To Disclose or Not to Disclose

The benefits of making timely disclosure to the government are often significant and may range from a reduced penalty in exchange for a plea, to a grant of immunity. The extent and importance of these benefits, however, often varies with the conduct at issue, the industry involved, and whether the client faces potential collateral consequences, such as debarment from government business. Because any information provided to the government may lose the protections of the attorney-client privilege and work product against third parties, it is important to consider potential consequences and theories of protection.

Selective Waiver: Opposing Positions

A corporation faced with a potential government request for the records of an internal investigation essentially has two choices: 1) disclose to the government in hopes of obtaining leniency, knowing that private civil litigants may be able to obtain the information, or 2) refuse to produce the privileged information to the government and risk harsher treatment. To open a third path, one federal circuit developed a doctrine now referred to as 'selective waiver.' Diversified Industries Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc), held that when a company discloses otherwise protected information to a government agency, the information is not subject to discovery by third parties, because the public benefits when corporations employ outside counsel to investigate possible wrongdoing and protect stockholders and consumers.

A few years later, the DC Circuit criticized Diversified Industries and held that the disclosure of materials protected by the attorney-client privilege to a government agency utterly destroys their confidential status. It said selective wavier does not serve the interests underlying the attorney-client privilege because the rationale for the privilege disappears when the client does not appear to value secrecy. Under this view, permitting selective waiver would allow a party to 'pick and choose' among its opponents, waiving the privilege for some and 'resurrecting' it for others. Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981).

While the Permian court saw voluntary cooperation with government investigations as a 'laudable' goal, it did not perceive how such cooperation could benefit the attorney-client relationship. The views expressed in Permian have subsequently been echoed by a number of other federal courts, including the Third Circuit, the Fourth Circuit and the Southern District of New York.

A Course Between Scylla and Charybdis?

Some businesses have tried disclosing confidential information to the government subject to the terms of an explicit confidentiality agreement ' usually one mandating that both parties will treat all information received as confidential and not obtained via a waiver of the attorney-client privilege or work product protection. The potential use of a confidentiality agreement was suggested in In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993), where the court declined to adopt a per se rule that all voluntary disclosures to the government waived work product protection.

Despite the apparent attractiveness of the confidentiality agreement, the protection provided by such documents is highly problematic. In an important decision, the Sixth Circuit recently declined to enforce or accept a confidentiality agreement. See In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002). In Columbia/HCA, the plaintiffs in a multi-district action moved to compel production of documents otherwise subject to the attorney-client privilege or work product protections that the defendant health services provider had previously furnished to the federal government. Columbia/HCA, the defendant, refused on the grounds that the information was produced under a strict confidentiality agreement with the Department of Justice.

The Sixth Circuit rejected Columbia/HCA's position as to both attorney-client privilege and work product. Observing that the attorney-client privilege was designed to protect only communications between a client and its own attorney, the court found encouraging voluntary disclosure to government agencies an insufficient rationale for the selective wavier doctrine. It warned that permitting selective waiver could transform attorney-client privilege into merely another means of obtaining a tactical or strategic advantage, and would not help attorneys prepare cases free from concern that their work product could be used against their clients. The court held for both the attorney-client privilege and work product doctrine that 'once the privilege is waived, [the] waiver is complete and final.'

Not all courts have treated identically the attorney-client privilege and the work product doctrine when ruling on a party's claim of selective waiver pursuant to a confidentiality agreement. In McKesson HBOC Inc. v. Adler, 562 S.E.2d 809 (Ga. Ct. App. 2002), a case cited by the SEC in urging disclosure through confidentiality agreements, the Georgia Court of Appeals affirmed the trial court's ruling that McKesson waived attorney-client privilege by providing investigative materials to the SEC, in part because McKesson anticipated disclosure to the SEC early in the investigation, and in part because attorney-client privilege is readily waived. Under the work product protection, however, disclosure to a non-adversary does not automatically result in waiver of the protection. Finding that McKesson presented some evidence of cooperation with the SEC and the possible existence of a 'common interest,' the appellate court remanded for further factual findings to determine whether the SEC was an 'adversary' under Georgia's work product doctrine.

Reasonable Expectation

At least one court has found that a confidentiality agreement executed prior to the sharing of otherwise privileged information provides the disclosing party with a reasonable expectation that the disclosures would not be obtainable by other adversaries. In an unpublished opinion, the Delaware Chancery court reviewed the tangled legal landscape of the selective waiver doctrine and determined that interests of public policy seem to favor allowing courts to protect the confidentiality of work product disclosed pursuant to a confidentiality agreement in order to encourage cooperation with law enforcement agencies. Saito v. McKesson HBOC, Inc., No. Civ. A 18553, 2002 WL 31657622 at *6 (Del. Ch. Nov. 13, 2002). The Saito opinion noted the inconsistency of denying selective wavier while expecting continued cooperation with the government, and suggested that adopting any other rule would likely lead to fewer instances of corporate cooperation with agencies. The court determined that when a party discloses pursuant to a confidentiality agreement, that party can reasonably assume that the information will not be disclosed to another adversary. According to Saito, it is not clear how disclosing protected materials to one adversary constitutes an unfair disadvantage to another. Furthermore, Saito directly addresses the argument that selective wavier is wrong because it permits litigants to 'pick and choose their adversaries' or to 'have their cake and eat it too.' First, a disclosing party is not having its cake and eating it too ' disclosure to a government agency does not absolve a corporation from liability for its acts. By cooperating, the corporation hopes to attain leniency, but at the cost of exposing past malfeasance with no guarantee of any benefit. Second, because selective waiver would benefit the public by encouraging more disclosure and resulting in more efficient operation of the government agency, private litigants are just as guilty of wanting the best of both worlds.

Making the Cost/Benefit Calculation

Despite Saito and McKesson, the current judicial trend rejects selective waiver. While it is wise to obtain a confidentiality agreement with the government agency whenever possible, the existence of such an agreement is no guarantee that the disclosed information will not become available to subsequent private litigants. Corporations wishing to minimize potential criminal liability by full cooperation must take into account the uncertain protection afforded by confidentiality agreements and the cost of potential private lawsuits.

Jonathan S. Feld is a partner in the Chicago office of Katten Muchin Zavis Rosenman, specializing in complex civil and criminal enforcement litigation. Jenny Johnson and BeLinda Mathie are associates in the firm's white-collar litigation practice group.

Recent corporate accounting scandals have brought to light disturbing revelations concerning the business practices of many American companies. New ' and more severe ' penalties for corporate fraud in the Sarbanes-Oxley Act of 2002 have caused companies to step up their internal efforts to detect and prevent wrongdoing.

Companies discovering possible unlawful activity frequently hire outside counsel to perform an internal investigation. The attorneys and their agents, such as accountants, interview key personnel and review business records. Investigators typically generate interview memoranda, chronologies, legal analyses, and summary reports. These investigative documents are shielded from disclosure to third parties by the attorney-client privilege and work product doctrines. See e.g., Better Government Bureau v. McGraw , 106 F.3d 582 (4th Cir. 1997). But see In re Grand Jury Subpoena Dated May 9, 2001, 179 F. Supp. 2d 270 (S.D.N.Y. 2001) (business advice and lobbying not protected).

Counsel must be able to guide companies not only through the process of conducting an internal investigation, but also the decision of what to do when that investigation reveals potentially criminal conduct. The most difficult question to answer will typically be: Should the corporation turn the materials over to the regulating government agency? This tough question is arising more often as prosecutors increasingly seek waivers of the corporate attorney-client privilege as a component of any negotiated settlement.

The benefits of making timely disclosure to the government are often significant and may range from a reduced penalty in exchange for a plea, to a grant of immunity. The extent and importance of these benefits, however, often varies with the conduct at issue, the industry involved, and whether the client faces potential collateral consequences, such as debarment from government business. Because any information provided to the government may lose the protections of the attorney-client privilege and work product against third parties, it is important to consider potential consequences and theories of protection.

Selective Waiver: Opposing Positions

A corporation faced with a potential government request for the records of an internal investigation essentially has two choices: 1) disclose to the government in hopes of obtaining leniency, knowing that private civil litigants may be able to obtain the information, or 2) refuse to produce the privileged information to the government and risk harsher treatment. To open a third path, one federal circuit developed a doctrine now referred to as 'selective waiver.' Diversified Industries Inc. v. Meredith , 572 F.2d 596 (8th Cir. 1978) ( en banc ), held that when a company discloses otherwise protected information to a government agency, the information is not subject to discovery by third parties, because the public benefits when corporations employ outside counsel to investigate possible wrongdoing and protect stockholders and consumers.

A few years later, the DC Circuit criticized Diversified Industries and held that the disclosure of materials protected by the attorney-client privilege to a government agency utterly destroys their confidential status. It said selective wavier does not serve the interests underlying the attorney-client privilege because the rationale for the privilege disappears when the client does not appear to value secrecy. Under this view, permitting selective waiver would allow a party to 'pick and choose' among its opponents, waiving the privilege for some and 'resurrecting' it for others. Permian Corp. v. United States , 665 F.2d 1214 (D.C. Cir. 1981).

While the Permian court saw voluntary cooperation with government investigations as a 'laudable' goal, it did not perceive how such cooperation could benefit the attorney-client relationship. The views expressed in Permian have subsequently been echoed by a number of other federal courts, including the Third Circuit, the Fourth Circuit and the Southern District of New York.

A Course Between Scylla and Charybdis?

Some businesses have tried disclosing confidential information to the government subject to the terms of an explicit confidentiality agreement ' usually one mandating that both parties will treat all information received as confidential and not obtained via a waiver of the attorney-client privilege or work product protection. The potential use of a confidentiality agreement was suggested in In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993), where the court declined to adopt a per se rule that all voluntary disclosures to the government waived work product protection.

Despite the apparent attractiveness of the confidentiality agreement, the protection provided by such documents is highly problematic. In an important decision, the Sixth Circuit recently declined to enforce or accept a confidentiality agreement. See In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002). In Columbia/HCA, the plaintiffs in a multi-district action moved to compel production of documents otherwise subject to the attorney-client privilege or work product protections that the defendant health services provider had previously furnished to the federal government. Columbia/HCA, the defendant, refused on the grounds that the information was produced under a strict confidentiality agreement with the Department of Justice.

The Sixth Circuit rejected Columbia/HCA's position as to both attorney-client privilege and work product. Observing that the attorney-client privilege was designed to protect only communications between a client and its own attorney, the court found encouraging voluntary disclosure to government agencies an insufficient rationale for the selective wavier doctrine. It warned that permitting selective waiver could transform attorney-client privilege into merely another means of obtaining a tactical or strategic advantage, and would not help attorneys prepare cases free from concern that their work product could be used against their clients. The court held for both the attorney-client privilege and work product doctrine that 'once the privilege is waived, [the] waiver is complete and final.'

Not all courts have treated identically the attorney-client privilege and the work product doctrine when ruling on a party's claim of selective waiver pursuant to a confidentiality agreement. In McKesson HBOC Inc. v. Adler , 562 S.E.2d 809 (Ga. Ct. App. 2002), a case cited by the SEC in urging disclosure through confidentiality agreements, the Georgia Court of Appeals affirmed the trial court's ruling that McKesson waived attorney-client privilege by providing investigative materials to the SEC, in part because McKesson anticipated disclosure to the SEC early in the investigation, and in part because attorney-client privilege is readily waived. Under the work product protection, however, disclosure to a non-adversary does not automatically result in waiver of the protection. Finding that McKesson presented some evidence of cooperation with the SEC and the possible existence of a 'common interest,' the appellate court remanded for further factual findings to determine whether the SEC was an 'adversary' under Georgia's work product doctrine.

Reasonable Expectation

At least one court has found that a confidentiality agreement executed prior to the sharing of otherwise privileged information provides the disclosing party with a reasonable expectation that the disclosures would not be obtainable by other adversaries. In an unpublished opinion, the Delaware Chancery court reviewed the tangled legal landscape of the selective waiver doctrine and determined that interests of public policy seem to favor allowing courts to protect the confidentiality of work product disclosed pursuant to a confidentiality agreement in order to encourage cooperation with law enforcement agencies. Saito v. McKesson HBOC, Inc., No. Civ. A 18553, 2002 WL 31657622 at *6 (Del. Ch. Nov. 13, 2002). The Saito opinion noted the inconsistency of denying selective wavier while expecting continued cooperation with the government, and suggested that adopting any other rule would likely lead to fewer instances of corporate cooperation with agencies. The court determined that when a party discloses pursuant to a confidentiality agreement, that party can reasonably assume that the information will not be disclosed to another adversary. According to Saito, it is not clear how disclosing protected materials to one adversary constitutes an unfair disadvantage to another. Furthermore, Saito directly addresses the argument that selective wavier is wrong because it permits litigants to 'pick and choose their adversaries' or to 'have their cake and eat it too.' First, a disclosing party is not having its cake and eating it too ' disclosure to a government agency does not absolve a corporation from liability for its acts. By cooperating, the corporation hopes to attain leniency, but at the cost of exposing past malfeasance with no guarantee of any benefit. Second, because selective waiver would benefit the public by encouraging more disclosure and resulting in more efficient operation of the government agency, private litigants are just as guilty of wanting the best of both worlds.

Making the Cost/Benefit Calculation

Despite Saito and McKesson, the current judicial trend rejects selective waiver. While it is wise to obtain a confidentiality agreement with the government agency whenever possible, the existence of such an agreement is no guarantee that the disclosed information will not become available to subsequent private litigants. Corporations wishing to minimize potential criminal liability by full cooperation must take into account the uncertain protection afforded by confidentiality agreements and the cost of potential private lawsuits.

Jonathan S. Feld is a partner in the Chicago office of Katten Muchin Zavis Rosenman, specializing in complex civil and criminal enforcement litigation. Jenny Johnson and BeLinda Mathie are associates in the firm's white-collar litigation practice group.