Case Serves As Reminder On Attorney-Client Privilege

Arecent ruling by a federal appeals court provides a pointed reminder to companies that they need to be careful when conducting investigations to ensure that they don’t give up the flexibility to fully cooperate with regulators and prosecutors.

Although it has become commonplace for companies to agree to cooperate with government investigators, that pledge can be undermined if an employee of the company has the ability to assert an attorney-client privilege that prevents certain information from being turned over.

Savarese

Companies can retain control over the attorney-client privilege if they issue proper warnings to employees during the course of a corporate investigation, notes John Savarese, a partner with Wachtell, Lipton, Rosen & Katz in New York.

“The lesson of the case is that corporate investigators must clearly warn employees that, while an interview is privileged, that privilege belongs solely to the company and can only be waived by the company,” says Savarese. “It is also important that lawyers who are conducting such employee interviews make it clear that they are seeking information from the employee that is needed to provide legal advice to the company, not to the employee.”

Investigating attorneys “should remind employees to keep the substance of the interview confidential in order to assist in protecting and preserving the company’s privilege,” says Savarese, who notes these precautions should allow companies “to retain control over the attorney-client privilege during an investigation and have the flexibility to decide at a later time if it is in the company’s best interests to waive the privilege by sharing information with government investigators or regulators.”

AOL Time Warner Investigation

The recent federal case, which was before the 4th Circuit Court of Appeals in Richmond, Va., involved AOL Time Warner’s internal investigation into its relationship with a company called PurchasePro.

As part of the investigation, attorneys for AOL interviewed Kent Wakeford, a manager in the company’s business affairs division, on several occasions. AOL lawyers warned Wakeford that they represented the company. “These conversations are privileged, but the privilege belongs to the company and the company decides whether to waive it,” the lawyers told Wakeford. At one meeting, the AOL lawyers explained to Wakeford that they represented AOL but that they “could” represent him as well, “as long as no conflict [arose].”

Similar warnings were issued to two other employees who were interviewed as part of AOL’s PurchasePro investigation. The court referred to those employees as John Doe 1 and John Doe 2 because, unlike Wakeford, they had not been indicted.

In November 2001, the Securities and Exchange Commission began its own investigation of AOL’s relationship with PurchasePro. Wakeford subsequently testified before the SEC, represented by his personal counsel.

At the hearing, SEC investigators questioned Wakeford about his discussions with AOL’s attorneys and Wakeford’s lawyer asserted the attorney-client privilege. John Doe 1 also testified before the SEC and refused to answer questions about AOL’s investigation, citing the attorney-client privilege.

In February 2004, a federal grand jury issued a subpoena directing AOL to provide "written memoranda and other written records reflecting interviews” conducted by AOL attorneys with Wakeford and the two John Doe employees. AOL agreed to waive the attorney-client privilege and produce the subpoenaed documents, but Wakeford and the two other AOL employees moved to quash the subpoena citing their individual attorney-client privileges.

Company Didn’t Give Up Control

The 4th Circuit agreed with the government that the individual employees could not prevent the disclosure of the information by AOL’s attorneys because AOL had not given up control of the attorney-client privilege.

“There is no evidence of an objectively reasonable, mutual understanding that the [employees] were seeking legal advice from the investigating attorneys or that the investigating attorneys were rendering personal legal advice,” the court said.

The fact that AOL’s lawyers may have said that they “could” possibly represent the individual employees, if no conflicts arose, did not change the situation, the court stated, noting that the phrase “we can represent you”—which the AOL lawyers used—is distinct from “we do represent you.”

Although AOL retained control in this instance, the court noted that the warnings given by AOL’s attorneys in this case were not necessarily ideal.

“[This] is a potential legal and ethical mine field,” the court said. “Had the investigating attorneys, in fact, entered into an attorney-client relationship with [the employees], as their statements … professed they could, they would not have been free to waive the [employees’] privilege when a conflict arose. It should have seemed obvious that they could not have jettisoned one client in favor of another. Rather, they would have had to withdraw from all representation and to maintain all confidences. Indeed, the court would be hard pressed to identify how investigating counsel could robustly investigate and report to management or the board of directors of a publicly-traded corporation with the necessary candor if counsel were constrained by ethical obligations to individual employees.”

Authorities May Not Be ‘Overly Sympathetic’

Taylor

David Taylor, a partner with the law firm Perkins Coie in Seattle, tells Compliance Week that the AOL case involved a situation that is “common in the sense that, in every internal investigation, you are going to interview witnesses that likely [may have] engaged in misconduct and will have an incentive to try to keep communications with you away from the government.”

In such a situation, it is crucial to “make clear to the witnesses who it is that you represent,” he says. “Typically you are going to represent just the company.”

Although there may be circumstances in which an investigating lawyer may represent the company and individual employees, that could create problems, Taylor notes. “Anytime you introduce some ambiguity as to whether you represent the witness, you take a certain amount of risk. Statements [can] sometimes introduce ambiguity if you’re not especially careful.”

Companies need to be “free to use the information [from an investigation] in any way they think is necessary to serve the company’s interest,” says Taylor. “That may include waving the privilege and producing the results of a privileged investigation.”

While prosecutors and the SEC may be “understanding” that issues of privilege need to be worked out, “they would probably not be overly sympathetic to a company that found itself unwilling or unable to waive [the privilege with respect to] those types of communications,” he notes.