Not So Confidential

In any corporate investigation by federal enforcement authorities, there is a very good chance that the corporation will be asked to turn over relevant privileged communications with counsel and other protected documents.

Many commentators, including the American Bar Association, complain that it is now “routine” for the government to demand access to a company’s privileged materials, such as internal investigative reports by counsel, as a condition to giving credit for “cooperation” and the chance for leniency.

In these circumstances, corporate counsel faces a Hobson’s choice. The company can refuse to produce privileged materials, and dramatically raise the risk of a crushing criminal indictment, non-negotiable harsh terms for any plea agreement, or serious civil charges.

Or, it can fully “cooperate” with the government, thereby potentially “waiving” attorney-client and work product protections against disclosure to third parties. Any such waiver risks putting sensitive investigational materials into the hands of plaintiffs’ counsel in any parallel class or mass litigation.

Along with a policy of asking for privileged information, the Department of Justice, the Securities and Exchange Commission, and other federal agencies have offered to make this tough decision on “cooperation” a little easier by agreeing, in general, not to disclose the corporation’s privileged materials to others.

By such “confidentiality agreements,” corporations seek to limit disclosure of protected materials to the government, keeping them out of the hands of private suitors.

In connection with SEC investigations, such “confidentiality agreements” (typically in letter form) will recite the company claims documents or information are protected by the attorney-client privilege and work product doctrine, and that, in providing the materials, the company does not intend to waive such protections.

In turn, the SEC staff will agree not to assert that the corporation’s production constitutes a waiver (at least as to any third parties) and not to “disclose [the materials] to any third party, except to the extent that the [SEC] determines that the disclosure is otherwise required by federal law or in furtherance of the [SEC’s] discharge of its duties and responsibilities.”

Such an agreement might also recite that the corporation and the government have a “common interest” in the company’s sharing of its privileged materials. On the other hand, the government can be expected to insist that it retains the right to use the materials as it sees fit in any prosecution or action against the corporation.

Little Protection

Do these “confidentiality agreements” keep privileged materials disclosed to the government out of the grasp of third parties? Most courts that have addressed the issue have answered the question “no.”

With the exception of a much criticized Eighth Circuit decision (Diversified Indus. Inc. v. Meredith, 572 F.2d 596, 611 (1978)), each of the federal circuit courts to address the issue have held that disclosure of attorney-client privileged information to the government, even under a confidentiality agreement, waives the privilege.

Courts in general have not been persuaded by the policy argument that confidentiality agreements with the government should be enforced because they encourage cooperation with the SEC and other federal agencies and thereby benefit the public.

The decisions demonstrate a disinclination to wrestle with public policy exceptions to the time-honored rule that disclosure to a third party waives the privilege. Further, according to these courts, there is no evidence that “selective waiver” promotes candor or completeness of attorney-client communications, the reason for the privilege in the first instance.

And any efforts to prevent waiver through recitals of “common interest” fall on deaf ears. Most courts reason that the inherent adversarial relationship between government and investigated company trumps any “common interest” of strategic convenience.

Unlike attorney-client communications, which lose protection upon voluntary disclosure to anyone outside the “magic circle” of the privilege, attorney work product loses protection only if it is disclosed to “real or potential adversaries.”

Disclosure to friends, allies, and even neutrals (perhaps including independent auditors) generally won’t result in work product waiver, even if disclosure to the same group would waive the attorney-client privilege.

According to most courts, however, disclosure to one “adversary” constitutes a waiver as to all. The majority of courts have held that production of work product to the SEC or other government agency, even under a “confidentiality agreement,” waives any protection from disclosure to other adversaries.

Further, the argument that the government really is not an “adversary” when the corporation is “cooperating” generally has been of no avail. The courts in the First Circuit have agreed that disclosure to the government waives work product protection from third parties. (In re Lupron Marketing & Sales Practice Litig., 313 F. Supp. 2d 8, 12-13 (D. Mass. 2004), mandamus denied, No. 04-1600 (1st Cir. July 12, 2004).)

Emerging Minority View

Recently, a few lower courts have granted some protection from waiver for work product based on confidentiality agreements with the government. For example, in In re McKesson HBOC, Inc., Sec. Litig. (2005 U.S. Dist. LEXIS *35-36 (N.D. Cal. March 31, 2005), class action securities fraud plaintiffs sought to compel production of counsel’s report and supporting materials (e.g., interview memoranda) created in connection with its investigation of McKesson’s financial reporting errors. The plaintiffs argued that McKesson had waived work product protection by providing the materials to the SEC and the U.S. Attorney’s Office. McKesson resisted, citing its confidentiality agreements with both agencies.

The district court rejected McKesson’s reliance on the “common interest” recital in the agreement, observing that the relationship was “adversarial” notwithstanding both parties’ present desire to cooperate.

Nevertheless, the court reasoned that encouraging disclosures that “increase[] government enforcement capability” is more beneficial to the public than a rule of “waiver” that deters such disclosures.

It held that McKesson did not waive its work product protection as to all adversaries, including class plaintiffs, by disclosing counsel’s investigative report and supporting materials to the SEC and U.S. attorney. The court further observed that the government’s right under the agreements to “re-disclose” the material as required by law or in accordance with the regulatory duties was “no broader than required to make voluntary disclosure by McKesson useful to the government” and therefore did not give private plaintiffs entrée to McKesson’s work product.

District courts in the 2nd Circuit recently have reached the same outcome, based on language in In re Steinhardt Partners L.P., 9 F.3d 230, 236 (2nd Cir. 1993). In that case, the 2nd Circuit suggested work product protection may not be waived as to third parties when the SEC and disclosing party explicitly agree the SEC will maintain the confidentiality of the disclosed material.

Whether recent decisions honoring “selective waiver” arrangements with the government ultimately prove anomalous, at present they remain in the minority. In the current state of the decisional law, and in the absence of any legislation, corporate counsel faced with the decision whether to “cooperate” and “waive” certainly cannot assume that a “confidentiality agreement” will prevent third-party claimants from getting their hands on attorney-client communications and work product given to the government and offering it in evidence in civil litigation.

In-house counsel will also need to advise their board members of these risks, as they might otherwise be unduly impressed by the evident authority and gravitas of government confidentiality agreements.

Finally, whenever there is an indication of possible corporate violation of law, in-house counsel need to carefully consider the necessity of conducting the investigation and the manner in which it is to be conducted.

Once a determination is made that information warrants an investigation, the corporation should anticipate having to decide between providing the investigation materials to the government, thereby potentially waiving its protections from disclosure to third parties, or withholding the material from the government, thereby increasing its criminal or other serious exposure to the government.

The Justice Department’s and the SEC’s recent prominent successes in insisting on “waivers” of privilege in exchange for cooperation in Enron, Worldcom, the KPMG tax shelter cases, and elsewhere, ensures that its practice of asking for waivers in exchange for leniency is not going to go away any time soon.

The hard recommendations on “waiver” will continue to confront in-house counsel. Unfortunately, the government’s willingness to enter “confidentiality agreements” – in which it truly gives up nothing – does not make those decisions any easier.

Peter M. Casey and Donald R. Frederico are both shareholders in the litigation department of the Boston office of Greenberg Traurig (www.gtlaw.com). Mr. Casey focuses his practice on securities litigation and investigations, concentrating specifically on financial reporting and disclosure matters, accounting and auditing issues, and insider trading. Mr. Frederico is a senior trial attorney with more than 25 years of trial and litigation experience who focuses his practice on representing defendants in class actions and mass tort litigation.