Wednesday, December 14, 2011

USA - Conducting privileged whistleblower investigations in the US

Philip M. Berkowitz, Partner, Littler Mendelson PC, New York

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) creates new remedies for whistleblowers in the United States. It provides rewards (or bounties) for whistleblowers, and strengthens existing penalties against employers under the Sarbanes-Oxley Act for retaliating against whistleblowers.

These laws have greatly heightened employers’ already strong interest in identifying potentially unethical conduct. Employers make significant efforts to encourage potential whistleblowers to come forward and raise complaints, so that they can address and eliminate wrongdoing before the claims become a cause célèbre.

In the United States, companies investigating claims of wrongdoing must be concerned about the possibility that the results of the investigation – wherever in the world they may be conducted – are subject to discovery in a lawsuit or arbitration brought by the whistleblower, or by the government, or even in related claims brought by others.

The United States has the most onerous discovery rules in the world. As a general matter, in US civil litigation, parties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense. This includes the existence, description, nature, custody, condition, and location of any documents or other tangible things, and the identity and location of persons who know of any discoverable matter. To be discoverable, information need not even be admissible at the trial, so long as the discovery appears “reasonably calculated to lead to the discovery of admissible evidence.”[1]

However, discovery normally may not be had of information which is protected by the attorney-client privilege. This privilege attaches when legal advice of any kind is sought from a professional legal advisor acting in his capacity as such, where the communications relating to that purpose are made in confidence by the client. In that case, the information may not be sought either from the client or the lawyer, unless the privilege is waived.[2]

US courts recognize as privileged both the communications by the client to the attorney, and legal advice rendered by the attorney to the client, to the extent that the advice reflects confidential communications between the two.[3] However, the privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney.[4]

An investigation into the allegations of alleged wrongdoing is, of course, normally essential to the successful defense of a claim. But the results of an investigation may reveal damaging evidence of wrongdoing on the part of the company or an employee, or shortcomings in the company’s internal compliance procedures. There is also danger in how an investigation is carried out, and what is done with its results. For example, the employee who is the subject of the investigation may claim that the report, or that accusations made during the investigation, constitute defamation.

Thus, employers must give considerable thought and care to how they can best conduct internal investigations that promote compliance, and avoid creating damaging (and discoverable) investigative materials. Employers must also be vigilant to assure that an investigation, if privileged, does not lose the protection of the privilege via waiver, unless the waiver is intentional.
While structuring the investigation as privileged, employers should nevertheless plan for the possibility that it may eventually see the light of day. 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

The leading case on the privileged nature of internal investigations is Upjohn Co. v. United States.[5] There, after the company’s independent auditor found apparent violations of the Foreign Corrupt Practices Act (“FCPA”), the Chairman authorized the general counsel to conduct an internal investigation. A questionnaire was sent to all foreign managers, over the Chairman’s signature, noting the general counsel’s authority to conduct an investigation to determine potential legal violations, and instructing the managers to treat the investigation as highly confidential, and respond only to the general counsel. Both the general counsel and outside counsel conducted the interviews.

The Company submitted a report based on its investigation to the SEC and the IRS; and the IRS then demanded the investigation documents and interview notes.

In considering whether the results of the investigation were privileged, the Supreme Court held that the corporation’s attorney-client privilege extended 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.

The Court also held that the attorneys’ notes were protected attorney “work product,” because they would “tend[ ] to reveal the attorney’s mental processes ... what he saw fit to write down regarding witnesses’ remarks.” Under US law, “work product” may be disclosed only if there is “substantial need ... and [the information] cannot, without undue hardship,” be obtained.[6]

Akzo Nobel

Nevertheless, application of the privilege is not a foregone conclusion. In Europe, in-house counsel’s advice and activities may not be protected by the privilege. In Akzo Nobel,[7] at issue were internal records of the company which were seized by UK prosecutors in dawn raids carried out in an antitrust investigation. Included were records reflecting communications with counsel. The European Court of Justice held, in September 2010, that, at least in this context, communications with in-house counsel are not privileged. The court held, in short, that in-house counsel are not independent enough to warrant extending legal professional privilege.

Thus, the status of in-house counsel in Europe as a professional legal advisor, for the purposes of US privilege law, is questionable. Companies simply may not be able to rely on the results of investigations carried out by in-house counsel overseas as privileged, sufficient to overcome US discovery rules.

Recent US cases

In a recent New York case, HSBC Guyerzeller Bank AG v. Chascona N.V.[8], the court held that the attorney-client privilege did not protect documents created by an attorney, who was employed by creditors as “Senior Vice President, Special Projects,” during an investigation he conducted of the debtors. The court held that the 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….”

More recently, in a July 2011 federal court decision in New York, Gruss v. Zwirn,[10] the court considered 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. There, counsel had created a memorandum detailing their 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 SEC, 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 in the defendants waived the privilege as to those notes and documents by revealing counsel’s findings.

In a comprehensive opinion, the court rejected every one of plaintiff’s numerous waiver arguments. 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.[11]

The court made clear that in camera inspection (a confidential inspection of the materials by the judge, which does not constitute a waiver the privilege) 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 employee’s defamation claim (and its own 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. [12]

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.

Government Investigations

Even if investigative materials are privileged, a company may find it has little choice but to waive that privilege during a US government investigation.

In August 2008, the United States Department of Justice (“DOJ”) released its Principles of Federal Prosecution of Business Organizations, commonly referred to as the “Filip Memorandum.” The Filip Memorandum makes clear that the DOJ 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 for the purpose of receiving a lesser sentence, 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 DOJ and SEC continue to expect and reward disclosure of all “relevant facts.” 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 investigating possible claims of wrongdoing, including international claims, should expect that the investigations will be the subject of disclosure, and must take steps in advance to assure their privileged nature.

The issue of who should carry out the investigation is of principal importance. Should it be carried out by in-house counsel, or outside counsel? The degree to which in-house counsel should be involved, or the two may work together, is particularly important if the matter involves in-house counsel based in Europe, or in other jurisdictions where the privilege is not as well established as in the United States.

Preferably, of course, any waiver of privilege should be voluntary and not compelled.

Counsel preparing reports must be cautious about 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.

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, when US-based litigation is a risk, 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.

[1] See Fed. R. Civ. P. 26(b)(1)
[2] See In re Grand Jury Subpoena, 731 F. 2d 1032 (2d Cir. 1984)
[3] In re Six Grand Jury Witnesses, 979 F. 2d 939 (2d Cir. 1992)
[4] Upjohn Co. v. United States, 449 U.S. 393, 396 (1981); In re Six Grand Jury Witnesses, 979 F. 2d at 944
[5] Upjohn Co. v. United States, 449 U.S. 393 (1981).
[6] Fed. R. Civ. P. 26 (b)(3)(A)(ii)
[7] Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v European Commission, Case 155/79, A M & S Europe Limited v Commission, [1982] ECR 1575.
[8] Index No. 114705/2003 (Sup. Ct., NY County, June 23, 2010).
[9] 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).
[10] Gruss v. Zwirn, 2011 U.S. Dist. LEXIS 79298 (S.D.N.Y. July 14, 2011).
[11] 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.
[12] Accord In re Steinhardt Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993).