Waiver: The attorney-client privilege quandary

In May 2006, following a six-month stretch of intensive negotiations with federal prosecutors, the infamous securities class action law firm, Milberg Weiss Bershad & Schulman, refused to hand over confidential information traditionally protected under the deeply rooted attorney-client privilege. For this reason, Milberg Weiss claims it was indicted on 20 counts in a conspiracy for obstruction of justice, perjury, bribery, and fraud. In essence, Milberg Weiss and two of its partners, David Bershad and Steven Schulman, are accused of conspiring to kickback fees to plaintiffs in shareholder derivative and class action suits. Specifically, the government claims that the firm paid individuals more than $11 million to serve as plaintiffs in such suits and that the firm received more than $200 million in attorneys' fees from these actions.

For Milberg Weiss, the attorney-client privilege is an indispensable component of its business, which is protecting the confidential information of its clients. Whereas clients are free to waive the attorney-client privilege, counsel may not. By turning over privileged and confidential documents, Milberg Weiss might not only subject its legal techniques to public view but will likely violate its client confidentiality agreements. Although waiver requests have been effective in prosecuting massive corporate frauds, the case against Milberg Weiss and partners is seminal in introducing the waiver sweep to the corporate law firm setting. As of publication, no trial date has been set for the legal super giant and its two partners. However, because the issue of attorney-client privilege is so important in the American legal system, the issue of waiver of attorney-client privilege will be addressed here before the resolution of the Milberg Weiss suit.

Because the attorney-client privilege is deeply entrenched in legal history, it's a principle upon which most attorneys rely to honor and maintain client relationships. Recognizing the corporation or other business entity as a client seems to have placed the privilege in a quandary. Along the same vein, prosecutors have started using waiver of the privilege as a tactic to encourage company cooperation with criminal investigations. Here we'll address the instable state of waiving the principle as it relates to corporations, and in particular, internal investigations. However, before delving into the fibers of corporate waiver, it's necessary to define the privilege.

THE ATTORNEY-CLIENT PRIVILEGE
The attorney-client privilege is used to protect confidential communications between a client and his or her attorney. For the privilege to work, the following elements must be present:

1. The person or entity asserting the privilege must be an existing client.
2. The communication must be made to an attorney or the attorney's agent who's facilitating legal advice under an attorney's supervision.
3. The communication is for the purpose of providing legal assistance (not business or accounting advice).
4. The communication is in confidence (that is, outside the presence of third parties other than agents as mentioned above).
5. The communication isn't used for committing a crime or fraud (often referred to as the "crime-fraud exception").

A corporate client is the corporation itself, individuals excluded. Nonetheless, it's clearly necessary that individuals give the corporation its voice. Therefore, questions as to whose communications within the corporation are privileged are common. In 1981, the United States Supreme Court in Upjohn Co. v. United States held that the confidential communication of relevant information by a corporate employee, regardless of his or her position in the company, to corporate counsel, can be protected under the privilege because "[t]he purpose of the attorney-client privilege is to encourage full and frank communication between attorneys and their clients."¹ The High Court further emphasized that low- or mid-level employees, by virtue of their employment, can "embroil the corporation in serious legal difficulties... [thereby having] the relevant information needed by corporate counsel if he is adequately to advise the [corporation] with respect to actual or potential difficulties.² To ensure protection under Upjohn, the following components should be present:

1. The communication by the employee was made at the direction of corporate officials or counsel, to corporate counsel;
2. The information communicated was confidential and made to corporate counsel for a legal purpose; and
3. The information communicated from the employee fell within the scope of his or her duties.

Although Upjohn appears to set forth guidance as to whose confidential communication may be protected under the attorney-client privilege, some circuits remain divided, as do state courts. Thus, it's imperative that your company seek legal guidance as to who's protected and when such protection is available.

ADVENT OF THE WAIVER
In 1999, Deputy Attorney General Eric Holder, in his memo entitled "Federal Prosecution of Corporations," set forth eight factors for determining whether to criminally charge a corporation:

1. nature and seriousness of the offense;
2. pervasiveness of wrongdoing within the corporation;
3. corporation's history of similar conduct;
4. corporation's timely and voluntary disclosure of wrong-doing and willingness to cooperate in investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection;
5. existence and adequacy of the corporation's compliance program;
6. remedial actions taken by the corporation (i.e., implementation of a compliance program; management oversight; disciplinary actions against wrongdoers; restitution; cooperation);
7. collateral consequences implemented by the corporation; and
8. adequacy of civil and regulatory enforcement.³ 

Nonetheless, it wasn't until the heat of the Enron debacle in 2002, that the United States Sentencing Commission began reviewing its Organizational Sentencing Guidelines. The following year Deputy Attorney General Larry Thompson composed "Principles of Federal Prosecution of Business Organizations" (referred to as the Thompson Memo"). The Thompson Memo expanded Holder's factors to include all businesses, not just corporations.⁴ Even more significantly, the Thompson Memo focused on the importance of company cooperation with prosecutors during investigation and negotiation proceedings.

ORGANIZATIONAL SENTENCING GUIDELINES
In April 2004, the U.S. Sentencing Commission added Section 8C2.5 to the Sentencing Guidelines for U.S. Courts. This new provision provided:

Waiver of attorney-client privilege and of work product protections is not a prerequisite to reduction in culpability score [as it relates to cooperation with prosecutors]... unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.⁵ 

The following year, in a memo by Deputy Attorney General Robert McCallum Jr., all federal prosecutors were advised that they "must consider [the Thompson Memorandum factors] in determining whether to charge a corporation or other business organization."⁶ The McCallum Memo further directed federal prosecutors to obtain proper approval before seeking an attorney-client waiver from an organization. Furthermore, U.S. Attorneys offices were advised to establish written waiver review processes to promote the protocol.

Needless to say, a fury of organizations banded together to fight the 2004 provision in the Sentencing Guidelines. On April 5, 2006, the United States Sentencing Commission unanimously voted to remove Section 8C2.5. Thus, lack of Congressional action by Nov. 1, 2006 will put the new rule into action.

CURRENT STATE OF WAIVER
Although removal of the waiver language in Section 8C2.⁵ from the Organizational Sentencing Guidelines is a significant step toward protecting the privilege, the reality is that prosecutors might still use the waiver as a method for encouraging or even coercing cooperation. Furthermore, the McCallum Memo is still in place.

Following word that the U.S. Sentencing Commission voted to remove the language from the Guidelines, Michael Greco, president of the American Bar Association (ABA) submitted a memorandum to Attorney General Alberto Gonzales, proposing modifications to the Justice Department's internal waiver policy (that is, the McCallum Memo). In the attachment to Greco's memorandum, the ABA's Task Force on Attorney-Client Privilege recommends that the Justice Department take these actions to achieve the "proper balance between effective law enforcement and the preservation of essential attorney-client ... protections":

1. Prevent federal prosecutors from seeking waiver during investigations.
2. Specify the types of factual and non-privileged information desired from companies.
3. Clarify that any voluntary waiver of privilege by an organization will not be used for the purpose of determining effective cooperation by the organization with the government.⁷  

It's not likely that this issue will be resolved in the near future. Therefore, it's important that corporate executives, counsel, and employees be aware that anticipated confidential information traditionally protected by the attorney-client privilege could be waived in the event of federal investigation. The tips in the next section are actions that companies should take prior to and while conducting an internal investigation. However, these lists aren't all-inclusive and should serve only as an informal guide rather than legal advice. Please contact your legal counsel to determine the proper steps to help ensure that your company maintains privilege under the attorney-client privilege and/or work product doctrines.

GENERAL TIPS TO HELP ENSURE PRIVILEGE
1. Always involve in-house or outside counsel prior to initiating an investigation. This will allow counsel to define the scope of privilege and ensure that all confidential communication received from the outset of an investigation, and within the scope of the privilege, is protected. Hiring outside counsel might be beneficial to show that the company was aware of potential illegalities occurring in the company and began taking remedial steps to cure such problems.
2. Ensure that counsel receives proper authorization for investigation as well as the purpose of the investigation. This will help protect the company against liability.
3. Clarify the role of counsel to all individuals who may submit confidential information. Make sure all employees are aware that protection under the privilege is limited to information as it relates to legal advice (rather than business or financial advice).
4. Label all confidential communication "CONFIDENTIAL" and/or "PRIVILEGED" and/or "ATTORNEY WORK PRODUCT" in addition to properly storing and limiting access to such documentation.
5. Enforce the necessity of maintaining confidentiality in interviews at the outset of interviews. Notify the employee that the attorney-client privilege belongs to the company, not to any individual employee.
6. Request that employees refrain from disclosing any information transcribed in an investigatory interview with one another.
7. Prepare for ex parte contact with employees and ensure employees are aware of various levels of confidentiality within and outside of the company.⁸ 

TIPS FOR ENSURING PRIVILEGE UNDER SARBANES-OXLEY
1. Consider contracting with outside counsel versed in Sarbanes-Oxley compliance to determine what should be reported, to whom it should be reported, and how to report.
2. Counsel should confer with appropriate in-house compliance managers to develop a plan for reporting if a violation of Sarbanes-Oxley should arise.

1. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). It's important to note that Upjohn applies only to federal courts though some state courts have adopted similar theories. 
   Id. at 391. 
2. See Memorandum from Deputy Attorney General, Eric H. Holder Jr. to heads of department components and U.S. Attorneys, Bringing Criminal Charges Against Corporations (June 16, 1999), available at www.usdoj.gov/criminal/fraud/policy/Chargingcorps.html [Referred to as the "Holder Memo"]. 
3. See Memorandum from Deputy Attorney General, Larry D. Thompson to heads of department components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003), available at www.usdoj.gov/dag/cftf/corporate_guidelines.htm.  
4. U.S. Sentencing Commission: Sentencing Guidelines for U.S. Courts 71 F.R. 28063 (§8C2.5) (2006). 
5. Memorandum from Deputy Attorney General Robert D. McCallum Jr. to heads of department components and U.S. Attorneys, Waiver of Corporate Attorney-Client and Work Product
6. Production (Oct. 21, 2005) [the "McCallum Memo"], available at www.usdoj.gov/usao/eousa/foia_reading_room /usam/title9/crm00163.htm.  
7. Memorandum from Michael Greco, to heads of department components and the U.S. Attorneys: Suggested Revisions to Department of Justice policy concerning waiver of corporate attorney-client and work product protections (Feb. 10, 2006) available at www.abanet.org/poladv/acprivgonz5206.pdf.  
8. See Regina M. Rodriguez and Jeffery S. Roberts, Preserving Attorney-Client Privilege in Internal Investigations, available at https://www.faegredrinker.com/en/insights/publications/2006/6/preserving-attorneyclient-privilege-in-internal-investigations. 

[Some source links referenced in this article are no longer available. — Ed.]

Juliana Morehead, J.D., CFE, is a legal writer and editor for the ACFE.