On 12 February 2003 we received a call asking us to respond to a dawn raid that was being conducted by the European Commission at the premises of Akros Chemicals Limited, a subsidiary of Akzo Nobel in Salford near Manchester. The raid was one of a number conducted at various sites of a number of major companies across Europe in relation to an investigation of alleged cartel activity in the tin stabilisers market. On our arrival at Akros Chemicals around 30 minutes later, the Commission's investigation team had already commenced their search. Over the following two days a number of documents were identified as potentially privileged and were the subject of intense debate.
In view of the massive fines the Commission can levy - up to 10% of worldwide turnover - this is the front line of corporate compliance. The last few years have seen a significant escalation in regulatory activity and cross- border co-operation between regulators for enforcement purposes, not only in the antitrust field but in many other areas. In the heated environment of a raid there is no opportunity to fully consider the context in which documents were created. A corporate defence team treads a fine line between the risk of incurring sanctions for obstruction and preventing the regulator from overstepping its powers. It is critical to engage lawyers who know the limits of the regulators remit. They will need to liaise effectively with general counsel, who is unlikely to be on site, in taking swift decisions and know when to stand their ground.
The decision of the European Court of First Instance (CFI) last month in relation to the Akzo raid has attracted huge attention and participation in the proceedings by way of amicus curae briefs by the European Chapter of the American Corporate Counsel Association (ACCA), the International Bar Association (IBA), The Council of the Bars and Law Societies of the European Union (CCBE) and the European Company Lawyers Association (ECLA). The CFI confirmed that a business subject to an investigation is entitled to refuse to allow Commission officials to take even a cursory look at specific documents over which privilege is asserted if the business considers that this would be impossible without revealing the content of the relevant documents and gives the Commission officials appropriate reasons for that view. On the Akzo raid the Commission team were held to have gone too far in insisting, notwithstanding the repeated objections raised, on reviewing a number of the contested documents rather than following the appropriate procedure by placing copies in a sealed envelope pending a formal decision on their status.
In view of the complexity of antitrust laws and other areas of regulation, safeguards are needed to ensure that proper advice can be debated, provided to the business and communicated in writing without the risk that it will form a building block in the case regulators are seeking to build. Excessive erosion of the rights necessary to achieve this can, for example, result in a reticence, particularly among in-house counsel, to commit advice to writing at all. There becomes a point at which the cause of compliance is hindered, particularly where the formulation and communication of clear guidance is needed across operations in many different jurisdictions. The increasing practice of regulators in putting pressure on businesses to waive privilege voluntarily can also be questionable from this perspective.
The CFI's decision in Akzo provides welcome clarification in relation to procedure, although quite how it will operate in the context of seizure of vast volumes of electronic data is not yet apparent. The CFI also effectively extended the range of documents that as a matter of EU law could be covered by privilege as regards internal documents produced to record or request external legal input. However, the primary focus of business interest in the case was the status of advice given by in-house counsel.
Over the last 25 years the Commission has effectively been at the forefront in the EU of attempts to restrict the scope of privilege which it sees as a potential cloak to conceal anti-competitive and fraudulent practices. The debate in the EU law context has largely focused on the antitrust field as it is in this area that the Commission takes a highly active enforcement role. Other areas of EU law, such as product liability, are enforced by the relevant authority in each member state on the basis of national legislation enacted in line with EU requirements. In these circumstances the law of the relevant member state in relation to privilege would apply. Even in the antitrust field, if the Akzo raid had been carried out by the Office of Fair Trading as UK regulator, rather than by the Commission, communications with in-house counsel would have been privileged if created primarily for the purpose of giving legal advice.
The AM&S case (Australian Mining and Smelting (Europe) Limited v The Commission) in 1982 however established in relation to EU law that communications between in-house lawyers and their client employer would not be regarded as privileged. It was this decision that led to the formation of ECLA (see prior mention). The role of corporate counsel has changed significantly since the AM&S judgment. In many EU member states that under national law would have taken a similar approach to the Commission there has also been a trend towards the recognition of privilege for in-house counsel. The resistance of national bar associations in some jurisdictions (which to U.S. eyes might easily appear as a form of restrictive trade practice) has been increasingly questioned. Despite this the CFI has disappointed the business lobby by confirming the AM&S position and distinguishing in-house advice in relation to privilege, primarily on the grounds that in-house counsel are insufficiently independent from the client organisation that employs them.
In practice, from the perspective of a U.S. corporation with subsidiaries in Europe, this means that sensitive advice on antitrust issues should be taken from external lawyers. This is also the case in certain states in Europe that are not part of the EU, notably Switzerland. This is an important jurisdiction for many U.S. and other multi-nationals, many of which have their European headquarters there for tax reasons. The Swiss antitrust authority has relatively recently remodelled its approach in alignment with EU practice and has introduced dawn-raid enforcement powers. Its website expressly states that privilege will not be afforded to advice from in-house counsel and that when making a raid it will not wait for the lawyers of the target business to attend on site.
In other fields where enforcement activity is likely to be conducted at the level of the individual EU member state, it is also advisable to seek external legal advice if the laws of that state do not afford privilege to in-house counsel. Envisage a situation where U.S.-based general counsel has a telephone conference with locally qualified lawyers for subsidiaries in Belgium, France and the UK in relation to a sensitive matter, and they all make an identical note. In the event of subsequent regulatory investigation or litigation commenced in each of the relevant jurisdictions as a matter of national law:
• General counsel's note is likely to be privileged in the U.S. and similarly UK counsel's note should be covered by legal advice privilege and/or, if proceedings were in contemplation at the time of the call, litigation privilege.
• French counsel's note will not be privileged.
• Belgian counsel's note will be privileged only if he is a member of the Belgian Corporate Counsel Association.
There is another aspect of the AM&S decision which has been paid less attention as it was not in issue on the facts of the Akzo case. Under AM&S, communications between external lawyers not professionally qualified in the EU and their client business will also not be privileged. Some years ago a client of Eversheds with global operations but no permanent presence in the U.S. was the subject of DOJ investigation (subsequently discontinued). As a result it instructed a U.S. law firm. Shortly after that the EU Commission commenced its own parallel investigation and raided the premises of the relevant business in the UK where advice from the U.S. law firm was held. In the context of the DOJ investigation the advice would have been privileged. However, in these circumstances external U.S. advice would not be accepted as privileged by the Commission on current case law.
Against this background it is critical that careful thought is given to where and how legal advice is obtained, particularly in the antitrust field. The circulation of sensitive communications should also be restricted as far as possible and legal advice recorded separately from all papers or other commercial communications to reduce the risk of the waiver of privilege. Documents over which privilege may need to be asserted should be clearly recognised and marked as such - although the label is not determinative, it certainly helps in an argument with regulators when in the eye of a storm.
It remains to be seen if the Akzo decision will be appealed to the European Court of Justice. In any event, in view of the issues at stake and the increased risk that businesses and their general counsel face in navigating their way through these difficult waters, it is clear that the debate is far from finished.