Dodd-Frank, with its rewards (or bounties) for whistleblowers, has heightened employers' concerns about identifying potentially unethical conduct.
In prior columns, we have discussed employers' efforts to encourage potential whistleblowers to come forward and raise complaints—in some cases, even offering monetary incentives—so that they can address and eliminate wrongdoing before the claims become a cause célèbre and the whistleblower's visage adorns newspaper covers and the websites of plaintiff's counsel.
An investigation, while normally essential to the successful defense of a claim, can create its own kettle of fish. It may contain damaging evidence of wrongdoing on the part of the company or an employee. It may reveal shortcomings in the company's internal compliance procedures. And, the employee who is the subject of the investigation may claim that the report constitutes defamation.
Even if conducted by or at the direction of counsel, it is entirely possible that an internal investigation is not privileged. Materials that start as privileged may not remain so during a civil litigation or government investigation down the road. For example, the employer may choose to rely on the results of the investigation in defense of the claim, thereby potentially waiving the privilege.
Thus, employers must give considerable thought to how they can best conduct internal investigations that promote compliance and avoid creating damaging (and discoverable) investigative materials.
While structuring the investigation as privileged, employers should consider that it may eventually see the light of day— indeed, a court considering whether an investigation report is privileged may well need to make an in camera inspection to do so. Of course, there is an inherent conflict between preparing a candid, privileged report while expecting that it may be disclosed—and this is an issue that is not readily resolved.
Application of the Privilege
Upjohn,1 of course, holds that a corporation's attorney-client privilege extends to investigative interviews with both management and non-management employees, so long as the investigation is undertaken at the direction of management and for the purpose of providing legal advice. Nevertheless, application of the privilege is not a foregone conclusion.
In a 2010 New York Supreme Court case, HSBC Guyerzeller Bank AG v. Chascona N.V.,2 Justice Bernard Fried held that the attorney-client privilege did not protect documents created by an attorney, who was employed by creditors as attorney's work was investigative rather than legal and "an investigative report does not become privileged merely because it was conducted by an attorney."
The court found that the attorney served in a non-legal role, and noted that his job description made no mention of his performing legal services. The court also dismissed as "conclusory" the attorney's affidavit describing his work as "predominately, if not exclusively legal…."3 (Interestingly, for this reason, Justice Fried declined the debtors' and the attorney's request that the court inspect the files in camera.)
More recently, in a July 2011 opinion, Southern District of New York Magistrate Judge Michael H. Dolinger considered, in a case with dueling claims of defamation, breach of fiduciary duty, and breach of contract, whether the corporate defendants had waived the attorney-client privilege regarding its counsel's internal investigation of alleged wrongdoing by the plaintiff, a former executive.
In Gruss v. Zwirn,4 counsel had created a memorandum detailing its findings; a set of talking points to be used by the company in discussions with investors explaining the plaintiff's departure; and PowerPoint presentations (which included summaries of witness statements). The defendants explicitly relied on, and disclosed to shareholders and the Securities and Exchange Commission, these findings, which blamed the plaintiff for the alleged financial irregularities.
The defendants' communications, the plaintiff said, were false and defamatory, and he sought counsel's underlying interview notes and other investigatory documents. The plaintiff argued that the defendants waived the privilege as to those notes and documents by revealing counsel's findings.
In a comprehensive opinion, Magistrate Judge Dolinger rejected every one of plaintiff's numerous waiver arguments. Significantly, though, the court acknowledged (and the defendants conceded) that they had waived the privilege vis-à- vis counsel's findings themselves, which (acknowledging the waiver) the defendants had produced to the executive in discovery.
The court also rejected the executive's claim that the report was prepared primarily for business rather than legal purposes, and therefore was not protected either by the privilege or the work product doctrine. While counsel's reports were prepared, in part, for the business purpose of how to communicate to investors and other business parties, there was no doubt that counsel were engaged to investigate accounting irregularities and to plan for the possibility, among other things, of employment litigation.
The court made clear that in camera inspection may be necessary in order to determine whether the report was prepared for a business or a legal purpose; as the court put it, to do so, it is necessary "to examine whether the attorney's notes reveal some focus on litigation strategy…."
The executive argued that the defendants waived the privilege as to the underlying notes because it intended to rely on counsel's report in defending the defamation claim (and its counterclaims of breach of fiduciary duty and breach of contract). But the court accepted their express disavowal of any intent to rely on the privileged notes and summaries in proving their claim. The defendants asserted that they would rely on other evidence (via the executive's testimony and other evidence) of his underlying conduct.
The executive also argued that the defendants waived the privilege by "selectively disclosing" the result of the investigation to the SEC. In the court's view, critical to the defendants' successful defense of this claim was their having entered into a written confidentiality agreement with the SEC.5
Nevertheless, a confidentiality agreement is by no means a guarantee against waiver. In In re IPO,6 the court found that Credit Suisse waived the privilege by disclosing to the SEC and the NASDR (National Association of Securities Dealers Regulation Inc.) counsel's memoranda summarizing facts they learned in interviewing witnesses, despite the presence of confidentiality agreements governing most of these disclosures.
Magistrate Judge Dolinger distinguished In re IPO and noted that Credit Suisse's disclosures there were "repeated and voluntary." In contrast, he characterized as "limited" the defendants' disclosures to the SEC in Gruss v. Zwirn.
Finally, the court held that the interview notes constituted opinion work product and could not be produced. The plaintiff asserted that the notes would have been created in essentially similar form irrespective of the litigation, and hence were for a business as opposed to a legal purpose.
Even if investigative materials are privileged, a company may find it has little choice but to waive that privilege during a government investigation.
In August 2008, the Department of Justice released its Principles of Federal Prosecution of Business Organizations, commonly referred to as the "Filip Memorandum." The Filip Memorandum makes clear that the Justice Department cannot compel a corporation to waive its "core" attorney-client privilege and that a corporation need not do so to receive cooperation credit.
Prior to the implementation of these new guidelines, corporations were often pressured to waive their attorney-client privilege and received more favorable treatment in exchange for doing so. Still, the Filip Memo also explains that, to receive cooperation credit, the corporation must disclose the "relevant facts of which it has knowledge."
Government pressure on companies to waive their attorney-client privilege has abated somewhat in recent years. Nevertheless, the Justice Department and SEC continue to expect and reward disclosure of all "relevant facts."
The federal Sentencing Guidelines afford corporations more favorable treatment, at the sentencing stage, if they can demonstrate rigorous internal compliance policies and procedures. Moreover, the Justice Department and SEC give companies "cooperation credit" when conducting investigations of alleged wrongdoing.
Similarly, the SEC's newly issued enforcement manual indicates that it will extend cooperation credit in exchange for disclosure of "all relevant underlying facts within [the company's] knowledge." The distinction between privileged communication and relevant fact is a slippery one, particularly with regard to an attorney's conclusions and findings during an internal investigation.
Thus, despite the government's recent efforts to limit the pressure to waive attorney-client privilege, the emphasis on full disclosure of facts gleaned during an investigation may still prompt the production of privileged information.
Employers should expect that internal investigations will be the subject of disclosure, and must take steps in advance to assure their privileged nature. Preferably, of course, any waiver of privilege should be voluntary and not compelled.
Counsel preparing reports must be cautious about providing a report that is perceived as intermingling business advice with legal advice. While the presence of business advice will not necessarily preclude application of the privilege, for the privilege to survive, the predominant purpose of the report must be legal advice.
In formulating its case and making disclosures to third parties, the employer should, as best it can, rely on non- privileged factual information.
To have the greatest likelihood of successfully limiting disclosure to the investigating government entity, a company should enter into a well-crafted confidentiality agreement with the government and avoid disclosures to adversarial parties other than the government.
Companies may consider an oral disclosure during a meeting with government representatives, rather than generating and disclosing a report that may later be deemed discoverable.
Of course, it is also important during the initial investigation to take particular care in issuing Upjohn warnings to company employees. An appropriate Upjohn warning must make clear that the investigating attorney represents the company and not the interviewee, the interview is covered by the company's attorney-client privilege only and the company may elect to disclose privileged information as part of a government investigation.
Philip M. Berkowitz is a partner and U.S. co-chair of Littler Mendelson's international law practice. Amy E. Mendenhall, an attorney in the Washington, D.C. office of the firm, assisted in preparing this article.
1. Upjohn Co. v. United States, 449 U.S. 393 (1981).
2. Index No. 114705/2003 (Sup. Ct., NY County, June 23, 2010).
3. Cf. Spectrum Services International v. Chemical Bank, 78 N.Y.2d 371 (1991) (court upheld as privileged a report carried out by an external law firm retained for the specific purpose of investigating possible internal fraud by employees and vendors, where affidavits of the firm's lawyers made clear that Chemical had retained them specifically to perform an investigation and render legal advice regarding this possible fraud, and to counsel Chemical with regard to possible litigation).
4. Gruss v. Zwirn, 2011 U.S. Dist. LEXIS 79298 (S.D.N.Y. July 14, 2011).
5. Accord, In re Steinhardt Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993).
Philip M. Berkowitz is a shareholder and U.S. co-chair of Littler’s International Law Practice Group. He is based in the firm’s New York City office. This article is reprinted with permission from the November 10, 2011 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.