In the wake of recent corporate scandals, corporations face increased regulatory and legal scrutiny. The disclosure of the results of an internal investigation conducted as part of a good faith effort to resolve an internal company problem could provide a road map for an adversary — whether the government or a third-party — to establish civil or criminal liability on behalf of the corporation. As a result, a corporation undertaking an internal investigation has a significant interest in preserving the confidentiality of counsel's findings.
While a corporation may ultimately decide to waive its attorney-client privilege, such waiver should only result from a considered, intentional strategic decision, not from inadvertent failure to preserve the privilege. Therefore, before initiating any serious internal investigation, the corporation and its counsel must structure and design the investigation to take full advantage of the scope of the attorney-client privilege in the relevant jurisdiction.
Scope of the Attorney-Client Privilege in the Corporate Context
A clear understanding of the scope of the attorney-client privilege in the corporate context is integral to the design of a successful internal investigation. The privilege is based on the principle that sound legal advice or advocacy depends upon full and frank communication between attorneys and their clients. To encourage the client to disclose all pertinent information to the attorney, the client must be assured that the information revealed will not be disclosed without the client's consent.
Application of the privilege to the communications of individual clients is relatively straightforward. However, its application to the corporate client is significantly more difficult. Corporations are artificial entities created by law that can only speak or hear through their agents. Corporations require extensive internal communications among their agents and employees to function effectively. Such communications may extend beyond management-level employees to lower-level employees. Moreover, because corporate agents have varied roles, they cannot only make statements on behalf of the corporation, but also in their capacity as individuals. As a result, significant uncertainty about the applicability of the privilege can arise when a corporation seeks to invoke the privilege in a particular circumstance.
Upjohn Co. v. United States
The search for clarity is also stymied by the varied application of Upjohn Co. v. United States, the leading Supreme Court case on the scope of corporate privilege. In Upjohn, independent accountants conducting an audit for the Upjohn Company informed the company's in-house general counsel that improper payments had been made to win government business. In response, the general counsel, outside counsel and the chairman of the board decided to conduct an internal investigation. Upjohn's attorney sent a questionnaire to all of its foreign managers seeking detailed information concerning such payments. All responses were to be sent directly to general counsel and recipients were instructed to treat the investigation as highly confidential. Attorneys also conducted interviews with 33 other Upjohn officers or employees. Following its investigation, the company voluntarily submitted a preliminary report to both the SEC and IRS. The IRS later sought all files relating to the investigation. Upjohn objected to the production of these documents, citing the attorney-client privilege and work product doctrine.
In deciding to apply the privilege to the communications of lower-level managers, the Court rejected the "control group" test, under which only those communications between counsel and upper-level management would have been privileged. The Court explained that employees beyond the control group are often the main source of information needed to make a full evaluation of corporate liability. Thus Upjohn gives broad protection to the confidential communications of any corporate employees — not just control group members — who supply relevant information to corporate counsel during a legal investigation.
Varied Federal and State Interpretation
Although Upjohn ultimately applied the privilege to communications between counsel and lower-level corporate employees, its holding is not universally followed and the opinion is still the subject of much interpretation, especially in federal diversity cases and state court litigation. The scope of the privilege in the corporate context is only somewhat more clear in the federal courts. For example, there is a split in the circuits regarding whether a former employee who communicates with corporate counsel about a matter within that former employee's scope of employment enjoys the protections of the privilege. Although the majority of federal courts have extended the privilege to include former employees, others have not.
This variability dictates that before an internal investigation can be designed or initiated, careful, considered thinking and detailed research must be undertaken to determine the likely scope of the attorney-client privilege in the relevant jurisdictions. Only then can an investigation strategy be developed that takes full advantage of the protections of the privilege, while planning for the various contingencies that could arise during the course of litigation.
Specific Suggested Courses of Action
Regardless of the specific rule that ultimately governs the scope of the privilege in a specific case, there are steps that companies can take to help ensure the applicability of the privilege in all jurisdictions. First, because of the complexity of privilege-related issues, counsel must be engaged from the outset of an investigation both to determine the scope of the privilege and to take advantage of the attorney-client privilege at all. If management conducts the investigation without the involvement of counsel, the corporation may not receive the protections of the privilege. Counsel must then ensure that the following are incorporated into every investigation:
1) Secure a Directive from Higher Authority that Authorizes and Delineates the Purpose of the Investigation
Before initiating an investigation, counsel should obtain documentation that authorizes the internal investigation and describes its purpose to obtain information that will be used to advise the corporation regarding potential liability and to defend against any potential or anticipated litigation. These recitals will help support a claim that the materials generated in the course of the investigation were gathered for the purpose of seeking legal advice and not for some other purpose.
2) Clarify the Role of In-house Counsel
In-house counsel face additional barriers to the application of the privilege. Only those communications relating to legal consultation are protected by the privilege. No business communications receive protection. Yet in-house counsel often wear many hats within a corporation — from legal advisor to manager to financial consultant. To ensure that corporations do not attempt to cloak business communications with the protections of the privilege, many courts use a more heightened scrutiny in evaluating whether communications made to in-house counsel should be classified as privileged. Therefore, when participating in an internal investigation, in-house counsel must only solicit information from an employee to formulate legal advice — not for any other purpose.
3) Consider Retaining Outside Counsel
The corporation may want to consider hiring outside counsel to conduct the investigation. Strategically, this underscores that employee communications were only made to outside lawyers retained exclusively to conduct an internal investigation about the alleged improprieties. This ensures that the information compiled during the course of the investigation was only communicated to an attorney for the purpose of securing legal advice.
4) Properly Label All Materials to Facilitate the Preservation of Confidentiality
To preserve the protection of the privilege, all written documents pertaining to the investigation must be kept confidential. To this end, corporations should ensure that employees label all written materials "confidential" or "privileged." However, it is important to note that excessive marking of documents may dilute the claim of privilege. Documents which do not deserve this designation should not be so labeled.
5) Document the Confidentiality
The party asserting the claim of privilege bears the burden of proof in establishing the necessary elements to support a claim of privilege. Counsel must ensure that the confidentiality of communications with a client is well documented by always indicating in memoranda or notes from interviews who was present. Counsel should also document efforts that were made to limit the number of agents involved in the investigation, to undercut arguments that the unnecessary involvement of corporate agents supports a waiver.
6) Emphasize the Confidentiality of the Investigation to Employees Who Are Interviewed
Counsel should begin all employee interviews by explaining that the interview is being conducted to provide legal advice to the employer corporation and that the employee may not discuss the interview with anyone. Counsel should also ensure that the employee understands that counsel represents the employer corporation and not the employee, so that any privilege belongs to the corporation and not the individual employee.
7) Regulate the Internal Flow
Counsel can further demonstrate that the contents of an internal investigation were intended to be confidential by 1) restricting dissemination of uncovered information to a limited number of individuals, 2) delivering reports from non-lawyers directly to counsel, rather than via intermediaries and 3) maintaining materials gathered as a part of the internal investigation separately from general corporate files.
The Thompson Memo
The conduct and design of internal corporate investigations has been made significantly more difficult by recent developments in Department of Justice corporate charging criteria. In 2003, Deputy Attorney General Larry Thompson circulated a memo ("Thompson Memo") which, as a part of the DOJ's broader efforts to enforce criminal laws vigorously against suspected corporate wrongdoers, identified several factors DOJ prosecutors should consider when determining whether to file charges against a corporation. The most controversial factor involved a corporation's "willingness to cooperate in the investigation of its agents, including if necessary, the waiver of the attorney-client and work product privileges…" Although DOJ officials have insisted requests for waiver are rare, recent surveys of lawyers in corporate practice indicate that federal prosecutors and agencies now routinely demand wholesale waiver of the attorney-client privilege during corporate investigations as proof that the entity is cooperating in good faith. Thus corporations that seek lenience in the form of non-prosecution must now consider early in the course of an investigation the likelihood of having to waive the privilege and the collateral consequences such waiver may have on pending or parallel civil litigation or regulatory enforcement actions.
Determining Whether the Benefits Provided by Waiver Outweigh the Risks
Although waiver may be in the best interest of a corporation and help it avoid prosecution, the Thompson Memo explicitly states that a corporation's cooperation provides no such guarantee. Following waiver, plaintiff's counsel will put the internal investigation on trial, subjecting it to an unrealistic degree of scrutiny. In an adversary system, the corporation has every right to make the plaintiff do his own work and meet the burden of proof on the relevant issues. Thus, before turning over the investigative report, defense counsel must ensure that revealing the contents of the investigation will meaningfully exonerate the corporation. If it will not, it may be more sensible to preserve the privilege and make the plaintiff prove a case without the assistance provided by the company's own investigation.
Internal corporate investigations have become a common component of a corporation's response to allegations of internal wrongdoing. Before initiating any serious internal investigation, the counsel must research the often uncertain scope of the corporate privilege in the relevant jurisdiction so that the investigation takes full advantage of the attorney-client privilege. In addition, counsel should be responsible for ensuring that applicability of the privilege is protected by preserving the confidentiality of communications and documenting that the investigation serves a legal, not business, purpose.
Even in cases where the corporation ultimately decides to waive the privilege, counsel should ensure that all internal investigations are conducted to take full advantage of the attorney-client privilege. Then, if waiver is undertaken, it will not be inadvertent, but the result of a well-considered, strategic decision.