The Perils of Confidentiality Agreements

The confidentiality agreement traces its origins to the now well-established 'joint defense privilege.' According to this doctrine, communications made between separately represented parties with a mutual and common interest do not waive their respective attorney-client privileges. See Hunydee v. United States, 355 F.2d 183, 185 (9th Cir. 1965). Traditionally, this 'common interest' privilege arises among cooperating plaintiffs or defendants in civil litigation or, even more likely, between actual or potential criminal defendants.

The idea that there can be a 'common interest' between government investigators and private parties initially surfaced in circumstances where the government obtained information from competitors of the government's target. 'So long as the [government and MCI, the cooperating party] anticipate litigation against a common adversary on the same issue ' they have strong common interests ' ' United States v. AT&T, 642 F.2d 1285, 1289 (D.C. Cir. 1980). Dicta in later cases seemed to suggest, without detailed explanation, that in order to preserve 'common interests' with the government, a written agreement is required. In re Steinhardt Partners L.P., 9 F.3d 230, 236 (2d Cir. 1993). Thus, apparently, was the government confidentiality agreement born.

Terms of the Agreement

In order to make a compelling case for protection from disclosure, the agreement requires several key terms. First, the agreement should establish that the corporation has a 'common interest' with the government agency to which it is disclosing. This provision usually takes the form of a desire by both parties 'to learn all the facts.' Second, the agreement should specify that it applies only to clearly privileged materials, such as counsel's investigative report to the company or witness interviews conducted for a report. Any attempt to shield general business documents would undermine the argument against waiver. The agreement may also seek a promise that the government will maintain the privileged material it is about to receive in strict confidence, as well as assurances that the government itself will not later assert that such disclosure is a waiver of privilege. If possible, the agreement should also state that the company is not a 'target' of the investigation, even if only 'at this time.' It is helpful if the government agrees that the disclosure is 'valuable' and will 'save government resources and manpower.'

For its part, the government may insist on some right to use the information provided in later criminal, civil and regulatory proceedings. (Without this term, the information would be useless to the government's law enforcement authority.) The government may also insist upon reserving the right to prosecute the company, notwithstanding its full cooperation, because at this stage it is far too early to make informed judgments about culpability and non-prosecution. These provisions may compromise the company's ability to avoid waiver of its privilege or work product protection. Corporate and outside counsel should agree to such terms only after carefully determining that the benefits outweigh the risks.

The Risks

The confidentiality agreement rests on shaky ground. Ordinarily, when privileged material is voluntarily produced, the privilege is waived. Weil v. Investment Indicators/Research & Management, Inc., 647 F.2d 18, 24 (9th Cir. 1981). This is, of course, precisely what occurs when the company discloses its privileged documents to the government. Indeed, one court has even concluded that materials created and produced after the confidentiality agreement is signed do not even qualify as privileged information because they were not created with any expectation of confidentiality. U.S. v. Bergonzi, Crim # 00-0505 MJJ, (N.D. Cal., Jan. 10, 2003). Likewise, the voluntary disclosure of attorney work product to a current or potential adversary normally effects a waiver. In Re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002). Because the government investigating possible wrongdoing is the company's quintessential adversary, courts in most federal circuits have found such disclosures to be work-product waivers. U.S. v. Massachusetts Institute of Technology, 129 F.3d 681, 685-86 (1st Cir. 1997).

Moreover, when the government files criminal charges against any of the individuals identified in the disclosures, the confidentiality agreement cannot prevent criminal defendants from obtaining at least some of the data, as they are constitutionally entitled to certain material under Brady v. Maryland or pursuant to federal criminal discovery rules. See U.S. v. Bergonzi, supra. See also, United States v. Sudikoff, 36 F. Supp.2d 1196, 1205 (C.D. Cal. 1999). This is especially true in situations where the corporation has agreed in advance that the government may use the disclosed information in law enforcement activities.

Common Interests

In an effort to overcome these legal obstacles, counsel for disclosing corporations have sought to protect the material from further disclosure by establishing that the company and the government did, in fact, have a 'common interest,' and so were entitled to share information without a waiver. The common ground asserted is that both parties are seeking to identify violations of law, as well as to find violations of fiduciary duties or similar obligations to the company. See In Re Mortgage & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal 1997). Companies point to the government's acknowledgment in the confidentiality agreement of their mutual interests, as well as to the benefits reaped by the government as a result of these disclosures. The confidentiality agreement itself is portrayed as clear evidence of the company's desire and intent to maintain its privilege in the face of disclosure. Id. Moreover, the company may try to demonstrate that the investigation is focused on errant employees, rather than on the company itself. Cooper Hospital/University Medical Cntr. v. Sullivan, 183 F.R.D. 119 (D.N.J. 1998). This analysis becomes more complicated, of course, where the company itself is the target of the government's investigation.

Most courts have rejected these 'common interest' arguments. The basic premise for sharing information is that the two parties are allied in the pursuit of litigation or a transaction, U.S. v. MIT, 129 F.3d at 685-6. But the government and the company will never share the 'common goal' of prosecuting the company; in fact prosecution is exactly what the corporation hopes to avoid. This is especially true in agreements that specifically preserve the right of the government to prosecute the company. U.S. v. Bergonzi, supra. Under basic laws of corporate criminal responsibility, even the acts of a few 'errant' employees can form the basis for corporate liability, so the company remains exposed. New York Central & H.R.R. Co. v. United States, 212 U.S. 481, 493 (1909). The bottom line is that a mutual desire to 'learn the truth' simply is too tenuous an interest to prevent waiver. Indeed, courts often explain that if a 'common interest' could be established by a desire to find the 'truth,' then virtually everyone, including adversaries, would arguably have 'common interests.'

The Public Policy Argument

The argument that has provided some limited success for disclosing corporations is 'selective disclosure,' premised on a public-policy rationale. This exception to the common-law rules of waiver is based on a desire to encourage companies to investigate and disclose unlawful activity. The public's interests are vindicated and its resources preserved, while the company protects itself from damage suits. The Eighth Circuit was among the first courts to adopt this view. Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 610 (8th Cir. 1978). Most recently, a Chancery Court in Delaware accepted similar arguments and refused to find that disclosure to the SEC waived the corporate privilege. Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del Ch. November 13, 2002). The majority of federal circuit courts considering whether to recognize a public-policy exception to the waiver laws have declined to do so. They have noted that many companies voluntarily disclose to the government despite waiver because it is still in their best interests to do so. Both the SEC and the Department of Justice provide significant benefits to cooperating companies, often conditioned upon the company's waiver of privilege.

Courts have also objected to allowing companies to use their privilege to unfair tactical advantages, disclosing in circumstances where it may be beneficial, and withholding production where it is not. See Columbia/HCA. This notion of fairness may have special importance where criminal defendants exposed to prison sentences are seeking the data rather than civil litigants. Absent a Supreme Court decision, however, the public policy argument remains a viable legal theory in some jurisdictions.

Public policy balancing privilege and cooperation should be set by Congress rather than the courts. As long ago as 1984, the SEC asked Congress to enact evidentiary protections for cooperating companies that voluntarily disclosed privileged information. Westinghouse Electric Corp. v. Republic of Philippines, 951 F.2d 1414, 1425 (3d Cir. 1991). Despite the SEC's direct request, the measure was not adopted. To date, even in the wake of the major law enforcement overhaul by the Sarbanes-Oxley Act, it still has not been adopted.

Conclusion

Confidentiality agreements, as presently drafted and as interpreted by federal courts, do not appear likely to solve the corporate disclosure dilemma. In the absence of a definitive Supreme Court decision or congressional enactment, corporations must continue to disclose privileged reports at their own peril. Nevertheless, the benefits of cooperation usually outweigh the preservation of privilege.

Robert Plotkin is a white-collar criminal defense lawyer in the Washington, DC, office of Paul, Hastings, Janofsky & Walker. He was part of the defense team in U.S. v. Bergonzi, discussed in this article.

The tidal wave of corporate scandals reminds us that the most popular and perhaps viable response for the corporation under siege remains cooperation with government investigators. Reports of disclosure of internal company investigations and documents have come pouring out of Enron, WorldCom, Global Crossing and many others. When corporations divulge potentially privileged materials to the government, concerns about whether such disclosure results in the waiver of the company's attorney-client privilege and the loss of its work product protection inevitably follow. Waiver of privilege and work product to the government could also mean loss of protection as to all third parties, including would-be class action plaintiffs and potential criminal defendants. The corporation sits on the horns of a dilemma ' cooperate and face significant civil liability, or resist and face strict government scrutiny and possible criminal conviction.

One attempted solution has been 'confidentiality' agreements with government investigators. Such agreements provide that disclosure to the government does not constitute a waiver of the company's privilege or work product and try to prohibit or limit the re-disclosure of the information to adversaries in parallel civil and criminal actions.

Origins

The confidentiality agreement traces its origins to the now well-established 'joint defense privilege.' According to this doctrine, communications made between separately represented parties with a mutual and common interest do not waive their respective attorney-client privileges. See Hunydee v. United States , 355 F.2d 183, 185 (9th Cir. 1965). Traditionally, this 'common interest' privilege arises among cooperating plaintiffs or defendants in civil litigation or, even more likely, between actual or potential criminal defendants.

The idea that there can be a 'common interest' between government investigators and private parties initially surfaced in circumstances where the government obtained information from competitors of the government's target. 'So long as the [government and MCI, the cooperating party] anticipate litigation against a common adversary on the same issue ' they have strong common interests ' ' United States v. AT&T, 642 F.2d 1285, 1289 (D.C. Cir. 1980). Dicta in later cases seemed to suggest, without detailed explanation, that in order to preserve 'common interests' with the government, a written agreement is required. In re Steinhardt Partners L.P., 9 F.3d 230, 236 (2d Cir. 1993). Thus, apparently, was the government confidentiality agreement born.

Terms of the Agreement

In order to make a compelling case for protection from disclosure, the agreement requires several key terms. First, the agreement should establish that the corporation has a 'common interest' with the government agency to which it is disclosing. This provision usually takes the form of a desire by both parties 'to learn all the facts.' Second, the agreement should specify that it applies only to clearly privileged materials, such as counsel's investigative report to the company or witness interviews conducted for a report. Any attempt to shield general business documents would undermine the argument against waiver. The agreement may also seek a promise that the government will maintain the privileged material it is about to receive in strict confidence, as well as assurances that the government itself will not later assert that such disclosure is a waiver of privilege. If possible, the agreement should also state that the company is not a 'target' of the investigation, even if only 'at this time.' It is helpful if the government agrees that the disclosure is 'valuable' and will 'save government resources and manpower.'

For its part, the government may insist on some right to use the information provided in later criminal, civil and regulatory proceedings. (Without this term, the information would be useless to the government's law enforcement authority.) The government may also insist upon reserving the right to prosecute the company, notwithstanding its full cooperation, because at this stage it is far too early to make informed judgments about culpability and non-prosecution. These provisions may compromise the company's ability to avoid waiver of its privilege or work product protection. Corporate and outside counsel should agree to such terms only after carefully determining that the benefits outweigh the risks.

The Risks

The confidentiality agreement rests on shaky ground. Ordinarily, when privileged material is voluntarily produced, the privilege is waived. Weil v. Investment Indicators/Research & Management, Inc. , 647 F.2d 18, 24 (9th Cir. 1981). This is, of course, precisely what occurs when the company discloses its privileged documents to the government. Indeed, one court has even concluded that materials created and produced after the confidentiality agreement is signed do not even qualify as privileged information because they were not created with any expectation of confidentiality. U.S. v. Bergonzi, Crim # 00-0505 MJJ, (N.D. Cal., Jan. 10, 2003). Likewise, the voluntary disclosure of attorney work product to a current or potential adversary normally effects a waiver. In Re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289 (6th Cir. 2002). Because the government investigating possible wrongdoing is the company's quintessential adversary, courts in most federal circuits have found such disclosures to be work-product waivers. U.S. v. Massachusetts Institute of Technology , 129 F.3d 681, 685-86 (1st Cir. 1997).

Moreover, when the government files criminal charges against any of the individuals identified in the disclosures, the confidentiality agreement cannot prevent criminal defendants from obtaining at least some of the data, as they are constitutionally entitled to certain material under Brady v. Maryland or pursuant to federal criminal discovery rules. See U.S. v. Bergonzi, supra. See also, United States v. Sudikoff , 36 F. Supp.2d 1196, 1205 (C.D. Cal. 1999). This is especially true in situations where the corporation has agreed in advance that the government may use the disclosed information in law enforcement activities.

Common Interests

In an effort to overcome these legal obstacles, counsel for disclosing corporations have sought to protect the material from further disclosure by establishing that the company and the government did, in fact, have a 'common interest,' and so were entitled to share information without a waiver. The common ground asserted is that both parties are seeking to identify violations of law, as well as to find violations of fiduciary duties or similar obligations to the company. See In Re Mortgage & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal 1997). Companies point to the government's acknowledgment in the confidentiality agreement of their mutual interests, as well as to the benefits reaped by the government as a result of these disclosures. The confidentiality agreement itself is portrayed as clear evidence of the company's desire and intent to maintain its privilege in the face of disclosure. Id. Moreover, the company may try to demonstrate that the investigation is focused on errant employees, rather than on the company itself. Cooper Hospital/University Medical Cntr. v. Sullivan , 183 F.R.D. 119 (D.N.J. 1998). This analysis becomes more complicated, of course, where the company itself is the target of the government's investigation.

Most courts have rejected these 'common interest' arguments. The basic premise for sharing information is that the two parties are allied in the pursuit of litigation or a transaction, U.S. v. MIT , 129 F.3d at 685-6. But the government and the company will never share the 'common goal' of prosecuting the company; in fact prosecution is exactly what the corporation hopes to avoid. This is especially true in agreements that specifically preserve the right of the government to prosecute the company. U.S. v. Bergonzi, supra. Under basic laws of corporate criminal responsibility, even the acts of a few 'errant' employees can form the basis for corporate liability, so the company remains exposed. New York Central & H.R.R. Co. v. United States , 212 U.S. 481, 493 (1909). The bottom line is that a mutual desire to 'learn the truth' simply is too tenuous an interest to prevent waiver. Indeed, courts often explain that if a 'common interest' could be established by a desire to find the 'truth,' then virtually everyone, including adversaries, would arguably have 'common interests.'

The Public Policy Argument

The argument that has provided some limited success for disclosing corporations is 'selective disclosure,' premised on a public-policy rationale. This exception to the common-law rules of waiver is based on a desire to encourage companies to investigate and disclose unlawful activity. The public's interests are vindicated and its resources preserved, while the company protects itself from damage suits. The Eighth Circuit was among the first courts to adopt this view. Diversified Industries, Inc. v. Meredith , 572 F.2d 596, 610 (8th Cir. 1978). Most recently, a Chancery Court in Delaware accepted similar arguments and refused to find that disclosure to the SEC waived the corporate privilege. Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del Ch. November 13, 2002). The majority of federal circuit courts considering whether to recognize a public-policy exception to the waiver laws have declined to do so. They have noted that many companies voluntarily disclose to the government despite waiver because it is still in their best interests to do so. Both the SEC and the Department of Justice provide significant benefits to cooperating companies, often conditioned upon the company's waiver of privilege.

Courts have also objected to allowing companies to use their privilege to unfair tactical advantages, disclosing in circumstances where it may be beneficial, and withholding production where it is not. See Columbia/HCA. This notion of fairness may have special importance where criminal defendants exposed to prison sentences are seeking the data rather than civil litigants. Absent a Supreme Court decision, however, the public policy argument remains a viable legal theory in some jurisdictions.

Public policy balancing privilege and cooperation should be set by Congress rather than the courts. As long ago as 1984, the SEC asked Congress to enact evidentiary protections for cooperating companies that voluntarily disclosed privileged information. Westinghouse Electric Corp. v. Republic of Philippines , 951 F.2d 1414, 1425 (3d Cir. 1991). Despite the SEC's direct request, the measure was not adopted. To date, even in the wake of the major law enforcement overhaul by the Sarbanes-Oxley Act, it still has not been adopted.

Conclusion

Confidentiality agreements, as presently drafted and as interpreted by federal courts, do not appear likely to solve the corporate disclosure dilemma. In the absence of a definitive Supreme Court decision or congressional enactment, corporations must continue to disclose privileged reports at their own peril. Nevertheless, the benefits of cooperation usually outweigh the preservation of privilege.

Robert Plotkin is a white-collar criminal defense lawyer in the Washington, DC, office of Paul, Hastings, Janofsky & Walker. He was part of the defense team in U.S. v. Bergonzi, discussed in this article.