White Collar Defense and Compliance : New Jersey White Collar Defense Lawyer & Attorney : Fox Rothschild Law Firm : Criminal Defense, Insider Trading, RICO, Consumer Fraud : New Jersey, New York City

Counsel conducting an internal investigation immediately face two related and important tasks: identifying the “client” group whose communications with counsel are within the attorney-client privilege exclusively held by the corporation and avoiding, through corporate Miranda warnings and other techniques, a subsequent claim by any of the interviewee-employees that they jointly hold the privilege because counsel represented them personally at the same time as representing the corporation. A corporation’s ability to fully and exclusively control the privilege is critical, whether to restrict and prevent discovery of employee statements by a civil adversary in order to limit exposure to liability and damages or conversely to be enabled to provide discovery and disclosure of employee statements to curry favor with law enforcement in an effort to avoid prosecution of the entity.

But identifying the “client” group of employees is complicated in organizations, such as sales-driven companies, with many 1099’d “independent contractors” who performed roles critical to the matter under investigation. Are they employees whose statements to counsel are within the corporation’s exclusively-held privilege or not? And, if they are employees, do they hold a cognizable claim to the privilege because they reasonably believed that the interviewing attorneys represented them as individuals?

The first question -- when is an employee an employee for privilege purposes -- was addressed in a recent Ninth Circuit opinion. United States v. Graf, 610 F.3d 1148 (9th Cir. 2010). The defendant in Graf was an outside consultant to a health insurance provider used to commit fraud against its insureds. Although not listed anywhere as an officer, director or employee of Employers Mutual, Graf was heavily involved in the company’s affairs. When the company hired counsel to deal with federal regulators, Graf made false statements to counsel, all while directing other employees to conceal documents from investigators. (The opinion did not address the applicability of the crime-fraud exception to any privilege). Following Graf’s indictment, the government called those attorneys as witnesses to testify to Graf’s statements to them, and the court-appointed fiduciary then operating the company agreed to waive its privilege and allow them to testify as to the statements. Graf objected, claiming that since he was not an employee, but an outside consultant, his statements were outside the corporate zone of privilege and, further, that he jointly held the privilege with the company and he would not waive it.

A two part analysis was employed, to determine first if Graf was an employee within the “client” group of Employers Mutual and, second, to decide if he held his own privilege as to discussions with counsel. The Eighth Circuit case of In re Bieter Co., 16 F.3d 929 (8th Cir. 1994) supplied the first answer. Under Bieter, communications between company counsel and outside consultants fall within the company’s exclusively-held privilege if the consultant is “the functional equivalent of an employee,” looking to factors such as the extent of daily involvement with the company’s activities and the role in managing and directing employees. See also Trustees of Elec. Workers Local No. 26 v. Trust Fund Advisors, Inc., 266 F.R.D. 1 (D.D.C. 2010). Graf was, under Bieter and its progeny, a functional employee of Employers Mutual.

Having found presumptively, then, that the privilege attaching to Graf’s statements to counsel belonged to and was able to be waived by the company, the Ninth Circuit then dismissed his claim to a jointly-held privilege. Adopting for the first time the multi-part standard of In re Bevill, Bresler & Schulman Asset. Mgmt. Corp., 805 F.2d 120 (3d Cir. 1986) (already the law in the First, Second, and Tenth Circuits), the Graf Court held that he failed to carry his burden as to several indicia of a separate, personal attorney-client relationship with corporate counsel, including failing to show that he made clear he was seeking individual legal advice, that the attorneys indicated they were representing him individually, and that the substance of the communications did not concern the affairs of Employers Mutual. As a result, there was no error in admitting the attorneys’ testimony against him and Graf’s conviction was affirmed.
 

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Corporate counsel, whether in-house or outside, often generate a substantial body of analytical material in the course of providing guidance to management. Often, that confidential material must be shared with outside consultants and experts when the subject matter -- such as accounting and tax determinations or intellectual property questions -- requires their input, and those outsiders in turn create their own confidential work product in response. A concern common to these recurring scenarios is whether attorney work product protection is lost when materials are sent to these outsiders and whether the responsively-created material enjoys like protection. A recent District of Columbia court of appeals opinion addressed both questions.

In United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir. 2010), an action brought to challenge certain IRS adjustments to the returns of partnerships owned by Dow Chemical, the government had moved to compel production of certain materials which the intervenor, Dow, claimed were covered by the work product doctrine. One item was a memorandum prepared by Deloitte, Dow’s outside auditors, to capture a discussion in the course of an audit among Dow employees, Dow’s outside counsel, and Deloitte personnel concerning possible tax litigation over one of the partnerships. The government argued that the Deloitte memo was not work product since it was not prepared by counsel and since it was prepared for an audit, not for litigation.

The court of appeals rejected the government’s arguments. First, it held, the work product doctrine does not turn on who prepared a document, but whether the document -- even if prepared by an independent auditor -- contained the thoughts and impressions of counsel, which the Deloitte memorandum did. Second, as to the purpose for the memo’s creation, the D.C. Circuit adopted the majority rule which focuses on the question whether the document was created “because of” the prospect of litigation (the rule in the First, Second, Third, Fourth, Sixth, Seventh, Eighth, and Ninth Circuits); the proponent of the doctrine need not show that the “primary motivating purpose” of the document’s creation (the rule in the Fifth Circuit) was to anticipate litigation. So, a memorandum prepared in the course of and to assist in an audit did not lose its work product status as long as it was also prepared because of threatened litigation. In this case, a remand was necessary for the district court to determine the memo’s purposes.

The government also contended that as to two other documents, which had been prepared by Dow or its counsel, their tender to Deloitte by Dow constituted a waiver of any work product protection. However, the court of appeals rejected this contention, as well. While established principles provide that the voluntary disclosure of work product to an adversary or a conduit to an adversary does indeed effect a waiver, this disclosure to Dow was not tantamount to disclosure to an adversary, because any future dispute between Dow and Deloitte would not be predicated on the subject matter of the memo, and does not amount to disclosure to an adversary-conduit, since Deloitte was bound by AICPA rules to treat the Dow materials confidentially.

Prudence would suggest that, before any distribution of work product materials to an outside auditor, counsel secure a written representation from the intended recipient that: (i) the recipient disclaims any right or entitlement to rely upon the protected materials in any future litigation (e.g., over fees, accountant malpractice) with the producing entity; and (ii) that the recipient agrees to treat the materials as confidential and to resist any effort by a third party to later compel their production.
 

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The Ninth Circuit recently issued a much-awaited opinion on the application of the attorney-client privilege in the area of a corporate internal investigation conducted amidst an options backdating scandal. The anticipation was enhanced because the district court had controversially concluded that the outside counsel who conducted the investigation had likely committed multiple ethics violations and spectacularly suppressed a number of incriminating statements made by the company's CFO to those attorneys. However, in an anticlimax, the court of appeals, finding that the lower court had made both factual and legal errors, reversed, allowing use of the statements, and failed to address the issue of ethical violations at all.

William Ruehle, the CFO of Broadcom Corp., was at the center of the company's practice of backdating stock options for select employees, a practice which the court of appeals noted was not intrinsically fraudulent unless misreported in the corporate books. When a storm swirled in 2006 over the practices, Broadcom engaged outside counsel, Irell & Manella, to conduct an investigation. As part of that investigation, Irell attorneys interviewed Ruehle; in a finding of fact critical to the outcome, it was found that Ruehle understood that his statements would be disclosed to third parties, at least to the company's outside auditors. There was a factual dispute, however, over whether the Irell attorneys had properly given Ruehle an Upjohn warning at the outset of the interview; that admonition, always good practice on the part of outside counsel, is intended to inform the interviewee that the attorneys questioning him are not his personal attorneys but attorneys solely for the corporation and that the individual is free to consult with his own counsel before proceeding.

Eventually, Ruehle's statements were disclosed to civil authorities and to the U.S. Attorney's Office in Los Angeles, which obtained Ruehle's indictment. Thereafter, the district court held a three-day evidentiary hearing, concluding that the Irell attorneys had not conducted themselves ethically and that Ruehle, who was surprised to learn that his statements were later provided to criminal authorities, held a reasonable belief that his statements were made to lawyers he believed represented him, and holding that the statements were privileged because he intended them to be confidential. His statements were suppressed.

The Ninth Circuit reversed. United States v. Ruehle, 2009 U.S. App. LEXIS 21450 (9th Cir., Sept. 30, 2009). First, the district court had applied the incorrect legal standard, substituting the more liberal California state formulation of the privilege, with its presumption of confidentiality, in place of the more severe federal common law test, which places the burden of proof on the party claiming privilege. Second, the district court had erred in finding that Ruehle's statements were made in confidence, one element of the federal test, since he admitted knowing they would be disclosed to third parties; his later shock and surprise that those third parties included the FBI was immaterial.

The court of appeals noted, but chose not to decide, more interesting questions, such as the proper test to apply when there is colorably a dual representation of both corporation and corporate officer (addressed in In re Bevill, Bresler & Schulman Asset. Mgt. Corp., 805 F.2d 120 (3d Cir. 1986)) or the standard to be used in determining, whether in a dual representation context, the corporation can waive the privilege against the will of the corporate officer (see In re Grand Jury Subpoena (Newparent), 274 F.3d 563 (1st Cir. 2001)). The court also skirted the issue of the Irell attorneys' ethics, since it was not presented in the appeal, but noted parenthetically that evidence obtained even in violation of attorney ethics rules was admissible, as long as neither the constitution nor federal law was violated.

The Ninth Circuit created no new precedent and arguably avoided addressing the most noteworthy issues raised by the short-lived district court opinion. Nevertheless, the case stands as a stark reminder of the problems created when outside counsel fail in the course of conducting an internal investigation to clearly inform individual officers that company counsel are not also their counsel and to document that advice of rights in the event of later litigation or prosecution.

[Fox Rothschild's White Collar Compliance and Criminal Defense group has extensive experience in conducting thorough internal investigations for corporate and institutional clients in numerous industries]

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The attorney client relationship is a time-honored and sacred relationship. It is black letter law that the attorney-client privilege prevents an attorney from disclosing to a third party any confidential communications made during the existence of an attorney-client relationship. This privilege fosters truthful and honest dialogue between the lawyer and the client. With certain very limited exceptions, the privilege is impenetrable unless the client voluntarily waives it. Additionally, an attorney may assert the work product privilege to protect mental impressions, notes and thoughts relating to litigation.

The Department of Justice has, first through the Thompson Memo and then the McNulty Memo, instituted corporate prosecution guidelines which have the effect of encouraging companies and organizations to waive attorney-client and work product privileges during investigations. In response, Senator Arlen Specter sponsored the Attorney Client Privilege Protection Act of 2008 (ACPPA). The purpose of the Act is to protect such confidential information and discourage unnecessary waivers of the privilege.

The new law proposed by Sen. Specter would prohibit law enforcement from: (i) requiring an organization or current employee to waive attorney-client or work product privilege; (ii) offering a reward or rewarding an organization or employee for waiving the attorney-client or work product privilege; and (iii) threatening to penalize an organization or an employee for declining to waive attorney-client privilege or work product privilege.

The government cannot use the following conduct it its decision to criminally or civilly charge a party or to determine if an employee is cooperating with the authorities:

• the organization or employee has asserted attorney-client or work product privilege;
• the organization provides legal counsel or payment of legal fees for an employee;
• the organization or employee present a joint defense;
• the organization or an employee share information;
• the organization fails to terminate an employee who asserts constitutional rights or legal protections.

The statute does not apply to information that a person of “ordinary sense and understanding” would not know is subject to attorney-client or work product privilege or information that is not entitled to attorney-client or work product. The statute does not prevent voluntary disclosures by an employee or organization who “voluntarily” or gives an “unsolicited offer” to waive the protections of attorney client or work product privilege.

We will report further on the progress of this legislation through Congress.
 

(With appreciation to Rochelle D. Laws, Esq., for contributing this entry)

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