Internal Investigations - Safeguarding Privileges

Thursday, January 1, 2004 - 01:00
Bertrand C. Sellier
Stacy L. Klein

As allegations of corporate wrongdoing have become increasingly common, so too have internal investigations. Corporations are under ever-growing pressure to share the results of their investigations with regulators and law enforcement agencies. Indeed, Justice Department guidelines now make a corporation's waiver of attorney-client privilege and work-product protection a factor in determining whether to charge a corporation with criminal conduct. But many courts hold that such cooperation with the government results in a waiver of privilege as to third parties. A finding of waiver can have serious adverse consequences in subsequent civil litigation arising out of the subject of the investigation by providing plaintiffs' counsel with a detailed road-map for prosecuting their claims. Investigatory reports may contain admissions with devastating consequences in subsequent litigation. Since the law regarding the issue of waiver is not wholly consistent, there are risks inherent in voluntary disclosure. However, measures can be taken to reduce the risk that waiver of privilege will be found when internal investigatory findings are shared with the government.

The attorney-client privilege exists to "encourage full and frank communication between attorneys and their clients" and "recognizes that sound legal advice or advocacy . . . depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). A properly conducted investigation should be fully cloaked in the privilege. To insure that the privilege is available, the findings of the investigatory process should be communicated directly to counsel, and when communicated to agents of counsel, it should be made explicit that legal advice is being sought. Any written report created should be authored by counsel, and indicate that the purpose of the report is to render legal advice. The work product doctrine, recognized in Hickman v. Taylor, 329 U.S. 495 (1947) and codified in Fed. R. Civ. P. 26(b)(3), provides even broader protection than the attorney-client privilege, and encompasses interviews, statements, memoranda, correspondence, briefs, mental impressions and personal beliefs. In re Grand Jury Proceedings, 219 F.3d 175, 190 (2d Cir. 2000).

Both the attorney-client privilege and work product privilege can be waived, expressly or by implication. In re Bulow, 828 F.2d 94, 100 (2d Cir. 1987). The party seeking to assert a claim of privilege bears the burden of demonstrating that it exists, and has not been waived. In re Health Management, Inc., 1999 WL 33594132 (E.D.N.Y 1999). Unlike the attorney-client privilege, work product protection is not automatically waived by disclosure to a third party; rather, waiver occurs when the covered materials are used in a manner inconsistent with the protection. Bank of America, N.A. v. Terra Nova Ins. Co., 212 F.R.D. 166 (S.D.N.Y. 2002). See also In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993) (Where an adversary is permitted to share the otherwise privileged thought processes of counsel, the need for the privilege disappears and the privilege is deemed waived as to other parties.)

Steinhardt is the leading case in the Second Circuit regarding waiver in the context of internal investigations. In Steinhardt, class action plaintiffs moved to compel production of a memorandum defendants' counsel submitted to the SEC. The defendants claimed that the document, which was designated "FOIA Confidential Treatment Requested," constituted work product. Despite the designation, no confidentiality agreement was in place. The court held that the voluntary disclosure to the SEC, which stood in an adversarial position at the time of disclosure, constituted a waiver. While the choice between waiving work product protection through cooperation with the government, or preserving the protection and forgoing the benefits of cooperation was difficult, this did not justify "carving a substantial exception to the waiver doctrine." Id. at 236. Significantly, the court declined to adopt a per se rule that all voluntary disclosures to the government waive work-product protection, and suggested that confidentiality agreements with the government could be respected. Id.

There are two important lessons to be learned from Steinhardt. First, voluntary disclosure of work-product to an adversary is held to be inconsistent with continued protection. Just as in Steinhardt, the government and a corporation may be deemed to be adversaries, even when they share a common interest, are not in litigation, and anticipate future litigation against a common adversary. See United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003). Waiver will be found when "the circumstances surrounding the disclosure evidence[ ] conscious disregard of the possibility that an adversary might obtain the protected materials." Bank of America at 173. Second, regardless of whatever practical pressures to cooperate may exist, in the absence of a subpoena, and perhaps even a motion to quash, corporate disclosure of investigatory materials will likely be characterized by the courts as voluntary. Even where certain disclosure is required by law, as is the case in many regulated industries, waiver will be found if the disclosure exceeds what is required.

The best way to prevent a finding of waiver is to negotiate a confidentiality agreement, although some courts have found a waiver even if such an agreement exists. In re Columbia/HCA Corp., 293 F.3d 289 (6th Cir. 2002). The mere request for confidentiality by the disclosing party is insufficient to prevent a finding of waiver. See, e.g., In re Leslie Fay Companies, Inc. Securities Litigation, 152 F.R.D. 42 (S.D.N.Y. 1993) (The voluntary disclosure of reports to the SEC in the absence of a confidentiality agreement constituted a waiver; it was irrelevant that the SEC agreed "not to assert" that disclosure would not constitute a waiver); Bowne of New York City, Inc., 150 F.R.D. 465, 479-480 (S.D.N.Y. 1993) ("Even if the disclosing party requires, as a condition of disclosure, that the recipient maintain the materials in confidence, this agreement does not prevent the disclosure from constituting a waiver of the privilege; it merely obligates the recipient to comply with the terms of any confidentiality"). Ideally, the agreement should be in writing, although federal courts in New York have enforced oral confidentiality agreements, at least where such oral agreements are subsequently confirmed by the government. Maruzen Co. Ltd. v. HSBC USA, Inc., 2002 WL 1628782 (S.D.N.Y. 2002).

Even in cases where a waiver is found, it may still be possible to limit the scope of any waiver. Unfortunately, the law on this point is not wholly consistent. Some courts have found a broad "subject matter waiver" of the entire subject of the disclosure. See, e.g. Bowne of New York City, Inc., 150 F.R.D. 465 (S.D.N.Y. 1993). In other words, the plaintiff may be entitled not only to the materials actually disclosed but also to the underlying interview notes and other work-product used to prepare the report. Other courts have limited the waiver to the specific material disclosed. For example, in Lugosch v Congel, 218 F.R.D. 41 (N.D.N.Y. 2003), an investigatory report, prepared by a criminal defense firm at the request of the defendants, was disclosed pursuant to a confidentiality agreement in redacted form. Plaintiffs subsequently sought production of the report in unredacted form, arguing that defendants had waived any protection by speaking to the press concerning the subject matter of the report. Based on its perception of "fairness," the court ruled that any waiver was limited to the communications revealed, and not to other parts of the report, or the underlying notes. Therefore, even if a waiver is found to result from voluntary cooperation, counsel should attempt to minimize the potential damage by persuading the court that fairness requires limiting the scope of disclosure to the documents which were actually disseminated - and not the underlying materials.

While there is no foolproof method to prevent a judicial finding of waiver in connection with disclosure of internal investigatory findings, there are steps counsel can take to minimize the risk. The best approach is to negotiate a broad confidentiality agreement with the government, which ideally contemplates responses to possible Freedom of Information Act requests, providing that no waiver will arise from the disclosure, and the government agency will cooperate if the agreement is challenged. The agreement should recite the parties' common interest and, if appropriate, that the parties were not adversarial at the time of production. It bears repeating that such agreements are generally - but not always - enforced by the courts. For example, in recent litigation arising out of the McKesson Corp.'s acquisition of HBO & Co., two courts upheld McKesson's confidentiality agreement with federal prosecutors and the SEC, while two other courts found a waiver. While the law in the Second Circuit supports enforcement of non-waiver provisions, in assessing the risks of disclosure, counsel must consider which jurisdiction's laws might apply in subsequent litigation.

Where a viable confidentiality agreement cannot be implemented, there may be other ways in which a corporation can cooperate with the government without disclosing investigatory materials. For example, corporate employees may be required to be interviewed by government investigators as a condition of employment. In order to limit the potential scope of any waiver, to the extent possible, disclosure should be in the format of an oral proffer, and any written materials disclosed to the government should be limited to non-privileged, factual material, while attorney opinion, thought process and other classic work-product should be excluded. Care should be taken not to create an inadvertent waiver in any public statements or summary issued concerning a report, or through inadvertent affirmative use in litigation of information obtained in the investigation. Inadvertent waiver can also occur in subsequent civil litigation when a party uses work-product or privileged information in an attempt to persuade law enforcement officials to take action against an alleged wrongdoer. See Spanierman Gallery v. Merritt, NYLJ (12/16/03). Finally, written reports should be prepared with a keen awareness of the possibility of subsequent disclosure, despite counsel's best efforts to avoid it.

Bertrand C. Sellier is a Partner and Stacy L. Klein is an Associate in the New York office of Proskauer Rose LLP.

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