The Erosion of the Attorney-Client Privilege and Work Product Doctrine in Civil and Criminal Investigations
By By Marc D. Powers

Over the past decade there has been an increasing willingness on the part of corporate clients subject to criminal and civil regulatory investigations and proceedings to offer — or acquiesce to the explicit or implicit request of the investigating tribunal — to waive the client’s attorney-client privilege and work product. This has been as a result of guidance from criminal and civil authorities since 1999 that waiver of the privileges may militate in favor of not charging or suing the client, or cause reduction in the civil penalties or criminal sentences. In some instances, waiver has been necessary and helpful to the government in the search for the truth and the expeditious administration of justice. However, it has also brought about an erosion of the attorney-client privilege and work product doctrine in several deleterious or unintended ways.

First, it put the privileges “in play” by the government even raising them as being available for waiver. Before these government pronouncements, a client would not be affirmatively penalized and deemed uncooperative if it asserted privileges. Now, there is an in terrorem effect by its presence.

Second, some counsel believe that in fulfilling his professional obligations to the client he must now offer, even when not requested, to waive the client’s privileges in the hope of obtaining credit for the client’s cooperation, which could potentially reduce or eliminate charges against the client. This perhaps unnecessary, gratuitous waiver will, in the long term, undermine the confidence of clients in the confidentiality of their communications with their attorneys. It will also have a “chilling effect” upon the quality of the candor of those communications.

Third, the current heightened prosecutorial environment has brought about a marked increase in the likelihood of concurrent criminal and civil investigations of many clients. Thus, whenever these parallel proceedings exist, the criminal guidelines on waiver issues trump any views of the other civil agencies. In effect, the statements by the Deputy Attorney Generals (starting with Eric H. Holder, Jr.) and until very recently, the United States Sentencing Guidelines as amended in 2004, make waiver the rule, not the exception, because it requires responsible counsel to advise clients on the merits of waiver. Twenty years ago, no such discussion was necessary or occurred.

In the past two years, there has been a groundswell and grass-roots movement by various business, public interest, civic and bar groups that are now challenging and asking governmental authorities to reconsider its current guidance on waiver. They are requesting an expressed statement in the guidelines that waiver of the attorney-client and work product privileges is not to be requested, implicitly or explicitly, or considered in evaluating the level of cooperation of the defendant and its penalties or sentencing. Further, to have a prophylactic effect, the new guidance would state that a defendant that waives the privileges would not be entitled to any benefit in charges, penalties, or sentencing.¹

Creating a Culture of Waiver

The first formal written suggestion that a corporation seeking to avoid criminal prosecution and demonstrate cooperation waive the attorney-client privilege and work product protections arose in a June 1999 Department of Justice memorandum prepared by Deputy Attorney General Holder. That document, entitled “Bringing Criminal Charges against Corporations,” outlined the factors for a prosecutor to consider in charging a target. One such factor was the target’s degree of cooperation in the criminal investigation. In gauging the extent of cooperation, the prosecutor was to consider the corporation’s willingness to identify the culprits, to make witnesses available, to disclose the results of its internal investigation, and to waive the attorney-client privilege and work product doctrine.

In discussing the basis for seeking waiver, the Holder Memorandum noted the advantages of obtaining the results of the corporation’s internal investigation and communications between specific employees and counsel. This permits the government to obtain witness statements without having to negotiate individual cooperation or immunity agreements. In addition, it enables the government to evaluate the completeness of a corporation’s voluntary disclosure and cooperation.

On its heels in October 2001 was the SEC 21(a) Report entitled the “Statement on the Relationship of Cooperation to Agency Enforcement Decisions.” In the commonly referred to Seaboard Report, the SEC announced that no action was being taken against a corporation for fraudulent activities taken by a former controller of a subsidiary. In making this determination, the SEC stated that the corporation cooperated in the SEC’s investigation and waived its attorney-client privilege and work product protection. The Report sets forth a number of criteria it will consider in determining whether and how much to credit cooperation, including the following: “Did the company voluntarily disclose information our staff did not directly request and otherwise might not have uncovered?” By so stating, the SEC was, perhaps inadvertently, encouraging companies to consider waiving privileges they otherwise might have, even when not requested by the SEC staff.

The Holder Memorandum was followed in 2003 by a Memorandum from then Deputy Attorney General Larry D. Thompson to the heads of Department Components and United States Attorneys. Thompson reiterated the statements from the Holder Memorandum about the advantages of seeking waiver and that DOJ did not consider waiver of the corporation’s attorney-client privilege and work product protection an “absolute requirement.” It further restated that the willingness of a corporation to waive the protection “when necessary to provide timely and complete information” is one factor to consider in evaluating a corporation’s cooperation.

It is submitted that the degree to which corporate clients in particular have been waiving their privileges has accelerated over the last several years and since November 2004 when the United States Sentencing Commission added language to Section 8C2.5 of the Guidelines. These Guidelines have encouraged prosecutors to request criminal targets, but more importantly and likely criminal defendants, to offer to waive their privileges in the hope of a lesser Guidelines culpability score. However, it is noteworthy that the Sentencing Commission has recently reconsidered its position based on comments and pressure from various organizations. On April 6, 2006, the Sentencing Commission voted unanimously to delete the following language from the 2004 amendment, which had closely tracked the language of the Holder/Thompson memoranda:

“Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score under subdivisions (1) and (2) of subsection (g) unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.”

The obvious problem with the 2004 amendment was that the language is too broad and vague, and thus subject to wide interpretation. It leaves too much discretion to individual prosecuting offices to determine when waiver is “necessary…to provide timely and thorough disclosure….” Further, any policy, no matter how well intentioned, that continues to institutionalize the waiver of the privileges, is objectionable. Thus, the Sentencing Commission’s decision to delete the language is wise and encouraging indeed.

There is also other, somewhat encouraging news. In an attempt to address the concerns of numerous legal and business groups about the regularity with which the privileges are being waived either voluntarily or upon request from government civil and criminal prosecutors, DOJ issued a memorandum seeking to standardize and control when waiver was appropriate. In a memorandum from Acting Deputy Attorney General Robert D. McCallum, Jr., each federal office was directed to establish “a written waiver review process.” While one might argue that this is a useful first step, it seems eight months later that several offices still have no meaningful process in place.

In January 2006, the SEC issued a “Statement Concerning Financial Penalties,” listing factors it will consider in deciding whether and how to impose corporate financial penalties. The two principal considerations are the presence or absence of a direct benefit to the corporation from the violation and the degree to which a financial penalty will recompense or further harm the injured shareholders. In addition, the SEC identifies several other factors, including the extent of cooperation with the Commission and other law enforcement. Thus, to both avoid civil SEC charges against a corporation and substantial monetary penalties, a corporation is encouraged to cooperate by, among other things, waiving its attorney-client and work product privileges.

The foregoing pronouncements by the Department of Justice, SEC and other federal and state agencies have brought about a sea-change in how corporate counsel advises his clients when they are faced with possible prosecution. While one could argue that the increased corporate fraud culture over the past ten years has brought this about, that neither justifies it nor merits its continuation. The attorney-client privilege and work product doctrine have been embedded in our common law for centuries and are predicated upon jurisprudence which recognizes the sanctity of the confidentiality of the communications between client and counsel. The only way to reverse this insipience is to affirmatively amend the government pronouncements as proposed herein and urged by various bar, public interest and business groups.

The Privilege in our Society

For centuries in our English and American law, the attorney-client privilege has been firmly grounded in the recognition that a client’s opportunity to consult with counsel, in confidence, serves the public interest.² Our Federal Rules of Civil Procedure and Rules of Evidence recognize the absolute importance of the privilege in preventing its disclosure.³ Except in limited circumstances,⁴ absent a knowing and voluntary waiver by the client, no third party, or government authority, can learn the contents of the communications. This is because society believes we all are best served when lawyers are able to provide their clients with dispassionate legal advice based on a full understanding of the relevant facts. If the client believes that those communications may be available to others, down the road, against his wishes or because it is coerced to do so, there is a possibility that the client may be less than candid. The lawyer may also shade or become equivocal in his advice, realizing it may be subject to second guessing later by others in litigation or overzealous government prosecutors seeking to criminally charge attorneys for purported wrongdoing.

While, in some circumstances, protecting communications between lawyer and client may in an objective sense hinder the search for truth, society has made a judgment that this “impairment is outweighed by the social and moral values of confidential consultations. The attorney-client privilege provides a zone of privacy within which a client may more effectively exercise the full autonomy that the law and legal institutions allow.” ⁵ The attorney-client privilege is said to be the most ancient of evidentiary privileges. In the words of Dean John Wigmore, “the privilege appears as unquestioned . . . . It is therefore the oldest of the privileges for confidential communications.” ⁶

The privilege benefits society because it helps create the trust that must exist between a client and an attorney in order to encourage open and full discussion with counsel. Not only is this necessary in order to promote the development of an informed defense, but the reliance on the privilege encourages open communication with counsel that can lead to advice to avoid conduct that the client might have otherwise undertaken in possible violation of the law.

Our laws are complex, particularly in the financial, health and securities fields. To effectively assist corporations to comply with the myriad of laws, rules and regulations and counsel it to be a “good corporate citizen” is not easy. If the corporate client, comprised of individuals for whom personally the privilege does not attach to their communications,⁷ there is the real risk that, over time, the corporation’s officers and employees will be less willing to seek out legal advice. Or worse, they may fail to disclose all the relevant facts for fear that their statements may at a later day be made available to the SEC or criminal prosecutors. This possibility has been recognized by the United States Supreme Court in Upjohn Co. v. United States,⁸ where the Court stated that failure to respect the privilege of these communications “threatens to limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.”

This chilling effect upon the quality of the communication is harmful to society overall, and is a deleterious and unintended effect of the various governmental pronouncements. It can not be the goal of the DOJ, the SEC or the Sentencing Commission to discourage compliance with the law, or the truthful factual communications with corporate counsel to seek out legal advice for compliance.

Assuming we in society all share the common goal of having clients fully and truthfully communicate with counsel so that they may be guided in their dealings and complying with law, there needs to be an absolute assurance to the clients and attorneys of the confidentiality of the communications. Unfortunately, this is no longer the case, in large measure because of the Holder/Thompson memoranda and SEC Seaboard Report.

The Normalcy of Waiver

In the corporate context, when a corporation learns of wrongdoing, in most instances it engages counsel to ferret out the facts of what occurred, analyze the effect of the findings to the law, and advise the corporation. As part of this process and investigation, which may or may not be known to government authorities at the time, counsel will interview company employees, review and analyze documents and render advice to the client about what to do to stop and correct any wrongful conduct. Counsel will also advise on whether any laws have been violated, whether the violations are civil or criminal, whether the corporation needs to or should disclose the findings and conclusions, and the degree to which the inevitable follow-on plaintiff’s litigation will be successful.

At some point, civil and criminal investigators get involved, and in this current environment, the issue of waiver often presents itself. The waiver issue has at least two forms. There are the communications with the agents of the corporation that is covered by the attorney-client privilege. In addition, there are the oral and/or written investigative findings by the counsel covered by the work product doctrine, which usually also contain privileged communications. This was unheard of a generation ago, and rarely considered and explored even ten years ago.⁹

A further consideration is selectively providing the privileged materials to the government solely, but not the class action plaintiffs in litigation. There is a body of law that is adopted by the majority of the federal circuits which states that if a client waives the attorney-client privilege or work product protections, the privilege is waived for at least those same communications and materials for all purposes and all others.¹⁰ Accordingly, advising a client to waive the privileges so it can cooperate with the DOJ and the SEC to obtain a benefit is a challenging task. Simply by including the language in the governmental pronouncements, the waiver issue is “in play.” Even while stated in the negative, (that waiver should not be a prerequisite to a reduction in culpability score) and providing an exception, the exception unfortunately has become the rule.

It is not so much that DOJ, SEC and other regulators now regularly request a waiver, although a recent ABA survey suggests that the practice is prevalent.¹¹ It is that the pronouncements themselves about waiver, by simply being in the memoranda on cooperation, encourage counsel and clients to voluntarily waive the privileges. It has an in terrorem effect on counsel and their clients who want to cooperate with authorities.

It is understood that the DOJ and the SEC pronouncements on cooperation list numerous factors, only one of which is waiver. Moreover, there are times when the government, in the interests of justice and the search for the truth, may ask for it and, indeed, demand it. Sometimes, too, targets hide behind the privilege, either improperly or by an over expansive interpretation of its parameters. However, there is no empirical study known to this author which proves that law enforcement today is any more effective than, say 20 or 40 years ago—when waiver of the privileges was never done or considered.

The demise of Enron, Adelphia and WorldCom demonstrate that there was a corporate culture of tolerance and greed unparalleled in the last 70 or more years that allowed rampant fraud and looting of corporate treasuries. It has produced a more diligent and aggressive enforcement program for criminal authorities and civil regulators alike. Now, more than any other time, there is a coordination of activities by these prosecutors and regulators, and parallel investigations and proceedings. This development is expected. The value and need for such programs can not be understated.

The parallel investigations, though, present difficult choices for clients and counsel. Each agency and authority has its own view and guidelines on whether cooperation is expected by a client, how to gauge that cooperation, and whether waiver of the privileges is a factor considered for cooperation and resolution of the matter. For example, the SEC will consider waiver as a factor of cooperation, but agree in writing that disclosures of privileged communications and work product is only selective and not deemed a general waiver as to others. The CFTC has on occasion demanded waiver of privileged communications immediately at the commencement of an investigation, and has refused to give any written comfort that the waiver would be deemed limited. The DOJ memoranda and current Sentencing Guidelines (until further amended with finality later this year) parameters, however, trump any nuances of these civil regulators when there are parallel investigations. This is an unfortunate result for the sanctity of the privileges, and thus requires modification of the DOJ guidelines.

Certainly, when there is a criminal investigation, the bar of liability of an individual and corporate client rises dramatically. There may be many instances where an attorney may counsel a client not to waive the privilege for a civil regulator. However, with the DOJ memoranda and the possibility of criminal charges and sentencing, there is an overriding—almost compulsive—-urge to waive. This should not be so, and has caused an unnecessary erosion of the attorney-client privilege and work product doctrine.

Effects to Protect the Privilege

Many different groups and organizations have been alarmed by the changes in governmental practices and waiver erosion occurring since the 1999 Holder Memorandum, and they have organized and started to speak out and react in different ways.

One of the first and largest to do so was the American Bar Association, which in August 2004 adopted a resolution opposing the then new 2004 Sentencing Commission Guidelines, which allowed for waiver in the context of determining cooperation and reduced sentencing. Also at that time, the ABA created a Presidential Task Force on the Attorney-Client Privilege to study the problem and consider solutions. Since then the Task Force held hearings in 2005 and at its August 2005 annual meeting, and the House of Delegates formally adopted a resolution opposing governmental policies and practices that encourage waiver of the attorney-client privilege or work product doctrine.

In late 2005 and early 2006, the ABA worked with a broad coalition of business and legal organizations as diverse as the Chamber of Commerce, Association of Corporate Counsel and the American Civil Liberties Union in conducting a survey of over 1200 corporate counsel in determining the extent of the “culture of waiver” that had evolved over the past five years. The results showed the significant prevalence of waiver to governmental authorities.

In March 2006, the House Judiciary Subcommittee on Crime, Terrorism, and Homeland Security held a hearing on the privilege waiver issue. Various business and legal organizations appeared along with the Justice Department. Members of the Subcommittee reportedly expressed strong support for the preservation of the privilege and concerns for the DOJ Memoranda and Sentencing Commission Guidelines on waiver policy.

Perhaps as a result of the House hearing or subsequent comment letters sent by not only coalition groups and the ABA, but State bar task forces that have been created within the last six months to join the ABA and address the waiver of privilege issues, the Sentencing Commission on April 5, 2006, voted unanimously to remove the privilege waiver language that it previously added to the Guidelines in 2004. Assuming Congress takes no further action, the new 2006 Guidelines, without reference to waiver, will become effective November 1, 2006.

On May 2, 2006, the President of the ABA wrote to United States Attorney General Alberto Gonzales, asking him to adopt specific proposed language, prepared by the Task Force, to amend and supplement the Thompson Memorandum in assessing whether an organizational entity has been cooperative. No consideration or credit is to be given if waiver of the attorney-client or work product privilege has occurred.¹²

Presently, the ABA Task Force is considering additional issues and ways to cause change in the government and at the DOJ. In addition, it is considering other related issues to its charge, such as those ways the privilege waiver policies and practices are affecting the individual rights of the corporation’s officers and employees and how auditors and public companies should address these issues. These and other proposals give reason for hope that the manner and practice of governmental intrusion on the privilege is being constructively reconsidered and repulsed.

Conclusion

The attorney-client privilege has served our legal system in the United States from its inception by protecting confidentiality and thus promoting the candor that results in accurate fact-finding and effective legal advice. The Holder Memorandum and its progeny have operated to abrogate this ancient privilege to the detriment of the legal system and the society it serves. The exceptions for waiving the privileges have become the norm.

The Sentencing Commission should be applauded for its recent decision to eliminate the 2004 amendment language that encouraged a potential defendant to waive the attorney-client privilege and work product protections to obtain a reduction of points under the guidelines. Now, the DOJ, the SEC and other regulatory authorities should reconsider their positions and provide in their pronouncements an explicit statement that waiver of the attorney-client and work product protections is not to be requested, implicitly or explicitly. Nor is it to be considered in evaluating the level of cooperation of the defendant and its potential civil and criminal liability and penalties. Further, to discourage erosion of the privileges, the new guideline should state that a defendant that waives the privileges shall not be entitled to any benefit from doing so. Until these positions change, counsel for corporate clients should resist advising waiver of the privileges except only in the most necessary and appropriate of circumstances.

Notes

1. Portions of this article are contained in a March 27, 2006 Report of the Task Force on Attorney-Client Privilege of the New York State Bar Association submitted to the United States Sentencing Commission. The Commission had sought comment on certain 2004 amendments to the Sentencing Guidelines which had statements about waiver of the privilege in the context of cooperation and sentencing of corporate defendants. The author is a member of the NYS Bar Task Force and a member of a parallel American Bar Association Task Force, and was one of the principal drafters of the Report. He is also a former Enforcement Branch Chief at the SEC.

2. See, e.g., WIGMORE, supra note 12, §2291, at 545-49.

3. See Fed. R. Civ. P. 26(b) (1) and Fed. R. Evid. 502.

4. Such as when the client puts the privileged communication in issue in an investigation or litigation, or where the communications fall within the crime-fraud exception to the rule.

5. American Law Institute, Restatement of the Law Governing Lawyers, § 68. c, at 520 (2000).

6. J. WIGMORE, EVIDENCE IN TRIALS AT COMMON LAW at 542 (McNaughton rev. 1961).

7. It is well established that when an attorney speaks to agents of a corporation, such as officers, directors and employees, the privilege belongs solely to the corporation, not the individuals. While all these communications with counsel, from low level employees to senior officers, are considered privileged communications under the attorney-client privilege and work product doctrine, as stated in the leading Supreme Court case, Upjohn Co. v. United States, 449 U.S. 383 (1981), it is the corporation, alone, that can determine to waive the privilege and work product protections.

8. Upjohn, 449 U.S. 383 (1981).

9. One of those rare occurrences was a high profile securities fraud case involving a trader called Joe Jett at Kidder Peabody. In that matter, the corporation voluntarily abandoned the privileges and provided the government the fruits of its investigation. The allegations were that improper phantom profits of over $300 million were created by Jett for GE’s newly acquired subsidiary, Kidder. The internal investigation was conducted in the mid-1990s by the former Director of Enforcement at the SEC, who turned over the results of his investigation to the United States Attorney’s office and the SEC.

10. See, e.g., In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002); In Re Syncor Erisa Litigation, No. CV03-2446-RGKRCX, 2005 WL 1661875 (C.D. Cal. July 6, 2005); In re Natural Gas Commodity Litigation, No. 03 Civ. 6186VMAJP, 2005 WL 1457666 (S.D.N.Y. June 21, 2005).

11. A March 2006 Survey Report by a coalition of organizations, aided by the ABA, had the following findings. About 75% of outside counsel has had to consider the issue of waiver for a client during the last five years, and approximately 50% of in-house counsel has had to do so. Over 50% of both groups confirmed that they believed there has been a marked increase in waiver requests by prosecutors, and 55% of outside counsel who have represented clients in investigations said that prosecutors had requested waiver, directly or indirectly, as part of cooperation. A Decline of the Attorney-client Privilege in the Corporate Context is available at http://www.acca.com/Surveys/attyclient2.pdf

12. The text of the letter from Michael S. Greco, President of the ABA, dated May 2, 2006, to the Honorable Alberto Gonzales, Attorney General, and proposed language for the amendment, can be found at http://www.abanet.org.

About the Author

Marc D. Powers (mpowers@bakerlaw.com) is a partner in the New York office of Baker Hostetler and leads the firm’s national Securities Litigation & Regulatory Enforcement Practice.