they have neither admitted nor been convicted of wrongdoing.
(b) Joint defense agreements Joint defense agreements have been recognized for at least a century as an exception to the general rule that disclosure to third parties will waive the attorney client privilege. Often in complex corporate cases there will be multiple codefendants and joint targets of government investigations, and both the corporation and its employees will be facing indictment. It should be in each targets’ best interests to share information and coordinate efforts to the greatest extent possible. Much like with advancement of legal fees, however, when the government is investigating a company it sometimes puts pressure on the corporation to refrain from entering into joint defense agreements with its employees. The resulting denial of joint defense options limits the ability of targeted employees to mount an effective legal defense, and again infringes on an individual’s right to make one’s own strategic decisions about his or her legal defense.67 As Judge Kaplan said in Stein, “the government may not both prosecute a defendant and then seek to influence the manner in which he or she defends the case.”68 Refraining from entering into joint defense agreements with employees also has an adverse effect on the corporation’s ability to investigate alleged wrongdoing. When an organization obtains counsel to conduct an internal investigation, it has a legitimate interest in gathering as much information as possible. In some cases, for the sake of efficiency, it would want to share information with counsel of a targeted employee with whom it has a common interest pursuant to a joint defense agreement. In the absence of such an agreement, this is information the corporation may not have access to at all.69 (c) Information sharing in general
66 Thompson, pp. 7-8. 67 See Wilmer Hale Cutler Pickering Hale and Dorr LLP Briefing Series, “Limits on Corporate Cooperation – A Judicial Criticism of the Thompson Memorandum,” pp. 4-5 (September 2006). 68 See, 435 F. Supp. 2d 330 (S.D.N.Y. June 26, 2006) at 357. 69 Task Force Report and Recommendation to the ABA House of Delegates on Employee Rights as Adopted (August 2006) at 10, available online at http://www.acca.com/public/attyclientpriv/abahodreportemployee.pdf.
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Beyond the advancement of legal fees and joint defense contexts, government policies like the Thompson Memorandum go even further in disfavoring information sharing among parties, even if it is a corporation sharing its own records with counsel of targeted officers and employees. This has negative implications for both the corporation and the employee. As with the denial of joint defense options, this policy severely hampers the ability of the employee and the corporation to gather the necessary facts to prepare an adequate defense. And in the interests of fairness, shouldn’t records provided to the government also be available to the defense, especially when such demands of the government are made before all the facts are in? Employees are often targeted by the government long before anyone is able to assess the predominant likelihood of an employee’s guilt. But those interviewed tell us that the coercion to deny access to records even extends to corporate historical records and records related to the alleged wrongdoing.70
(d) Termination or sanctioning of employees Prosecutors sometimes make it clear to a corporation that it is expected to discharge or sanction employees who assert their right against self-incrimination against the government. The mere assertion of this right should not be used against a targeted employee to the detriment of that employee’s Constitutional rights. In the context of a government investigation, an organization will have to demonstrate cooperation before anyone has been tried or charged. Sometimes it will happen even before all the facts of the case can come out. As with other aspects of the Thompson Memorandum, this policy contravenes the principle that one is innocent until proven guilty.71 And it disrupts morale for corporate employees who remain at the company, sending a message that the company is not to be trusted and has no loyalty – even to employees whose criminality is still unclear. For more on this issue, you may wish to read ACC’s amicus brief in the case of two officers who were forced “under the bus” in an effort by the company to save itself from indictment under terms demanded by prosecutors, in U.S. vs. Lake & Wittig, available online at http://www.acca.com/public/amicus/lakewittig.pdf.
2. U.S. v. Jeffrey Stein72: A Turning Point Against Coercive Government Practices? Earlier this year, the Association of Corporate Counsel joined the Securities Industry Association, the Bond Market Association, and the National Chamber Litigation Center as amicus participants in U.S. v. Jeffrey Stein. Still ongoing, Stein is the largest tax fraud case in American history. Recent rulings in the case revolve around the coercive tactics of the U.S. Attorney’s Office for the Southern District of New York (USAO) in its investigation of tax shelters allegedly created by KPMG and others. KPMG went to great lengths to ensure the USAO of its cooperativeness in the investigation,
70 Id. at 14. 71 Id. at 15-16. 72 435 F. Supp. 2d 330 (S.D.N.Y. June 26, 2006) (“Stein I”); 440 F. Supp. 2d. 315 (LAK) (S.D.N.Y. July 25, 2006) (“Stein II”).
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in hopes of avoiding a criminal indictment of the firm. The facts of this case make it clear that the fate of former accounting giant Arthur Andersen, which did not cooperate with government demands, was on the collective minds of those in cooperation with the government.73 Like many organizations, it had been longstanding practice at KPMG to pay the legal fees of its employees. However, in communications with KPMG attorneys, the USAO was very persistent in asking whether KPMG intended to pay the attorney fees of the targeted present and former employees under investigation. The court found that the USAO “deliberately, and consistent with DOJ policy, reinforced the threat inherent in the Thompson Memorandum” that advancement of legal fees to “culpable” employees was a factor in determining a targeted company’s cooperation. KPMG in turn agreed it would put a cap on the amount of attorneys’ fees it would pay ($400,000), and stipulated that the payments would be cut off if any employee was indicted. 74 In essence, KPMG acceded to the government’s demands, and, proverbially speaking, “threw its employees under the bus.” In August 2005, KPMG entered into a deferred prosecution agreement with the government, staving off indictment. KPMG would admit wrongdoing, accept some restrictions on its business, pay a $456 million fine, and continue to cooperate “fully and actively” in the investigation.75 Once the individual defendants were indicted, KPMG cut off the advancement of legal fees. The former KPMG partners argued that the government’s interference with their advancement of attorneys’ fees was in violation of their Constitutional and other rights. In what would be known as Stein I, issued June 26, 2006, Judge Lewis Kaplan noted KPMG’s longstanding policy of advancing legal fees and that the employees had “every reason to expect” KPMG would cover their costs, adding “KPMG refused to pay because the government held the proverbial gun to its head.” The Court held that the pressure exerted by Thompson Memorandum to induce a company to deny advancement of legal fees to employees was so coercive that it infringed the employees’ Fifth Amendment (due process) and 6th Amendment (right to counsel) rights.76 In his written opinion, Judge Kaplan let loose his contempt for the government tactics:
Those who commit crimes – regardless of whether they wear white or blue collars - must be brought to justice. The government, however, has let its zeal get in the way of its judgment. It has violated the Constitution it is sworn to defend.77
73 Stein I. at 341. 74 Id. at 352. 75 Deferred prosecution agreements and non-prosecution agreements are discussed at greater length in Section VIII of this paper. 76 Stein I at 367. 77 Id. at 336.
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Some have criticized the Stein case for not going far enough, by not outright dismissing the case against the KPMG executives upon a finding of Constitutional violation. What Judge Kaplan opted for instead was a judicial remedy of a hearing to decide whether KPMG would be required to pay attorneys’ fees. The argument is that denial of a right to attorneys fees in the early stages of an investigation when they were government targets, subjects, or witnesses cannot be remedied after the fact.78 In Stein II, nine of the defendants moved to suppress statements they had made to USAO prosecutors in the investigation. The court found that when the prosecutors requested these statements from the individuals and they refused, the prosecutors reported their uncooperative behavior to KPMG. The firm in turn advised the targeted employees and former employees that this stance could result in termination of legal fees, and in discharge for the current employees.79 The government contended that KPMG’s actions were private actions that could not be attributable to prosecutors. The court disagreed, finding that the firm’s actions were a direct result of the prosecutors’ coercive tactics. In the end, each of the nine defendants made the proffers after being informed of the KPMG response if they withheld their statements. Six of them could not produce any evidence that they had no alternative but to make the statements (one employee had evidence for one proffer, but not for a second). Two of the proffers, and “the fruits thereof,” were suppressed because the court found the government coercion was attributable to their decision to make the statements.80 In sum, the court in Stein II found that where that mechanism of pressure actually coerced employees to make statements to the prosecutors, those statements were obtained in violation of the Fifth Amendment right against self-incrimination. The fact that employees made their statements after KPMG let them know that advancement was contingent on cooperation was not enough. It had to be because of the pressure placed on them by KPMG.81 In commenting on one example of coercion, Judge Kaplan noted that the witness had “no practical choice but to cooperate .… [T]he government here coerced KPMG to apply pressure to Mr. Watson and other individual defendants in order to secure waivers of constitutional rights that the government itself could not obtain. That goes beyond the bounds of appropriate government action.”82 Former Attorney General Ed Meese, commenting on this decision, put it this way: “When an individual’s constitutional rights are implicated, the government may not do
78 Stephen W. Grafman and William F. Boyer, “Judge Kaplan’s Ruling is Right and Wrong.” National Law Journal (August 14, 2006) at http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1155303321428. 79 Stein II at 323-324. 80 Id. at 338. 81 Id. at 333. 82 Id.
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indirectly…what it is forbidden to do directly.”83 Though the Constitution would not allow prosecutors to threaten the targeted employees with loss of employment if they asserted their Fifth Amendment rights, in essence they did that indirectly through threats to KPMG. Because the Stein case is still ongoing, its implications are not yet fully known. While the government does not show any signs of backing down from its use of policies like the Thompson Memorandum, at least one commentator has questioned whether the government can continue its use and thereby risk the integrity of future prosecutions.84 And there are conversations about whether Judge Kaplan’s ruling will stand if challenged on appeal. As it stands as of this writing, corporate counsel should expect the government to continue its coercive tactics.
C. Discussion Topics: Practices to address evolving privilege issues in the context of employee rights
Given the unsettled state of employee rights issues in the immediate aftermath of Judge Kaplan’s Stein decisions, many corporations are adopting a ‘wait and see’ attitude regarding how to approach these issues. Practices that corporations have adopted, however, include the following:
• Ensure there is a set policy in place regarding advancement of legal fees to employees. Some case law supports an argument that if a company is simply following its legal obligations, it has no choice but to advance legal fees. In Bergonzi v. Rite Aid,85 for example, the Delaware Chancery Court found Rite Aid was obligated to pay legal fees to a former CFO up until the time of sentencing, despite the fact he had plead guilty to criminal fraud. Such policies should be applied uniformly, however, to dissuade the government from arguing that the policy is simply a tool on the company’s books used to impede investigations. This is not to say that advancement of legal fees should always be made to employees under criminal investigation, but rather that any weighing of the merits on an individual basis should be done in a consistent manner and preferably in response to a clearly written policy.
• Clearly identify the terms of any fee advancement policy. Questions that can arise unless specifically addressed in a fee advancement policy include:
• What group of employees is covered? Is the group (e.g., “officers”) clearly defined? • What relationship do those covered employees have with the business organization’s
counsel both before and after the issue of indemnity/advancement of legal fees arises? When, if ever, will a business organization share counsel with a covered employee?
• At what point does the business organization provide covered employees their own counsel?
• What is the scope of this outside counsel’s legal representation?
83 Statement of Edwin Meese III before the U.S. Senate Committee on the Judiciary Regarding the Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investigations (September 12, 2006) at p. 4, citing Rutan v. Republican Party of Ill., 497 U.S. 62, 77-78 (1990). 84 Ellen D. Podgor, White Collar Crime Professor Blog (August 14, 2006) at http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/08/more_on_kpmg_st_1.html. 85 2003 WL 22407303 (Del. Ch. Oct 20, 2003).
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• Does the business organization have the right to refuse, revoke or limit indemnification? Under what circumstances?
• Will there be a clawback provision? If so, what are its terms?
• Take special care with respect to directors and officers. Some business organizations’ engagement letters for lawyers representing board members make clear that representation is limited to the director’s conduct in their specified role at the indemnifying company. Another area of particular sensitivity that arises when directors or officers are targeted individually is waiver of privilege.86 A corporation may want to try to clarify that as a general rule a single board member or officer cannot waive a corporation’s privilege. On the other hand, directors and officers may balk if such a rule applies in the context of a legal defense (e.g., “I relied on advice from the corporation’s counsel”). Moreover, even under a joint defense agreement, concerns regarding waiver may arise if (i) an outside director who is the CEO of another company seeks advice regarding a privileged board issue from the general counsel of that other company, (ii) corporate counsel sends a privileged e-mail to the work e-mail address of an outside director who works at a company where the e-mail policy is that “nobody should have any expectation of privacy with regard to their e-mails,” or (iii) corporate counsel sends a privileged e-mail to the home e-mail address of an outside director who shares that e-mail account with her or his spouse.
VI. Document Retention and Labeling
A. Overview In the age of electronic discovery where cases can involved literally millions of documents, document retention policies are particularly important. Basic elements of such a policy include clearly instructing employees on basic retention procedures (e.g., what documents need to be saved and where to save them), proper labeling of protected information (designations such as ‘attorney-client privilege’ and ‘attorney work product’ should not be under-used or over-used, and should be consistently used), a well-organized system to archive retained documents (e.g., efficient search and retrieval functionality as well as easy identification of privileged documents), regularly scheduled destruction of documents (including ensuring that employees comply), and procedures to preserve documents relevant to litigation (e.g., use of “do not destroy” or “litigation hold” memos). Although mundane, document retention policies can have a substantial impact on a company’s legal fortunes.
B. Background
1. Severe Consequences for Destruction of Documents
86 A recent Alabama case held that outside directors can claim attorney-client privilege against the company with personal counsel paid for by the company, even if corporate affairs are part of the discussion. Ex parte Smith, 2006 WL 1304943 (2006), Ala., No. 1050607 (May 12, 2006).
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Under the doctrine of spoliation, a company has an obligation to preserve documents potentially relevant to pending or threatened litigation. Litigants must take great care in identifying and preserving all such documents, or else face severe sanctions, including fines, attorney fees, default judgment, or even dismissal of the case.87 Another possible sanction is the court giving a “spoliation” inference to the jury. This permits the jury to infer that missing documents might or would have been unfavorable to the party who did not produce the documents – even if the reality is that the missing documents are, in fact, neutral or favorable to that party.88 In addition to the adverse consequences a failed document retention policy can have in litigation, the criminal sanctions also can be severe. For example, the catch-all obstruction of justice statute, 18 U.S.C. § 1503, punishes by a fine and/or up to 10 years in prison anyone who “corruptly” endeavor to impede or obstruct the “due administration of justice.” Under this provision, the government only needs to prove intent to obstruct justice, not that justice was actually obstructed.89 Furthermore, the Sarbanes-Oxley Act created a very far-reaching document destruction offense, which does not even require an active government investigation. Section 802 § 1519 imposes corporate responsibility for improper destruction of documents done “knowingly…with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction…of the United States.”90 Additionally, Section 1102, metes out sanctions for interfering with official proceedings: “[w]hoever corruptly alters, destroys, mutilates or conceals a record, document, or other object, or attempts to do so with the intent to impair the object’s integrity or availability for use in an official proceeding.”91
2. Inadvertent Waiver and Non-Waiver Agreements Particularly in the digital age, inadvertent waiver of privileged documents is becoming increasingly common. Although a lawyer can ask for the return of an inadvertently produced document and courts are often sympathetic, with the growing prevalence of large-scale electronic discovery so-called “non-waiver agreements” are becoming increasingly popular. Under such agreements, the parties make massive productions of electronic documents with an understanding that the production of protected documents will not constitute waiver of privilege. The agreements also contain a set of defined procedures for litigants to retrieve the privileged materials, called “quick peek” or “clawback” procedures. Courts are split, however, regarding whether such non-waiver agreements are
87 See, e.g., Deborah J. Edwards, et al, “What To Do When the Whistle Blows,” ACC Docket 22, no. 5 (May 2004. 88 See, e.g., Mosaid Technologies v. Samsung Electronics Co., Ltd., 348 F.Supp.2d 332 (D.N.J. 2004); Coleman v. Morgan Stanley, 2005 WL 674885 (Fla. Cir. Ct. Mar. 23, 2005). 89 18 U.S.C. § 1503 90 SOX §802(a) (18 USC 1519) 91 SOX §1102, amending 18 USC § 1512
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enforceable. Moreover, even if these agreements are enforceable between the signing parties themselves, they may not protect parties from waiver claims by non-parties. 92 It is likely that the use of non-waiver agreements will increase due to changes in the Federal Rules of Civil Procedure expected to take place in December 2006. For example, proposed FRCP 26(b)(5) includes a mechanism for the return of inadvertently produced documents and proposed FRCP 26(f)(4) lets parties agree on a procedure for post-production privilege claims. Importantly, however, despite the text of the rule permitting such agreements, the comments are clear that the rule does not substantively impact whether the privilege will in fact be waived. That issue remains a matter for the courts to determine.93
C. Discussion topics: Practices to have an effective document retention policy Practices corporations have adopted regarding document retention policies and labeling include the following:
• Avoid improper designation of privilege. Although failure to designate privileged documents as “privileged” or “attorney work product” (under-use) risks disclosure of sensitive information and waiver of privilege, improperly designating non-privilege documents (over-use) also creates risks. Improper over-designation of privilege can give companies and employees a false (and dangerous) sense of security. First, employees become conditioned to be more candid about sensitive issues than they should be if they assume many documents are improperly designated. Business organizations also can lose credibility with prosecutors and judges if the privilege designation is overused. Finally, overuse of attorney work product designation is dangerous because plaintiffs can find the earliest work product designation regarding a given piece of litigation and look for a gap in time before the business organization issued a “do not destruct” memo. Any significant gap can be the basis of a spoliation claim. For this reason, some business organizations prevent their in-house lawyers from automatically stamping their e-mails “privileged.” In the end, however, there is no substitute for regular training and clear policies on this issue.
• Ensure clear labeling of properly designated privileged information. If a document is privileged, companies should make sure that fact is easy to spot in the course of a massive document review. Although the specific labeling procedure adopted is not crucial, uniformity within a company can be helpful. Such labeling is particularly important with respect to lawyers that also have a business role; labeling document as “privileged” can help identify when those lawyers are acting in their legal capacity.
• Establish comprehensive e-mail policies prohibiting certain topics from even being discussed over e-mail. Some who have reviewed this idea at work in one of the interviewed organizations have suggested that this is not a possible or reasonable expectation. But the company engaged in
92 O’Melveny & Myers, “Non-Waiver Agreements: Is the Privilege Actually Protected?” (Sept 27. 2006) at www.omm.com/webdata/content/publications/client_alert_electronic_discovery_2006_09_27.htm. 93 See “Summary of the Report of the Judicial Conference Committee Rules of Practice and Procedure” (September 2005) at http://www.uscourts.gov/rules/Reports/ST09-2005.pdf#page=114.
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this practice argued that adoption of such policies can reduce the risk of “e-mail informality” resulting in the inadvertent waiver of privilege, and employee training can help to make what sounds like an unenforceable concept a very effective tool in eliminating a large percentage of problem emails. Apparently at least one aggressive prosecutor has threatened to base an obstruction of justice claim on the regular communication of such policies to employees, but such a threat appears misguided if the policy reflects merely reasonable prudence and is not designed or implemented for purposes of withholding non-privileged information.
• Anticipate requests for production of voicemail messages. Some business organizations are concerned that voicemails may be subject to discovery (and therefore should be retained) since they are saved at least temporarily on most systems. While this vigilance is admirable, it may be prudent to refrain from taking significant proactive steps to retain this information before the issue is better developed in the courts because a company could create an obligation to produce that it would not have but for taking such proactive steps.
VII. Limited Waiver
A. Overview Given the “culture of waiver” detailed in Section II, it is common for private plaintiffs to seek the disclosure of privileged documents which a company previously was coerced to provide to government enforcers. While some have tried to solve this by entering into confidentiality agreements with the government, these agreements are not honored in most courts. Such an inequitable result – especially after the government strips the company of its ability to say no to the privilege demands – reinforces the message that the attorney-client privilege in the corporate context is unreliable.94 Although the concept of “limited waiver” is attractive to the extent it prevents further inequitable results for companies in this situation, it would not solve – and could exacerbate – the crucially important underlying problem of government enforcement policies eroding attorney-client and work product protections. While it is an admirable goal to fashion a remedy for companies that have been forced to waive their privileges against future litigants, to do so by establishing a limited waiver doctrine might have the impact of creating a presumption on the part of the government that it is indefensible for a company to reject a waiver request, given that the government can now offer protection against third party disclosures.
B. Background
1. The majority of federal circuit courts do not recognize limited waiver. With respect to attorney-client privilege, the Eighth Circuit first recognized the concept of limited waiver almost 30 years ago in Diversified Industries, Inc. v. Meredith.95 This recognition was limited 94 See Upjohn, 449 U.S. at 389-93, “[a]n uncertain privilege…is little better than no privilege at all.” 95 572 F.2d 596, 607 (8th Cir. 1977)
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both literally and figuratively, however, as the Eighth Circuit’s entire discussion fell within a single paragraph and no other circuit subsequently has adopted limited waiver. In fact, the First, Second, Third, Fourth, Sixth, and D.C. Circuits all have explicitly rejected limited waiver in this context. With respect to the work product doctrine, only the Fourth Circuit recognizes limited waiver, and even then only with respect to opinion work product. In Re Martin Marietta Corp.96 While many of the other circuits have left open the possibility of applying the concept of limited waiver to work product in certain situations, none has adopted it explicitly, and the First, Fourth, and Eighth circuits have rejected it in the context of non-opinion work product. Perhaps the best recent articulation of the current majority position regarding limited waiver is in In Re Columbia/HCA.97 There the Sixth Circuit rejected limited waiver, holding that the attorney-client privilege was never intended to protect communications to the government. Despite a vigorous dissent, the majority observed that third-party disclosure waives the privilege and that the government is indeed a third party. Putting it succinctly, the majority characterized a decision between maintaining confidence or revealing privileged documents to combat prosecution as merely a “tactical litigation decision.” Similarly, the Third Circuit concluded that:
When a party discloses protected materials to a government agency investigating allegations against it, it uses those materials to forestall prosecution (if the charges are unfounded) or to obtain lenient treatment (in the case of well-founded allegations). These objectives, however rational, are foreign to the objectives underlying the work-product doctrine. Moreover, an exception for disclosures to government agencies is not necessary to further the doctrine's purposes; attorneys are still free to prepare their cases without fear of disclosure to an adversary as long as they and their clients refrain from making such disclosures themselves.98
Consistent with this position of the majority of federal circuit courts, “[i]t does not appear that any state has implemented, by statute or rule, a general government-investigation privilege, and this type of privilege does not appear in the Uniform Rules of Evidence (Uniform Rules).”99 Accordingly, there is little current legal support for limited waiver. 2. Limited waiver may be adopted via proposed FRE 502. In light of this legal landscape, the Advisory Committee on Evidence Rules of the Judicial Conference of the United States has recognized that courts generally reject that limited waiver is enforceable, including when companies under investigation produce otherwise privileged materials to the government. In response, the Judicial Conference has proposed for comment an evidentiary rule recognizing limited waiver, proposed Federal Rule of Evidence 502. In current form, proposed FRE 502 states privilege is waived when a person or entity discloses protected information unless the
96 856 F.2d 619 (4th Cir. 1988) 97 293 F.3d 289 (6th Cir. 2002) 98 Westinghouse Elec. Corp. v. Republic of the Phil ., 951 F.2d 1414 (3d Cir. 1991) 99 In Re Qwest Comm. Int’l ., 450 F.3d 1179, 1199, n.8 (10th Cir. 2006).
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disclosure is made “to a federal, state, or local governmental agency during an investigation by that agency, and is limited to persons involved in the investigation.”100 Although this limited waiver rule has been proposed, enactment is far from assured. There are eight steps before a proposed rules in enacted, and so far FRE 502 is on only the third. The Evidence Rules Advisory Committee met April 2006 and approved the limited waiver amendment to FRE 502 (Step 1), with recommendation to the Standing Committee on Rules of Practice and Procedure to approve its release for public comment. At its June 2006 meeting, the Standing Committee accepted the recommendations (Step 2), and now FRE 502 is in the publication and comment stage (Step 3). The deadline for comments on the rule is February 15, 2007, and public hearings are set to take place in January 2007 in New York and Phoenix. After the comment period it will be sent back to the Advisory Committee (Step 4) to be reassessed in light of the public comments, and if it survives it will go back to the Standing Committee (Step 5) for approval of the changes. Upon making changes, it would go to the Judicial Conference (Step 6), which has the power to amend the rule or to decline to send it on to the Supreme Court. If the rule reaches the Supreme Court (Step 7), it is nearly automatic that it will then go on to Congress (Step 8). Once in Congress, if neither chamber acts to derail the proposed rule it becomes law. [ACC filed its first set of comments with the Advisory Committee on June 20, 2006; it is available at http://www.acca.com/public/attyclientpriv/502acc.pdf.] Although uncertain, this rulemaking could result in a limited waiver doctrine within a relatively brief period of time.101 The ongoing development of common law is not irrelevant to this rulemaking process, however, as “[t]he accumulated experience of federal common law in the area of attorney-client privilege and work-product protection is but another source for the legislative and rule-making bodies to draw on to inform their deliberations concerning the need for and parameters of selective waiver or a new privilege.”102 C. Discussion Topics As discussed above, under current law companies cannot rely on a limited waiver doctrine, and therefore should expect that otherwise privileged documents produced to government officials – even under the auspices of a confidentiality agreement – may have to be turned over subsequently to private plaintiffs. Practice that companies have adopted in light of this legal reality include the following:
• Work with government officials to seek options other than even limited waiver. Government officials sometimes want information that the company can provide without producing privileged information. This is especially true when government investigators and prosecutors
100 Report on the Advisory Committee on Evidence Rules at http://www.uscourts.gov/rules/Reports/EV05-2006.pdf. 101 See generally Qwest at 1201-02 (“[l]egislatures and rule-making bodies are endowed with tools to marshal evidence, facts, and experience from numerous and diverse sources that can support more dramatic and immediate creation of new rules or modifications of old rules [than common law]”). 102 Id. at 1202.
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are truly in search of underlying facts and do not care about access to attorney work product or attorney-client communication per se. Unfortunately, there may not be an obvious dividing line between facts and protected materials. Moreover, once at loggerheads it can be hard to compromise with federal enforcers. Reports confirm that enforcers can put heavy and direct pressure on senior management, including to disregard the advice of their own counsel (management, not counsel, is the ultimate privilege decision-maker). Indeed, there even can be pressure to produce privileged documents before enforcers are willing to negotiate, and attempts at appeasement (e.g., producing facts only, agreeing to limited waiver of a subset of documents) may not satisfy enforcers. Experience with state enforcers, in contrast, typically has been less confrontational and ultimately more productive for everyone involved.
• Insist on a court order that turning over documents to the government under a confidentiality agreement does not constitute waiver with respect to third parties. Although not foolproof, a court order explicitly recognizing the limited nature of a company’s waiver likely will be dispositive in that court and may be accorded substantial weight in other courts. Of course, it is not always possible to get such a court order given time constraints, resistance of government officials, or refusal by the court to enter one. Even if a company does not succeed in getting a court order, however, insisting on one may give the company additional bargaining leverage (e.g., to further limit the scope documents being produced).
• Don’t ever explicitly waive privilege. In the face of often intense pressure, business organizations and their counsel need to think beyond the specific issue at hand. Even if coerced to turn over documents, companies should not explicitly agree to waive privilege or acknowledge that it has been waived. Government officials should not demand such an explicit admissions if they get the information they need. If there is no formal waiver, a company can preserve its arguments and live to fight another day.
VIII. Prosecution Agreements and Corporate Monitorships
A. Overview Prosecution agreements are now the generally preferred way for the DOJ to resolve criminal investigations involving corporations. In a deferred prosecution agreement, the prosecutors charge the company with a crime, but agree to drop it if the obligations in the agreement are met. In a no prosecution deal, the government will agree not to press charges at all if the specified demands are met. Although not universally required, the appointment of an independent monitor has become an accepted component of many prosecution agreements. The scope of the monitor’s authority and the functions to be carried out by the monitor are not regulated by statute or dictated by DOJ policy; how monitors operate varies depending upon the nature and extent of the wrongdoing addressed by the prosecution agreement as well as the customs of the particular United States Attorney’s office that is prosecuting the matter. It is safe to say, however, that by their nature all monitorships require a great deal of communication among the corporation, the monitor, the government and possibly the court. An important issue for corporate counsel today is the fact that sharing privileged communications with corporate monitors can waive privilege
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B. Background
1. The Rise of Deferred Prosecution and Non-Prosecution Agreements Deferred prosecution agreements and no prosecution deals are now the preferred way for government to handle corporate crime. According to the DOJ, since its corporate fraud task force was created four years ago, “a couple dozen” deferred prosecution agreements have been signed. According to one account, that is twice as many of such agreements as in the ten years before.103 In the first six months of this year alone, the DOJ completed at least 12 deferred prosecution agreements or no prosecution deals, as opposed to the previous all-time high of eight that signed in 2005.104 There are certainly incentives for signing them. One, a company doesn’t have to look past Arthur Andersen to see that criminal indictment can be the death knell of a company. Two, even if a corporation pays hundreds of millions of dollars in fines, the company’s stock will typically go up, because the market prefers certainty. Overriding every other reason, however, is that corporations have no practical choice but to sign these agreements. Government prosecutors today have all the bargaining power, and they prefer prosecution agreements in part because they never get to trial and therefore their tactics will not be subject to judicial oversight. But there can be consequences to signing DPAs – in essence, in most cases, a corporation will be signing away all of its rights and admitting to guilt (often characterized in a manner that is highly distasteful and even inaccurate by prosecutors). Moreover, because a trial will not be involved, the conditions of settlement for a company will be set without judicial approval. Typically, privilege waiver will be required. An illustrative example of the coercive power of a DPA can be seen in the KPMG tax shelter case, U.S. v. Jeffrey Stein.105 There, KPMG went to great lengths to ensure its cooperativeness in a government investigation, in hopes of avoiding a criminal indictment of the firm. Eventually, the company entered into a deferred prosecution agreement with the government.106 As noted above in Section V, KPMG had to admit wrongdoing, accept some restrictions on its business, pay a $456 million fine, continue to cooperate “fully and actively” in the investigation and force their employees to offer proffers while threatening withdrawal of legal fees and/or termination for non-cooperation.107 One additional provision not previously discussed, however, is that KPMG agreed
103 Edward Iwata, “Debate heats up on Justice’s deferred-prosecution deals.” USA Today (May 31, 2006) at http://www.usatoday.com/money/companies/regulation/2006-05-30-justice-usat_x.htm. 104 Sue Reisinger, “Deal-making by DOJ is on the rise: Deferred-prosecution agreements way ahead of last year’s pace.” Nat’l L.J. 8 (2006). 105 The Stein case is discussed at greater length in the Section V on “Employee Rights.” 106 The DPA can be found at http://www.usdoj.gov/usao/nys/Press%20Releases/August%2005/KPMG%20dp%20AGMT.pdf.
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to refrain “through its attorneys or agents, partners, or employees” from “mak[ing] any statement, in litigation or otherwise, contradicting the Statement of Facts or its representations in this Agreement.”108 Such non-contradiction clauses can have pernicious consequences. If there is a contradictory statement, even an inadvertent one, and the company does not repair the breach by repudiating it, then the terms of the DPA are violated and the government remains free to prosecute. If the government does prosecute, the company’s admissions in the DPA should ensure a conviction.109 There also is the possibility of judicial estoppel in related third party lawsuits in which any contradiction of previous statements is barred.110 The Stein defendant moved to dismiss his indictment on the grounds that this non-contradiction clause constituted prosecutorial misconduct, but Judge Kaplan denied the motion. As demonstrated in Stein, DPAs can be a powerful tool the government can use in punishing a company short of prosecution, but this comes at the expense of both employee and corporate rights. And another recent case still pending before the Supreme Court, revolves around the question of whether the government (unlike the corporation) has to live up to the terms of the agreement should they wish to go back and revisit them. Such a one-sided lack of certainty has sent waves of concern through the corporate community.111 2. The Corporate Monitorship and Privilege There is potentially a large set of monitor-related communications and documents that are generated among the corporation, the monitor, the government, and sometimes the court. This may include communications and documents concerning: the nature of specific business reforms to be undertaken; advice from the monitor as to the sufficiency of the corporation’s reform efforts; the design and operation of new compliance program components; the monitor’s assessment of the corporation’s compliance with its reform controls and with the prosecution agreement; reformed or new training program design and operation; revised document retention policies and compliance efforts; investigation of alleged conduct that potentially violates the terms of the prosecution agreement; handling of hotline and whistleblower complaints; pending or anticipated litigation
107 As Judge Kaplan said in the case, “[t]he government has substantial influence and almost certainly, power over KPMG by virtue of the cooperation clauses in the [deferred prosecution agreement]. It may very well be in its interest to use that influence or power to cause KPMG to advance the defense costs.” Stein I at 380. 108 See DPA at 16. 109 Ben Vernia, “Here’s Your Story, And You’re Sticking To It: When Contradicting the Deal Can Mean Prosecution, Companies Must Step Carefully.” Legal Times 38 (2006). 110 Id. 111 See the amicus filing of ACC and the US Chamber of Commerce in Stolt-Neilson v. US, cert pending before the US Supreme Court: http://www.acca.com/public/amicus/stoltnielsonbrief.pdf.
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involving the corporation; corporate activities related to mergers and acquisitions; and reports by the monitor, board or committee regarding the status of the corporation’s efforts. The possibility of disclosure of these communications and documents to third-parties creates a dilemma for corporations, similar in nature to the problem when corporations undertake an internal investigation. In the monitorship setting, the corporation’s effort to fully comply with the prosecution agreement creates significant litigation risk should monitorship materials be subject to disclosure. There are two independent bases, however, for shielding corporate monitoring documents and communications from disclosure to third-parties: the non-disclosure and confidentiality clause; and the “special officer” privilege covering attorney work-product and attorney-client communications. The doctrines underlying these protections are distinct, but prosecution agreements can be drafted to harmonize the requirements of both so that corporations can best attempt to protect a wide array of monitoring materials. Importantly, planning for this needs to be done during the prosecution agreement’s negotiation and the drafting process.
(a) The Non-Disclosure and Confidentiality Provision The non-disclosure and confidentiality provision protects a broad set of monitoring communications that would not exist but for the monitorship, not limited to attorney-client privileged documents and work product. The provision should require that parties not disclose non-public monitoring documents except by court order or as otherwise mandated by law. It should indicate that monitoring documents in the possession of the monitor will be returned at the conclusion of the monitorship. The provision should also require that all parties to the agreement maintain the confidentiality of all documents and communications. Case law and practice suggest that companies involved in publicly disclosed investigations - or those likely to become so - enter into a deferred prosecution agreement to optimize the likelihood of successful enforcement of the provision. Because the deferred prosecution agreement is approved by the court, the provision can be made part of a protective order of the court. This is the approach that was utilized in U.S. v. Computer Associates International, Inc.112 In that case, in addition to their deferred prosecution agreement, Computer Associates and the government filed a separate joint request for an order to appoint the selected monitor and to require that the corporation, the monitor and the government maintain the confidentiality of all monitoring-related documents. The joint request also asked for a protective order to shield monitoring-related documents from disclosure to third-parties. A copy of the protective order is included in Appendix ‘A’.
There is support in case law for non-disclosure provisions in the area of consent decrees. In U.S. v. Bleznak,113 the Second Circuit upheld a non-disclosure and confidentiality provision of the consent decree shielding telephone conversations that were explicitly required by the consent decree to be recorded and monitored by defendant’s antirust compliance officer. The Second Circuit essentially 112 Criminal Docket No. 04-837 (ILG) (E.D.N.Y.) 113 153 F. 3d 16 (2nd Cir. 1998).
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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adopted the lower court's “but for” analysis of the recording, holding that there was strong policy arguments for protecting monitoring materials that would not have existed but for the consent decree’s monitoring requirements.114 Two additional legal bases have been put forth to support the enforceability of monitoring document provisions in deferred prosecution agreements.115 The first, put forth by the parties in their request for a protective order in Computer Associates, analogizes the protection of the monitor’s communications to “the quasi-judicial immunity frequently accorded court-appointed bankruptcy examiners for the protection of testimony, documents and other information obtained by examiners through their court-ordered powers.”116 The second is also based upon analogy. It has been argued that because the monitor in a deferred prosecution agreement is performing a role that corresponds to that of the probation department in the progenitor to deferred prosecution agreements, the pre-trial diversion program, the communications should be accorded the same level of confidentiality as that granted to the probation department.117
(b) The “Special Officer” Privilege Covering Work Product and Attorney-Client Privileged Documents
The “special officer” privilege is a hybrid privilege created by some courts to protect monitorship documents. Much like with non-disclosure and confidentiality provision, its protection is not limited to attorney-client privileged documents and work product. In fact, the basic requirements are the same here as for the non-disclosure and confidentiality provision, but there is a different underlying basis for each protection. Two issues emerge when considering the use of this privilege to shield monitoring materials from disclosure. First is whether the corporation's communication with the monitor operates as a waiver of privilege. Second is whether monitoring communications are of the type that fall within the attorney-client privilege.
114 Subsequently, in McCoo v. Denny’s, 192 F.R.D. 675 (D. Kan. 2000), Denny’s, operating under a consent decree that included the appointment of an independent monitor as well as a Bleznak nondisclosure provision, conducted an internal investigation. Documents relating to the investigation were disseminated to the monitor. In denying Denny’s request to protect the documents from disclosure, based in part upon the non-disclosure provision, the court relied upon the Bleznak rationale in its determination to grant the request for production. The court held that the “Bleznak standard” only applied to documents that were required by the terms of the consent decree, and would not have been created but for the consent decree. Because the consent decree did not require Denny’s to undertake the investigation – and because the investigation probably would have occurred without the consent decree, the court granted the plaintiff’s request for production of the investigation documents. 115 See David Pitofsky “Monitor/Examiner’s Role Under Deferred Prosecution Agreements”, New York Law Journal, September 14, 2005. 116 Computer Associates letter to J. Glasser 117 Supra, note 3.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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On the first issue, corporations can best avoid the waiver of privilege issue by having the monitor appointed by the court, and by having the monitor file only a summary status report to the government unless there are specific instances of improper conduct to report. There is case law to support the non-disclosure of otherwise privileged monitoring materials. In In re LTV Securities,118 the court, acknowledging the deleterious effects of permitting disclosure of a corporation’s remedial work under a consent decree, recognized a hybrid privilege that protected from disclosure work product and privileged documents of a “special officer” appointed pursuant to the decree.119 In Cobell v. Norton,120 the court granted the defendant’s request for a protective order for privileged communications disclosed to a court-ordered monitor. Part of the court’s reasoning relied on its interpretation of the monitor’s status as an agent or officer of the court. Disclosure to the monitor, the court reasoned, was the equivalent of an in camera review. To best protect documents and communications between the corporation and the monitor under this approach, the prosecution agreement should mandate only summary reports to the court and the government unless there are specific instances of improper conduct to report. There is a confusing array of case law as to whether the services of a monitor are the type of legal services or advice to which the attorney client privilege applies. Corporations can maximize the likelihood of the successful use of the “special officer” privilege by assuring that monitoring communications are framed as a necessary component to assist the monitor in rendering, at least in part, not only technical assessments but also legal services or advice. The safest course of action to successfully assert the attorney-client privilege is to include in the monitor’s role functions that require some legal assessment of compliance and advice to the corporation regarding its reform efforts.
C. Discussion Topics Integrating the strategies from these two approaches leads to the following set of recommendations for negotiating and drafting prosecution agreement provisions related to monitorship communications and documents:
1. To maintain the possibility of the attorney-client privilege, the monitor should be an attorney.
2. The prosecution agreement should anticipate court approval and a protective order covering monitoring communications and documents. This suggests a deferred prosecution agreement.
3. The prosecution agreement should clearly identify the monitor’s duties to the court. 4. The prosecution agreement should include the non-disclosure and confidentiality provision
and should reference the parties' joint request for a protective order covering monitoring communications and documents.
118 89 F.R.D. 595 (N.D. Tex. 1981) 119 Although the Second Circuit declined to address the privilege, the district court applied the privilege in holding that documents were not discoverable. U.S. v. Brown, 963 F. Supp. 235 (S.D.N.Y. 1997). 120 213 FRD 69 (D.D.C. 2003)
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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5. To the extent feasible, identify in the prosecution agreement those documents and communications that are a requirement of the agreement, and would not otherwise be created but for the agreement.
6. The prosecution agreement and proposed protective order should indicate that the monitor is court-ordered and approved.
7. The proposed order should contain a separate non-disclosure and confidentiality clause covering all monitoring documents and communications among the agreement parties.
8. Structure the monitor’s reporting duties to report only in a summary fashion to the court and the government unless there are specific instances of improper conduct to report.
9. To the extent feasible, the agreement should identify what tasks the corporation and the monitor must undertake as part of the agreement and to the extent appropriate state that these are specific requirements of the prosecution agreement that would not be otherwise undertaken.
10. The monitor’s duties should include some form of legal analysis including the rendering of an assessment of the adequacy of the corporation’s compliance and recommending reform measures to help corporation comply with the agreement’s requirements.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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APPENDIX A “In the Trenches: Waiver of the Privilege Has a Strong Negative Impact” The Department of Justice maintains that there is no erosion of privilege and concerns regarding a “culture of waiver” are overblown, stating that its prosecutors very rarely seek waivers.121 Confident that the DOJ’s contention is not supported by the facts but rather by their incorrect conjectures, ACC decided to collect empirical data on the prevalence of waiver requests made to ACC members, as well as other indicators of the current health of the attorney-client privilege. ACC particularly wished to address the contention of the Justice Department that waiver of the privilege is only one of the several criteria it examines under the Thompson Memorandum and is rarely determinative in the assessment of whether a company is cooperating with the government. ACC’s findings, based on actual experiences of corporations under investigation or being prosecuted by the government, suggest that this singular criterion – privilege waiver – is all-powerful in determining whether a company will qualify for the crucial designation of “cooperative.”
ACC and its coalition partners122 on this issue have repeatedly challenged the Department of Justice to undertake a similar process by asking US Attorneys to respond to detailed information requests that include more nuanced questions than have been asked in the past, but so far, the only response we have received from the Department is that most US attorneys are required to get permission from a supervisor before they demand privilege waivers of corporate defendants, and only a small handful of such permissions have ever been recorded. We do not find it odd that prosecutors who may be violating internal policies requiring formal permissions to request waivers are not likely to report that they’ve asked for waivers without such permissions.
Further, we know that many prosecutors claim that “permission” requirements pertain to waiver “demands” and not to conversations with targeted companies when waivers are merely “requested.” Some prosecutors actually believe that when they say, “It’s your choice: you can waive or we’ll indict,” that they have actually provided the company with two viable options from which they can choose. Thus, they believe that their “requests” for privilege waivers do not constitute “demands.”
Other prosecutors cited in our surveys employ other “subtle” tactics such as tossing a copy of the Thompson Memo on the table with the privilege waiver section highlighted and making a statement such as “you’d like to qualify for the benefits of cooperation in this investigation, correct?” Perhaps
121 See, e.g., Mary Beth Buchanan, “Effective Cooperation by Business Organizations and the Impact of Privilege Waivers,” 39 Wake Forest L. Rev. 587, 598 (2004), citing to DOJ internal surveys conducted several years ago. No more recent review of department practices has been made available and many question whether this survey asked the best questions to elicit information that is responsive to this debate. 122 The Coalition to Protect the Attorney-Client Privilege is made up of a diverse and broadly representative constituency of interests and memberships – from the U.S. Chamber of Commerce to the ACLU – all of whom are concerned by governmental policies and practices that erode the protections of the attorney-client privilege. In addition to the ACC, this coalition includes the following organizations: American Chemistry Council, American Civil Liberties Union, Business Civil Liberties, Inc., Business Roundtable, The Financial Services Roundtable, National Association of Criminal Defense Lawyers, National Association of Manufacturers, U.S. Chamber of Commerce.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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prosecutors don’t deem such practices to qualify as “demands,” but the client receiving that communiqué gets the message loud and clear. Such loaded prosecutorial “requests” or presentations of “choices” are the functional equivalents of a demand to the corporation facing possible indictment and a shutdown of the entity. No choice but waiver exists for the company interested in protecting their stakeholders’ interests in continuing to engage in business and trying to get past the problems currently plaguing it.
ACC’s survey results from its members stems from original efforts to collect general information about privilege erosion in 2005, and a follow-up survey to delve deeper into additional related questions in 2006. In the first survey (2005), over 700 corporate lawyers offered answers and detailed perspectives about their privilege waiver experiences in the prosecutorial, enforcement, audit, and civil litigation context. Over half of our responses came from corporate counsel, many of them general counsel; the remainder came from outside counsel who specialize primarily in white collar criminal defense. We were struck by the strong response rate given the limited size of the pool we solicited to comment, and the unanimity of the message sent by respondents from different disciplines. The following are the results from this survey:123
• Reliance on privilege: In-house lawyers confirmed that their clients are aware of and rely on privilege when consulting them (93% affirmed this statement for senior-level employees; 68% for mid and lower-tier employees).
• Absent privilege, clients will be less candid: If the privilege does not offer protection, in-house lawyers believe there will be a “chill” in the flow or candor of information from clients (95%); indeed, in-house respondents stated that clients are far more sensitive as to whether the privilege and its protections apply when the issue is highly sensitive (236 of 363), and when the issue might impact the employee personally (189 of 363).
• Privilege facilitates delivery of legal services: 96% of in-house counsel respondents said that the privilege and work-product doctrines serve an important purpose in facilitating their work as company counsel.
• Privilege enhances the likelihood that clients will proactively seek advice: 94% of in-house counsel respondents believe that the existence of the attorney-client privilege enhances the likelihood that company employees will come forward to discuss sensitive/difficult issues regarding the company’s compliance with law.
• Privilege improves the lawyer’s ability to guarantee effective compliance initiatives: 97% of corporate counsel surveyed believe that the mere existence of the privilege improves the lawyer’s ability to monitor, enforce, and/or improve company compliance initiatives.
Presented with this data, the United States Sentencing Commission initiated a process to review its 2004 decision to include privilege waiver language in its organizational sentencing guidelines. Commissioners asked us to conduct further research in several areas of particular interest to their inquiry. The results of this second, follow-up survey were cited by the US Sentencing Commission as a primary determinant in their decision to propose amending the corporate sentencing guidelines in the 2005/6 amendment cycle to eliminate language they’d only inserted in 2004.
123 An executive summary of this survey and its results is online at http://www.acca.com/Surveys/attyclient.pdf.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
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In brief, this second survey124, found:
• A Government Culture of Waiver Exists: Almost 75% of both inside and outside counsel who responded to this question expressed agreement (almost 40% agreeing strongly) with a statement that a “‘culture of waiver’ has evolved in which governmental agencies believe it is reasonable and appropriate for them to expect a company under investigation to broadly waive attorney-client privilege or work product protections.” (Only 1% of inside counsel and 2.5 % of outside counsel disagreed with the statement.) It is important to note that these surveys were sent to a cross section of practitioners without any knowledge of whether their company clients had had exposure to government prosecutions or specifically to privilege waiver requests, and so the overwhelmingly negative evaluation of government practices is doubly troubling.
• ‘Government Expectation’125 of Waiver of Attorney-Client Privilege Confirmed: Of the respondents who confirmed that they or their clients had been subject to investigation in the last five years, approximately 30% of in-house respondents and 51% of outside respondents said that the government expected waiver in order to engage in bargaining or to be eligible to receive more favorable treatment.
• Prosecutors Typically Request Privilege Waiver – It Is Rarely “Inferred” by Counsel: Of those who had been investigated above, 55% of outside counsel responded that waiver of the attorney-client privilege was requested by enforcement officials either directly or indirectly. Twenty-seven percent of in-house counsel confirmed this to be true (60% of in-house counsel responded that they were not directly involved with waiver requests). Only 8% percent of outside counsel and 3% of in-house counsel said that they “inferred it was expected.” Clearly, prosecutors are regularly asking this question, even if they don’t believe that asking for waiver is the functional equivalent of demanding it, as our member constituents believe,
• DOJ Policies Rank First, Sentencing Guidelines Second Among Reasons Given For Waiver Demands: Outside counsel indicated that the Thompson/Holder/McCallum Memoranda are cited most frequently when a reason for waiver is provided by an enforcement official, and the Sentencing Guidelines are cited second. In-house counsel as a group placed the Guidelines third, behind “a quick and efficient resolution of the matter” (1) and DOJ policies (2).
• Third Party Civil Suits Among Top Consequences of Government Investigations: Fifteen percent of companies that experienced a governmental investigation within the past 5 years indicated that the investigation generated related third-party civil suits (such as private antitrust suits or derivative securities lawsuits). Of the eight response options that asked respondents to list the ultimate consequences of their clients’ investigations, related third-party civil suits rated third for in-house lawyers. The first and second most common outcomes for in-house counsel were that the government decided not to pursue the matter
124 The second survey’s results are online at http://www.acca.com/Surveys/attyclient2.pdf. 125 The survey defined ‘government expectation’ of waiver as a demand, suggestion, inquiry or other showing of expectation by the government that the company should waive the attorney-client privilege.
Association of Corporate Counsel (ACC) Pragmatic Practices in Privilege Protection
Copyright © 2006, Association of Corporate Counsel
This document is available online in ACC’s privilege libraries at www.acca.com.
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further (24%), or that the company engaged in a civil settlement with the government to avoid further prosecution (18%). For outside counsel, the most cited outcome was criminal charges against individual leaders/employees of the company (18%), and a decision by the government not to prosecute (14%). “Related third party civil litigation” finished fifth (for outside counsel respondents) with 12%.
Faced with this evidence of privilege erosion and increasingly successful government waiver demands, the United States Sentencing Commission acted on April 5 of this year to repeal the privilege wavier language contained in the commentary to Chapter 8 – over the Justice Department’s objections. Thus, a critical leg of the stool on which the Thompson Memorandum rests has been kicked out; the DOJ has lost the one “independent” justification it regularly cited as an authority upon which it premises its right to demand privilege waivers. All that remains to justify DOJ’s waiver practices is their own internal policy guideline, which they suggest is not open to discussion or public scrutiny.
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