New Pressures To Provide Disclosure To The Government
In the wake of the headline-grabbing corporate fraud scandals starting with Enron, in early 2003 the Justice Department issued revised guidelines making a corporation's waiver of the attorney-client and work-product protections a factor in deciding whether to charge a corporation. Prosecutors may now "consider" a company's willingness to identify wrongdoers, make witnesses available, disclose internal investigation, and waive the attorney-client and work-product protections. Memorandum from Deputy Attorney General Larry D. Thompson re: Principles of Federal Prosecution of Business Organizations, Jan. 20, 2003.1 The SEC, CFTC and NASD have similar policies. Government demands that corporations waive the privilege and work-product protection have become routine, even at the outset of investigations. See, e.g., T. Loomis, New DOJ Guidelines Encourage Waiving Attorney-Business Client Privilege, Broward Daily Business Review 8, February 26, 2003.
But the decision to waive and share the results of an internal probe with the government should be taken only after carefully weighing the possible consequences. Disclosure may be used as an admission of fact, with devastating effect in later litigation. And while the purpose of disclosure is to avoid liability and mitigate damage, it is no guarantee against prosecution.
Plaintiffs in later actions, and defendants in related criminal cases, will demand copies of these materials. Courts generally agree that the information gathered by counsel in the course of an internal investigation is privileged or work product See, e.g., In re Int'l Sys. & Controls Corp. Sec. Litig., 693 F.2d 1235 (5th Cir. 1982). But disclosure of such information to a third party, including the government, may waive the privilege against other adversaries. Further, disclosure may result in a broader waiver for communications related to the subject matter of the disclosure. See In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993); In re Subpoenas Duces Tecum, 738 F.2d 1367, 1375 (D.C. Cir. 1984); Dellwood Farms, Inc. v. Cargill, Inc., 128 F.3d 1122d, 1126-27 (7th Cir. 1997).
So far, with the exception of the Eighth Circuit and the Delaware Chancery, courts have been reluctant to recognize the doctrine of "selective waiver" that would allow disclosure to the government while protecting the privilege vis-à-vis third parties. See Diversified Industries v. Meredith, 572 F.2d 596 (8th Cir. 1977) (en banc); Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. Nov. 13, 2002).
To reduce the risk of waiver, corporations have sought to shield privileged material by entering into confidentiality agreements in which the government agrees that no waiver will arise from the disclosure.
With the notable exception of the Sixth Circuit, most Circuits have retreated from the bright-line waiver rule and have encouraged reliance on non-waiver agreements to shield the corporation from efforts to pierce the privilege. Compare, e.g., In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002) with In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993).
But as shown by the recent court experience of McKesson Corp., the medical supply company, a non-waiver agreement is no panacea.
McKesson's Experience With Confidentiality Agreements
McKesson's problems began when it acquired HBO & Co. ("HBOC").2 Four months later, McKesson announced that its auditors had discovered serious financial irregularities and a flood of stockholder actions followed. The United States Attorneys Office ("USAO") and the SEC started investigations leading to the indictment of two HBOC officers.
McKesson's board launched its own investigation conducted by outside counsel. In a successful effort to forestall an indictment, McKesson offered to share the results of its investigation with the government - provided the resulting report and underlying interviews be treated as confidential. The USAO and SEC each entered into agreements with McKesson. The company's outside counsel conducted more than 50 interviews and reported its findings to the company's audit committee along with the interviews. McKesson then provided the report and interviews to the government.
The agreement with the USAO stated that McKesson believed the investigation was privileged, that it had a common interest with the government, and that while it was agreeing to share information, it did not intend to waive privileges as to any other party. The SEC agreement stated that McKesson "has not waived, and does not intend to waive . . . any . . . privilege as to any third party." In each case, the government agreed not to assert that production waived any of McKesson's privileges and agreed to maintain the confidentiality of the disclosed materials. Predictably, shareholders and the criminal defendants (former HBOC officers) sought discovery of the report and interviews.
McKesson had every reason to hope the courts would uphold its agreements with the government and protect the report and interviews from disclosure: (1) McKesson was arguably a victim of fraud by HBOC's officers; (2) McKesson disclosed the accounting issues upon discovery; (3) McKesson cooperated only on condition that the government sign a confidentiality agreement; (4) both agencies agreed to maintain confidentiality, and McKesson only handed over the materials after the agreements were in place; and (5) McKesson could reasonably believe the common interest exception would apply.
So far, the discovery of the McKesson report and interviews has been litigated in four actions - but with very mixed results:
In McKesson HBOC, Inc. v. Adler., a shareholder action in the Georgia, the state court held that the privilege had been waived by disclosure to the USAO. 562 S.E.2d 809, 812 (Ga. 2002). The SEC argued for the appeals court to overturn the ruling. Instead, the Georgia Court of Appeals upheld the privilege ruling. Id. But it also recognized that work product is "not necessarily waived by disclosure to a third party," and found that, in addition to the confidentiality agreement, there was evidence to support McKesson's view that it shared a common interest with the SEC. Id. It remanded to the trial court to determine whether McKesson had waived its work-product protection. Id. at 813. The parties settled the case promptly thereafter.
In Saito v. McKesson HBOC, Inc., the Delaware Chancery Court held that the materials were protected by the work-product doctrine, and that McKesson had not waived such protection. 2002 WL 31657622 (Del. Ch. Nov. 13, 2002). The court rejected the common interest argument. But it held that the materials were protected from disclosure nonetheless, because McKesson had a reasonable expectation of confidentiality in disclosing the information. Id. at *11. The court accepted the SEC's public policy argument that corporations should be encouraged to disclose their investigations to the government without risking further disclosure. Id. at *9 and *11. The court disputed the view that selective waiver permits litigants to "have their cake and eat it too" finding "disclosures made to the SEC when the corporation is under investigation are not really akin to enjoying a dessert." Id. at *9. And finally, in a reminder that work-product is not absolutely protected, the court considered, but rejected, the argument that plaintiff it had a substantial need for the report and interview materials. Id. at *11-12.
In Green v. McKesson, Inc., another Georgia shareholder action, the court ordered production of the materials over the SEC's opposition. The court has certified the order for immediate appeal and McKesson has sought review by the Georgia Court of Appeals.
Finally, United States v. Bergonzi, the California district court held that the investigative materials constituted work-product, but their disclosure to the government waived any protection because the government was McKesson's adversary and the two did not share a common interest. 216 F.R.D. 487, 572 (N.D. Cal. 2003). While conceding that the agreements were "replete with language which would support a finding [that] the Company intended the documents now sought by Defendants to be confidential," the court held that the documents were not confidential because McKesson knew they were created "for the purpose of relaying [the] communication to a third party," i.e. the government. Id. at 569. The court also noted that the agreements gave the government discretion to use them in the criminal proceedings. Id. at 570 and 572. Finally, the court found that since no privilege barred its production, the report must be divulged to the criminal defendants under Brady v. Maryland, 373 U.S. 83 (1963) because it contained "exculpatory information that [was] either admissible or reasonably likely to lead to admissible evidence." 216 F.R.D. at 499. McKesson's appeal to the Ninth Circuit is pending.
The Lessons Of McKesson
As McKesson's experience shows, while the pressures to cooperate are considerable, companies must not automatically acquiesce in the government's waiver demands. Any waiver must be weighed and the consequences of possible disclosure to third parties factored in from the outset.
As shown above, the law governing the enforcement of these types of confidentiality agreements varies significantly from one jurisdiction to the next. Before offering a waiver, the company must determine which jurisdiction's laws will govern.
In any event, narrower alternatives to waiver should be considered: requiring employees to speak to the government as a condition of continued employment, limiting disclosure to non-privileged materials, and disclosing information orally in the context of a proffer.
In any event, any public statements about the investigation must be crafted to avoid claims that the statement itself waived the privilege or the terms of any confidentiality agreement.
If waiver is the only option, the corporation must seek a written and unconditional confidentiality agreement. Submitting information to the government while "reserving" the company's confidentiality rights is insufficient. The government's attempt to carve out exceptions to use the materials in other cases and before a grand jury may undermine the agreement's protections.
The precise timing of the agreement is important. As shown in the McKesson case, the very fact that the agreement was reached at the outset was a factor in finding that there was no expectation of confidentiality in disclosing the information to the government.
As part of the agreement, the corporation should reserve expressly the right to assert the privileges in later proceedings and seek the agency's agreement to make submissions supporting the company's privilege claims.
But even with a confidentiality agreement, as shown by McKesson's experience, the investigation itself must be undertaken with the understanding that any report or interviews may have to be disclosed by the government. 1 The pertinent section of the guidelines reads as follows: "In determining whether to charge a corporation, the prosecutor may consider the corporation's willingness to identify the culprits within the corporation, including senior executives; to make witnesses available; to disclose the complete results of its internal investigation; and to waive attorney-client and work product protection.
2 The facts concerning the McKesson case are based on the SEC and McKesson submissions and the court opinions in the cases summarized and cited below and the earlier reports about the McKesson case. See, e.g., S. Reisinger, Much Rides On The Ninth Circuit's McKesson Decision, The Recorder (San Francisco) 3, April 24, 2003.
Andre Castaybert is a Litigation Associate in the New York City office of Proskauer Rose LLP.