Corporate internal investigations appear to be everywhere these days. From Enron to WorldCom to Global Crossing to the hundreds of cases not in the headlines, the flush of white collar scandals, and the requirements of laws like the Sarbanes-Oxley Act,1 have resulted in counsel being regularly asked to conduct investigations of allegations of impropriety.
The legal landscape regarding the privileged protections afforded counsel's work has shifted in the wake of Sarbanes-Oxley and the post-Enron crackdown on white collar malfeasance. The awesome discretionary power wielded by prosecutors and regulators who decide whether to charge a corporation with wrongdoing puts tremendous pressure on companies to cooperate with the government in an attempt to gain favorable treatment.
More and more, the government requires as a condition of such cooperation that the company waive its attorney-client and work-product privileges and produce its internal investigation. Indeed, the current U.S. Department of Justice guidelines for bringing criminal charges against corporations issued in January 2003 go out of their way to emphasize that a corporation's willingness to waive both the attorney-client and work-product privileges with respect to internal investigations is an important factor that prosecutors will weigh in assessing whether a company has effectively cooperated and therefore should be afforded any leniency.2 The Securities and Exchange Commission and other law enforcement agencies have taken similar approaches.3
But the decision to waive, or not to waive, is a difficult one, with repercussions far beyond the confines of the government's investigation. It is a fair bet that any civil lawsuits that follow a government investigation are sure to request the disclosure of any internal investigation, and if the privilege no longer applies, the company may find itself handing over to civil plaintiffs a virtual road map to assist them in their lawsuit.
The U.S. Courts of Appeals are split on the question of what effect the decision to share privileged communications or work product with the government will have on the ability to protect those, and related, documents in the future. The case law in the Second Circuit does not offer much comfort to corporate counsel when they are making their Hobson's choice.
The Circuit Split
The prevailing view in most circuits is that there can never be "selective waiver" of the attorney-client privilege and therefore, if a company turns over attorney-client privileged information or attorney work product (such as the results of an internal investigation) to the government as part of its cooperating with a governmental investigation, it has forever lost that privilege with respect to all third parties.4
In In re Columbia/HCA Healthcare,5 the Sixth Circuit, after analyzing the case law on "selective waiver," reaffirmed the majority view rejecting selective waiver. The Sixth Circuit reasoned that the purpose behind the attorney-client privilege Â– to foster frank communication between a client and his or her attorney Â– was no longer served once there had been any disclosure to the government, or any other adverse party. The Columbia court also held that clients should not be allowed to use the privilege as both a sword and a shield by "picking and choosing" what will be disclosed and to whom.
Finally, the court was not convinced by the argument that permitting selective waiver with respect to government investigations would promote cooperation and truth-finding and allow the public to realize a cost savings. While acknowledging the benefit of encouraging cooperation with the government, the Sixth Circuit concluded that private litigants often play very important roles in the truth-finding process through qui tam proceedings, shareholder derivative lawsuits and other actions. In rejecting the selective waiver doctrine, the Sixth Circuit joined the First, Third, Fourth and District of Columbia Circuits6 in adopting a rule of "no selective waiver of the attorney-client privilege in any situation."
The Eight Circuit, sitting en banc in Diversified Industries v. Meredith,7 adopted the minority position and recognized selective waiver of the attorney-client privilege in the context of disclosure to the government. The facts in Diversified mirror countless scenarios confronted by corporations facing government and regulatory inquiries. After allegations of corporate bribery surfaced, Diversified hired an outside law firm to conduct an internal investigation and prepare a report that was presented to the Board of Directors.
The SEC, not surprisingly, requested and received a copy of the final report in response to a subpoena. Shortly thereafter, a private litigant sought both the report and the minutes of the board meeting where the report was presented. The Eight Circuit held that Diversified's disclosure of the report in a separate and non-public SEC investigation resulted in only a "limited waiver" of the attorney-client privilege. Accordingly, neither the report nor the board minutes had to be produced. The Diversified court reasoned, "[t]o hold otherwise may have the effect of thwarting the developing procedure of corporations to employ independent outside counsel to investigate and advise them in order to protect stockholders, potential stockholders and customers."
The issue is muddied further when one examines the positions of the circuit courts regarding selective waiver in the context of attorney work product. For example, the D.C. Circuit, which squarely rejects selective waiver of the attorney-client privilege, upheld such a waiver in connection with work product where the company had an agreement with the SEC that the material would be kept confidential.8
A 'Case by Case' Approach
The D.C. Circuit reasoned that disclosure of attorney-client privileged material, even pursuant to a confidentiality agreement, waives any privilege since such privilege is premised upon assuring the client that any statements made in seeking legal advice will be strictly confidential. In contrast, the attorney work product doctrine exists only to promote the adversary system by protecting an attorney's trial preparations from discovery, and selective disclosure made "in the pursuit" of such trial preparation pursuant to a confidentiality agreement need not waive the work-product privilege.9
The Second Circuit, while generally hostile to selective waiver, has adopted a case by case approach. Such approach provides various arguments that can be used in support of selective waiver in battling subsequent civil litigants, if the appropriate steps are taken during the course of the internal investigation and in dealing with the government's request for cooperation.
The history of selective waiver in the Second Circuit is helpful to understanding the current uncertainty in the law. One of the first district court cases to address selective waiver was Teachers Insurance & Annuity Assoc. of America v. Shamrock Broadcasting Co.10 There, Judge William C. Conner of the Southern District of New York was asked to consider whether the disclosure of purportedly privileged documents to the SEC in response to an administrative subpoena waived the attorney-client privilege. After reviewing case law from several circuits, including the Eighth Circuit's opinion in Diversified, the court concluded that "disclosure to the SEC should be deemed a complete waiver of the attorney-client privilege unless the right to assert the privilege in subsequent proceedings is specifically reserved at the time the disclosure is made."
The court noted that "[i]t does not appear that such a reservation would be difficult to assert, nor that it would substantially curtail the investigatory ability of the SEC." In that case, however, the court refused to find selective waiver absent proof that Teachers Insurance had made an effort to protect the privilege by, for example, objecting to the SEC subpoena or entering into a confidentiality agreement.
The Second Circuit largely rejected this broad approach to selective waiver in In re John Doe Corp.11 In that case, the government was requesting the production of a report of an internal investigation that had been disclosed to outside accountants and counsel for John Doe's underwriter in connection with a routine audit and public offering.
Relying on the D.C. Circuit's holding in Permian Corp. v. United States, the Second Circuit rejected the " 'pick and choose' theory of the attorney-client privilege" and found that any protection afforded by the attorneyclient privilege had been waived. Because the government was arguing that waiver occurred by disclosure to third parties, In re John Doe did not fully address the issue of selective waiver in the context of a company cooperating with a governmental inquiry.
The Second Circuit grappled with that question in In re Steinhardt Partners L.P.,12 holding that the voluntary disclosure of attorney work product to the SEC waived the protections of the work product doctrine as to subsequent civil litigants. In reaching this conclusion, the Second Circuit considered, but rejected, the Eighth Circuit's reasoning that selective waiver encourages cooperation with the SEC.
The Second Circuit was unsympathetic to Steinhardt's argument that, by rejecting selective waiver, the court presented those "in similar situations with a Hobson's choice between waiving work product protection through cooperation with investigatory authorities, or not cooperating with investigative authorities." Instead, the Steinhardt court concluded that "[a]n allegation that a NEW YORK LAW JOURNAL party facing a federal investigation and the prospect of a civil fraud suit must make difficult choices is insufficient justification for carving a substantial exception to the waiver doctrine" and that "selective assertion of privilege should not be merely another brush on an attorney's palette, utilized and manipulated to gain tactical or strategic advantage."
Common Interest Exception
Despite these harsh words, the Second Circuit refused to adopt a per se rule that all voluntary disclosures to the government waive work product protection. Rather, the court recognized that a full waiver may be inappropriate where either: 1) the disclosing party and the government share a common interest, or 2) the SEC and the disclosing party have entered into an explicit agreement that the SEC will maintain the confidentiality of the disclosed materials.13
The common interest exception, which examines whether the party with whom the confidential information is shared is an adversary to the disclosing party, has generally not been held sufficient to avoid waiver in the context of disclosures to the government. Indeed, even while recognizing the exception, the Steinhardt court was unwilling to apply it in that case despite the fact that Steinhardt's disclosure to the SEC had been voluntary and made, at least arguably, in an effort to assist the SEC in its investigation.14
Likewise, in Bank of America v. Terra Nova Insurance Co., Magistrate Judge Gabriel Gorenstein of the Southern District of New York rejected a common interest argument and found waiver of attorney work product which had voluntarily been disclosed to state regulators and federal prosecutors, even though the company was not the subject of the investigation, because the court concluded that the company's cooperation was motivated by its desire to forestall, or at least to narrow the scope of, any investigation.15
Paradoxically, the new legal requirements under Sarbanes-Oxley requiring inquiry into allegations of wrongdoing16 and the government's heightened efforts to require counsel to assist their investigations Â– in effect deputizing counsel to act as private prosecutors Â– may have the effect of bringing the interests of the company and the government more in line, and revitalizing this line of argument for selective waiver.
Confidentiality agreements have fared somewhat better in supporting selective waiver. For example, the D.C. Circuit found that a confidentiality agreement Â– while it did not prevent waiver of the attorneyclient privilege Â– did protect attorney work product that was disclosed to the SEC.17 In addition, last year, Southern District Judge Richard Owen held that documents produced to the U.S. Attorney's Office pursuant to an oral confidentiality agreement were still protected by the work product doctrine.18 At the same time, confidentiality agreements do not guarantee continued protection, as both the Third and Sixth Circuits reject the notion of selective waiver despite the existence of confidentiality agreements.19
How to Proceed
Where does this leave practitioners in the Second Circuit? Be careful. Inexperience in approaching an internal investigation can be costly if the collateral consequences of issues like waiver are not thought out in advance. Of course the best approach is to attempt to avoid waiver. While this may not always be possible, a company certainly should not acquiesce to the government's rote request for waiver without extensive dialogue with the government regarding the necessity for it.
The government may be willing to settle for less than a full waiver, especially if counsel provides a reasonable alternative, such as assisting the government by identifying witnesses, requiring company employees to speak with the government as a condition of continued employment, or sharing information with the government orally, in the context of an attorney proffer or plea negotiations. Pursuant to Rule 410 of the Federal Rules of Evidence, disclosures made in the context of plea negotiations will generally be inadmissible in any subsequent civil or criminal proceeding.
Given that counsel will often not know if such a waiver can be avoided until much or all of the internal investigation is completed, counsel must, from the start, factor in the possibility of losing the privilege, and consider how that affects every aspect of the investigation, including note-taking, documenting the facts uncovered in the investigation, and deciding whether to create a formal written report of the findings. Indeed, federal prosecutors have long adjusted their note-taking to reflect the requirement that notes from witnesses will be turned over to the defense at trial.20 Defense counsel conducting internal investigations will need to keep this possibility very much in mind given the uncertainty that exists regarding the availability of selective waiver.
When waiver is inevitable, steps taken to align the company's interests with the government's inquiry to buttress an argument that the disclosure was made to further common interests shared by both the company and the government, as well as explicit, written, and unconditional confidentiality agreements with the government regarding such disclosure, will provide the best means to fight off later claims by civil plaintiffs for disclosure of this privileged material.
Richard M. Strassberg, the former chief of the Major Crimes Unit in the U.S. Attorney's Office for the Southern District of New York, is a partner in Goodwin Procter's litigation department and co-chair of its white-collar crime and government investigations practice, resident in the New York office. Sarah E. Walters, resident in the firm's Boston office, is an associate in the litigation department and maintains a complex business litigation, securities, and white-collar criminal practice.
This article is reprinted with permission from the July 7, 2003 edition of the NEW YORK LAW JOURNAL. © 2003 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited. For information contact, American Lawyer Media, Reprint Department at 800-888-8300 x6111. #070-07-03-0011
(1) 15 U.S.C. §§7201 et seq. (Supp. 2003).
(2) Memorandum from Deputy Attorney General Larry D. Thompson: Principles of Federal Prosecution of Business Organizations, Jan. 20, 2003.
(3) E.g., Securities Exchange Act of 1934 Release No. 44969, Oct. 23, 2001, and Accounting and Auditing Enforcement Release No. 1470, Oct. 23, 2001, Report of Investigation Pursuant to §21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation and Agency Enforcement Decisions.
(4) See, e.g., United States v. Massachusetts Institute of Technology, 129 F.3d 681 (1st Cir. 1997); Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (3d Cir. 1991); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988); Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981).
(5) 293 F.3d 289, 298-302 (6th Cir. 2002).
(6) See supra note 4.
(7) 572 F.2d 596, 607, 611 (8th Cir. 1978).
(8) Permian, 665 F.2d at 1219-22.
(9) See also Martin Marietta, 856 F.2d at 623, 626 (refusing to allow "limited waiver" of privileged communications and non-opinion work product but preserving protection of opinion work product). Cf. In re Chrysler Motors Corp. Overnight Evaluation Program Lit., 860 F.2d 844 (8th Cir. 1988) (holding that work product protection is waived by disclosure, despite Diversified's holding that the attorneyclient privilege is not waived by disclosure).
(10) 521 F.Supp. 638, 644-46 (S.D.N.Y. 1981).
(11) 675 F.2d 482, 484-85, 489, 492 (2d Cir. 1982).
(12) 9 F.3d 230, 231, 236 (2d Cir. 1993).
(13) Id. at 236.
(15) 212 F.R.D. 166, 171-72 (S.D.N.Y. 2002).
(16) E.g., 15 U.S.C. §§7202 et seq.; 17 C.F.R. Part 205.
(17) Permian, 665 F.2d at 1219.
(18) Maruzen Co. Ltd. v. HSBC USA, Inc., 2002 WL 1628782 (S.D.N.Y. July 23, 2002).
(19) Columbia, 293 F.3d at 302-03; Westinghouse, 951 F.2d at 1426-27.
(20) See 18 U.S.C. §3500 (2000).