The waiver dilemma

Cultural change is usually a slow process, sometimes taking generations to manifest itself. The government and its prosecutorial divisions have, however, achieved significant cultural change far quicker than that. They have established a culture of waiver. That waiver is, of course, referring to attorney-client privilege, one of the longest held precepts in common law. Privilege has come under serious attack from the government in recent years and we are now in a culture where protecting that privilege is an all-or-nothing gamble. And only the foolhardy choose the nothing option.

The current situation surrounding privilege and work-product protection has received significant coverage from all sides of the business world. There is controversy because companies no longer realistically have the choice to waive privilege if they are asked to do so by a government agent such as the SEC or the US Department of Justice (DoJ).

This problem arises from the DoJ’s Thompson memo of 2003 which sets forth corporate charging guidelines for federal prosecutors that condition a company’s status as a co-operator on waiver of privilege. Specifically, the memo states ‘prosecutors should consider the willingness of a corporation to waive such protection when necessary to provide timely and complete information as one factor in evaluating the corporation’s co-operation. Additionally, the US Federal Sentencing Guidelines further ratify the concept of leniency in exchange for co-operation (meaning waiver).’

The decision to waive or not is a difficult one. Companies worry that information they share with the government may have to be disclosed to future civil litigants. Jeremy Burns of the University of California-Berkeley School of Law, though, says the Thompson memo seems to offer protection. In his law review article Selective waiver in the era of privilege uncertainty, Burns writes that the guidelines ‘appear to an attorney in the following posture: A government agency, such as the SEC or the Justice Department seeks the investigated body’s cooperation, requiring waiver of privilege and full assistance. In exchange, the government agency offers leniency and provides a confidentiality agreement to protect against disclosure to third parties.’

Whether those confidentiality agreements hold up is what is causing so many problems. ‘Let the buyer beware,’ Burns cautions. ‘Under the traditional understanding of waiver, when the subject of an investigation waives privilege to the government, the privilege no longer applies as against third parties.’

This ability to choose to waive for purposes of an SEC or other government investigation but retain privilege is widely considered by many as farcial. ‘As the law stands at the moment the idea of selective waiver is a complete fantasy,’ says Scott Fredericksen, a partner in Foley & Lardner’s Washington, DC office. ‘The courts do not support the concept and have consistently said that a waiver for the SEC or DoJ is a waiver for all purposes.’

Mixed messages

The facts certainly seem to support this argument although there is some division among the various courts as to the validity of selective waiver. The Federal, Second, Third, Fourth and Sixth Circuit courts have ruled that there is no such thing as selective waiver. The Eighth Circuit says there can be selective waiver. The First and Seventh have, according to Burns, made statements supporting limited waiver accompanied by confidentiality.

As time progresses those courts that originally supported the waiver concept are moving away from it and more towards the culture of waiver.

Lauren Rosenblatt, associate with McGuireWoods, writing in the Business Crimes Bulletin, explains ‘Only two courts have approved selective waiver to the government. The Eighth Circuit Court of Appeals upheld the protection for attorney-client communications previously disclosed to the SEC in a lawsuit by a private litigant who argued waiver (See Diversified Industries v. Meredith, 572 F.2d 596 (8th Cir. 1977)). The 4th Circuit, while rejecting selective waiver of attorney-client communications and fact work product, upheld the protection of opinion work product disclosed to the government because of its especial protection under Federal Rule of Civil Procedure 26(b)(3).

Reluctance to adopt selective waiver in furtherance of governmental investigations has come from the First, Third, Sixth, Tenth and Federal Circuits. These courts have acknowledged that cooperating with the government is laudable, but hold that encouraging such cooperation has little to do with the purpose of the attorney-client privilege and work product doctrine, that is, to protect the confidential nature of the attorney-client relationship and the attorney’s case preparation. Indeed, because the investigating government authority is a potential litigation adversary, upholding the protection for materials disclosed to the government squarely contradicts the well-established authority that disclosure to an adversary establishes a clear case of waiver.’

She continues, ‘The Tenth Circuit recently stated its view that the selective waiver would not be so much an exception to the rules of waiver but, rather, an entirely new government-investigation privilege. (In re Qwest Communications International. Sec. Litig., CV  No. 06-1070 (10th Cir, June 19, 2006)). The Sixth and Tenth Circuits both have held that a confidentiality agreement between the producing corporation and investigating authority does not prevent waiver. In contrast, the First, Second and Fourth Circuits have left open whether a confidentiality agreement with the government can protect the documents from discovery by others.’

In order to address the sometimes conflicting interpretations of the courts, Congress proposed an amendment to the Federal Rules of Evidence (FRE) to codify the concept of selective waiver. To the surprise of the writers, the proposal has attracted considerable criticism from many powerful legal groups and also from corporations.

Testifying before the Standing Committee on Rules of Practice and Procedure Judicial Conference about proposals to change the rules of evidence to allow courts to recognize confidentiality agreements, the ACC said ‘while we support many provisions in the new proposed rules, the selective waiver provision,  502 (c), is a wolf in sheep’s clothing.’

Susan Hackett, general counsel, Association of Corporate Counsel, America (ACCA) says ‘I think one of the key concepts we tried to get across in the comments [to the standing committee] is that if you asked this question a few years ago, I would say that we fully support selective waiver. It is extremely important as a concept at the corporate bar to protect corporations involved in the investigation process. In today’s environment, however, we are adamantly opposed to it.’

Paved with good intentions

The ACC said in its testimony before the Standing Committee that its ‘problem with the passage of FRE 502 (c) is not that it is not well-intentioned, and not that it is not needed by many companies that have been painted into a corner by prosecutors.  Our problem is that 502 (c) will not operate as a brake to stop abusive prosecutorial practices, it will operate as a gas pedal to facilitate more of them.’

In a public release accompanying the testimony, ACC says it ‘believes that the codification of selective waiver agreements will perversely increase the number of waiver demands made of companies.’ The release also made clear other ACC opinions: ‘the selective waiver provision only addresses privilege erosions within the context of a formal government proceeding, and not in routine situations such as ongoing regulatory compliance, where the government continues to review privileged material without any option for ensuring protection against others who may seek access.’

In short, it is not selective waiver or FRE 502 that is the problem, it is the underlying culture of pressing for waiver existent within the DoJ and the SEC.

Trying to codify powers to demand waiver is not new for the SEC. It has tried twice before. Rosenblatt explains ‘In 1984, Congress rejected the SEC’s proposed amendment to the Securities and Exchange Act of 1934, which would have established selective waiver of materials when in furtherance of cooperation with the SEC. The SEC also included selective waiver in the final draft of its Sarbanes-Oxley regulations, but did not ultimately adopt the provision because of concerns regarding its authority to do so: under the Rules Enabling Act of 1934 Congress reserved for itself the sole authority to approve any rules of court creating, abolishing, or modifying an evidentiary privilege.’

Burns expands ‘The SEC has a longstanding interest in the creation of a selective waiver doctrine. In addition to giving Congressional testimony arguing for the doctrine of selective waiver in HR 2179, the SEC filed amicus briefs in a number of cases where selective waiver was at issue. The SEC proposed and invited comment on a rule implementing the Sarbanes-Oxley Act that purports to establish the doctrine.’

One of the big issues, explains Hackett, is that even groups like the ACC which would have historically supported the idea find themselves working in an environment where there is such pressure for waiver within the prosecutorial community – from the DoJ to state AGs. ‘There is a sense right now that the government feels that a company has no choice but to cooperate to the fullest extent which is interpreted as waiving fully in every situation.’

One of the major complaints from companies and their lawyers is that oftentimes the investigators will ask for waiver before they have even established if the allegations are founded. There appears to be a definite feeling that companies are guilty before proven innocent. Of further concern is that often a company is able to provide investigators with sufficient factual information for them to pursue their investigation without having to waive privileged conversation – but they are rarely given this option.

No more excuses

By codifying the concept of selective waiver in the current environment there are serious concerns that it removes a major argument for companies that do not wish to waive. Hackett explains ‘we are very concerned about codifying selective waiver because what ends up happening in that environment is that, if there is a presumption that you have to give it to the government, then what possible justification would you have for not turning over protected information?’

There are serious concerns that if FRE 502 passes into law it will further encourage and embolden an already aggressive government to force privilege waiver because now they can guarantee that anything provided to them will not be made accessible to a third party.

What happens at the moment, explains Hackett, is that the SEC is in the habit of promising a company that is under investigation that they will sign a confidentiality agreement with them and therefore not provide the information to third parties. So then the company moves forward with the SEC (or other government agency) and then the courts refuse to enforce the agreement.

‘The law basically says that if it is waived, it is waived. Once it is out you can’t put it back in the box,’ says Hackett.

What will happen if selective waiver becomes part of the rules of federal evidence is that if these kinds of agreements are signed then they will become enforceable by law and judges will not be able to choose to ignore the agreement signed with the government.

That is, according to many corporate lawyers, the problem, because it removes the option to waive to the government. Basically the company is thinking ‘I am not worried about providing it to third parties; I am worried about providing it to you. You are the adversary in the criminal process.’

There are a lot of times when companies may not wish to waive privilege for the government and it does not always mean they are trying to shield guilty executives or cover up other corporate wrongdoing. It is simply that they are preparing to defend against the charges. ‘It is very difficult to defend a charge if everything you do is handed over to the other side,’ cautions Hackett. ‘That is what the privilege is for – to encourage people to talk with a lawyer so they can mount a defense and people do have a right to a defense. If counsel is not confidential, it is pointless.’

The government is basically doing an end run around a person’s right to counsel because they can force general counsel and others to reveal what has been said. Corporate employees are aware of this and it is providing a huge disincentive to raising problems and concerns because they are worried about possible prosecution. Selective waiver does nothing to protect these people or to allay their fears.

An alternative way forward

Rather than support selective waiver the ACC and a coalition of other groups including the US Chamber of Commerce and the American Civil Liberties Union (ACLU) took another tack in backing legislation brought by Senator Arlen Specter entitled ‘The Attorney-Client Privilege Protection Act of 2007’ (S. 318) as a vehicle for change.

‘ACC will continue to endorse legislation introduced by Senator Specter as a means to more effectively address the erosion of the attorney-client privilege in the corporate context. If that legislation passes, then it will be possible for ACC to meaningfully discuss selective waiver options that encourage and protect truly voluntary company disclosures made to the government to cooperate with an investigation,’ says Frederick Krebs, president of ACCA.

One of the most compelling arguments for rolling back privilege to where it was pre-Thompson memo is that corporate crime was very well prosecuted before this situation was in place. Since that time the SEC and DoJ have and not done much better in terms of completing successful prosecutions so it should be very difficult for them to support the current situation, explains Hackett. In fact, according to several lawyers, the record of prosecutions was much better before these policies were in place. The main reason for this is that in the current environment people and corporations are very reticent to do or say anything and certainly do not wish to cooperate more than they need to.

Fredericksen agrees: ‘It is undeniable now that employees have got to be aware that what they say may not be protected and this is possibly limiting the ability of companies to conduct investigations and gain full  information.’

He does not, however, feel overly positive about the prospects of the Specter legislation. ‘Right now no one is predicting this is going to pass,’ Fredericksen says. That is not to say that he does not feel there is no possibility of change. ‘There is a lot of change that could be going on at the Department of Justice in the near future and that could determine to a great degree what kind of change in the interpretation of privilege waivers we will have,’ he continues. ‘This is something that is in flux right now. There is an overall movement from the private sector to rein in regulation and there is an opportunity that there may be additional change here, but it is hard to tell right now.’

‘Even though the proposed rules offer comfort to companies that have been forced to waive in a government investigation, they do not address the more basic concern: namely, why is the government coercing privilege waiver in the first place?’ says Krebs. ‘Coerced waiver is wrong; the privilege is the client’s right and not the government’s bargaining chip.’