Corporate Investigations: Their Hidden Traps ... And How to Avoid Them

This is the second in a two-part series on how to conduct corporate investigations for corporate counsel.

One of the many challenges faced by corporate counsel when conducting or overseeing an internal workplace investigation is how not to compromise critical attorney-client privilege during the process.

Protecting Attorney-Client Privilege

Investigating attorneys need to ensure that they do not waive the attorney-client privilege during the investigation and any ensuing litigation. This situation frequently arises in harassment cases when the attorney conducts the investigation under the assumption that the information is protected by privilege, only to later find that the privilege was waived because the investigation is asserted as an affirmative defense.

The attorney-client privilege applies to a communication made in confidence to an attorney by a client for the purpose of obtaining legal advice including client summaries, interviews, reports and legal advice and recommendations. The purpose of the attorney-client privilege is to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” Upjohn v. United States, 449 U.S. 383, 389 (1981).

Investigating attorneys must be certain that the privilege is not inadvertently waived during the course of the investigation, which should be performed for legal, not general business purposes, and that information is shared only on a need-to-know basis.

Legal vs. General Advice

Since providing general business advice does not qualify for the attorney-client privilege, corporate counsel must establish that their advice was legal advice for the privilege to apply in order to ensure that actions are protected by privilege.

For example, in In re Woolworth Corp. Securities Class Action Litigation, Civ. A. No. 94 2217, 1996 U.S. Dist. LEXIS 7773 (S.D.N.Y. June 7, 1996), the Woolworth Audit Committee hired special legal counsel to investigate issues of accounting irregularities. Among its other tasks, the firm analyzed relevant documents, interviewed Woolworth employees, and prepared a public report. A group of plaintiffs ultimately sued Woolworth for violations of the Securities and Exchange Act. During discovery, the plaintiffs filed a motion to compel the law firm to produce its internal notes created during the investigative process, arguing that the firm's involvement in the matter was limited to “furthering a business purpose rather than providing legal advice.” After investigating the facts, however, including the fact that the firm engaged in discussions with the SEC on the Committee's behalf, the court held that the investigation was connected to the provision of legal advice to the client and deemed the attorney-client privilege to apply to the investigation notes and memoranda.

By contrast, In re subpoena dues tecum served on Willkie Farr & Gallagher, Civ. A. No. M8-85, 1997 U.S. Dist. LEXIS 2927 (S.D.N.Y. March 14, 1997), the court found that the law firm had been hired merely to provide business advice, and therefore, investigation documents were not protected by work-product protection. Although the law firm interviewed employees and analyzed its client's accounting practices as part of its investigation, the court determined that the client hired the law firm to deal with “a serious business problem.” Since the documents were created for a purpose other than litigation, the work product protection did not apply.

Since categorizing advice as business, legal or a mixture of the two can be difficult, counsel must clearly define its' role. If that role is legal advisor, counsel should ensure that the attorney-client privilege is preserved by taking the following steps:

• confirming in writing that the investigation is legal advice to the company;
• separating out general business advice from legal advice related to the investigation; and
• informing interviewees that the purpose of the interview is so that the corporation may obtain legal advice.

Employee Interviews

The employee interview process is critical to any investigation of alleged misconduct. Interviews with officers, agents and high-level management employees are clearly privileged communications. See Upjohn v. United States, 449 U.S. 383, 389 (1981).

In Upjohn, the United States Supreme Court indicated that interviews of low and mid-level employees are protected by attorney-client privilege. Recognizing the fact that a lawyer needs to know all of the facts at issue, the Court noted that it is often those other than the officers and agents of the corporation with that knowledge. In reaching the conclusion that these interviews were privileged, the Court noted that interviewed employees were aware that they were being questioned for the purpose of legal advice; the questions related only to the scope of their corporate duties; the questionnaires they were asked to complete referenced the company's general counsel; a statement of policy accompanying the questionnaire indicated the legal implications of the investigation, and the communications were considered “highly confidential” and the questionnaire responses were not disclosed to anyone except in-house and outside counsel. Id. at 394-95.

The Upjohn decision left open the question of whether communications between corporate counsel and former employees were within the attorney-client privilege. The majority of the courts that have addressed this issue have extended the Upjohn rationale to cover such communications. See, eg, Better Gov't Bureau, Inc., v. McGraw, 106 F.3d 582, 606 (4th Cir. 1997); In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust, 658 F.2d 1355, 1361 n.7 (9th Cir. 1981); Miramar Construction Co. v. The Home Depot Inc., 167 F. Supp. 2d (D.P.R. 2001). But see Clark Equip Co. v. Lift Parts Mfg. Co., 1985 WL 2917 (N.D. Ill. 1985), and Barrett Ind. Trucks v. Old Republic Ins. Co., 129 F.R.D. 515 (N.D. Ill. 1990).

Investigative Reports

Investigative reports are traditionally protected by attorney-client privilege. See Robinson v. Time Warner, Inc., 187 F.R.D. 144, 146 (S.D.N.Y. 1999) (holding that plaintiff was not entitled to discovery of the attorney's notes taken in the internal investigation or to review the final investigative report prepared by counsel as the documents were protected by attorney-client privilege and work product protection).

Waiver Issues

Once attorney-client privilege is established, it may be inadvertently waived by sharing information with employees or management. Attorneys should provide information only on a need-to-know basis. Consistently adhering to a few simple tips will help to preserve privilege:

• Do not discuss theory, strategy, assessments or evidence with any individuals other than those who have a need to know, including management;
• Minimize the presence of those other than counsel during interviews;
• Make sure counsel only interviews low-level and mid-level employees who have pertinent information;
• Refrain from showing privileged documents to employees who are being interviewed;
• Label privileged documents so that they are not inadvertently shared with employees;
• Limit the circulation of privileged documents to those who have a need to review such document;
• Limit the access of privileged documents – keep privileged documents in one place and require those who have a need to see such documents to come to a central location to review the documents. Do not let the privileged documents leave the designated location.

Client Confidences At Issue in Harassment Cases

Attorneys investigating sexual and other harassment cases may face particular challenges. In the Supreme Court decisions in Ellerth and Faragher, the Court provided an affirmative defense for employers who prevent and correct promptly harassing behavior. Pursuant to the Ellerth/Faragher defense, an employer can defend against liability in harassment cases where the employer can demonstrate that it: a) exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and that b) the plaintiff unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise. See Burlington Indust., Inc. v. Ellerth, 524 U.S. 742, 765 (1998), City of Boca Raton v. Faragher, 524 U.S. 775, 807-08 (1998). Employers who argue that their investigations were reasonable as part of their defense, however, may waive any applicable privilege by placing the reasonableness of the investigations at issue. Courts have held that these employers are attempting to use the privilege “as both a sword and a shield.” See Brownell v. Roadway Package Sys., 185 F.R.D. 19, 25 (N.D.N.Y. 1999).

Privilege waived:
For example, in Harding v. Dana Transport, Inc., 914 F. Supp. 1084 (D.N.J. 1996), the court held that an attorney's investigation materials in a sexual harassment case were discoverable where the corporation placed the reasonableness of the investigation at issue. The attorney in the Harding case acted as both the company's attorney and investigator into allegations of sexual harassment. Id. at 1094. Although the court determined that the attorney was acting as counsel for the purpose of applying the attorney-client privilege, the court found that the corporation waived the privilege when it relied “upon the investigation as a defense to employer liability under Title VII and the NJLAD.” Id. at 1093. “By asking Mr. Bowe to serve multiple duties, the defendants have fused the roles of internal investigator and legal advisor. Consequently, Dana cannot now argue that its own process is shielded from discovery. Consistent with the doctrine of fairness, the plaintiffs must be permitted to probe the substance of Dana's alleged investigation to determine its sufficiency. … Consequently, this court finds that Dana has waived its attorney-client privilege with respect to the content of Mr. Bowe's investigation of the plaintiff's allegations. ” Id. at 1096. The court concluded its analysis by stating: “Corporate litigants hoping to counter charges of respondeat superior liability may easily avoid this result in the future either by separating the role of investigator from that of litigator, or by refraining from defending themselves on the basis of reasonable investigation.” Id. at 1099. Accord Payton v. New Jersey Turnpike Auth., 148 N.J. 524, 691 A.2d 321 (1997) (the fact that an attorney participated in an internal investigation of sexual harassment did not require a “blanket protection” against disclosure of the materials; the court conducted an in camera review of the documents to determine the applicability of the attorney-client and work product doctrines).

Privilege was not waived:
In contrast, in Robinson v. Time Warner, Inc., 187 F.R.D. 144 (S.D.N.Y. 1999), the court found that the investigation was protected by both attorney-client privilege and work product protection and that the company did not waive privilege by relying on the investigation as a defense to the Title VII discrimination lawsuit. In reaching its decision, the court recognized that the attorney's investigation was for a legal purpose and was conducted in anticipation of litigation, and thus, fell within attorney-client privilege. Therefore, the court found that the plaintiff was not entitled to discover the notes taken by the attorney during the internal investigation, nor allowed to review the final investigative report prepared by the attorney.

What To Do in Advance Regarding Privilege

In summary, for an investigation to remain privileged the attorney must:

• conduct the investigation
• ensure that the investigation is for legal, and not business, purposes
• inform the client that they may not defend the lawsuit on the basis that the investigation was reasonable or on the basis of the results of the investigation, or else risk waiving the privilege.

Conclusion

With so many issues, there may never be a perfect investigation but that is no excuse for a shoddy investigation that can harm your company. People expect fair and thorough investigations into workplace misconduct. By following the principles discussed above, counsel can go a long way to ensuring that an adequate investigation is conducted in a fair manner and in ways that do not waive important privileges.

Jeffrey I. Pasek is a Senior Member of Cozen O'Connor, where he chairs the firm's national labor and employment practice group. E-mail: [email protected]; telephone 215-665-2072.

This is the second in a two-part series on how to conduct corporate investigations for corporate counsel.

One of the many challenges faced by corporate counsel when conducting or overseeing an internal workplace investigation is how not to compromise critical attorney-client privilege during the process.

Protecting Attorney-Client Privilege

Investigating attorneys need to ensure that they do not waive the attorney-client privilege during the investigation and any ensuing litigation. This situation frequently arises in harassment cases when the attorney conducts the investigation under the assumption that the information is protected by privilege, only to later find that the privilege was waived because the investigation is asserted as an affirmative defense.

The attorney-client privilege applies to a communication made in confidence to an attorney by a client for the purpose of obtaining legal advice including client summaries, interviews, reports and legal advice and recommendations. The purpose of the attorney-client privilege is to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” Upjohn v. United States , 449 U.S. 383, 389 (1981).

Investigating attorneys must be certain that the privilege is not inadvertently waived during the course of the investigation, which should be performed for legal, not general business purposes, and that information is shared only on a need-to-know basis.

Legal vs. General Advice

Since providing general business advice does not qualify for the attorney-client privilege, corporate counsel must establish that their advice was legal advice for the privilege to apply in order to ensure that actions are protected by privilege.

For example, in In re Woolworth Corp. Securities Class Action Litigation, Civ. A. No. 94 2217, 1996 U.S. Dist. LEXIS 7773 (S.D.N.Y. June 7, 1996), the Woolworth Audit Committee hired special legal counsel to investigate issues of accounting irregularities. Among its other tasks, the firm analyzed relevant documents, interviewed Woolworth employees, and prepared a public report. A group of plaintiffs ultimately sued Woolworth for violations of the Securities and Exchange Act. During discovery, the plaintiffs filed a motion to compel the law firm to produce its internal notes created during the investigative process, arguing that the firm's involvement in the matter was limited to “furthering a business purpose rather than providing legal advice.” After investigating the facts, however, including the fact that the firm engaged in discussions with the SEC on the Committee's behalf, the court held that the investigation was connected to the provision of legal advice to the client and deemed the attorney-client privilege to apply to the investigation notes and memoranda.

By contrast, In re subpoena dues tecum served on Willkie Farr & Gallagher, Civ. A. No. M8-85, 1997 U.S. Dist. LEXIS 2927 (S.D.N.Y. March 14, 1997), the court found that the law firm had been hired merely to provide business advice, and therefore, investigation documents were not protected by work-product protection. Although the law firm interviewed employees and analyzed its client's accounting practices as part of its investigation, the court determined that the client hired the law firm to deal with “a serious business problem.” Since the documents were created for a purpose other than litigation, the work product protection did not apply.

Since categorizing advice as business, legal or a mixture of the two can be difficult, counsel must clearly define its' role. If that role is legal advisor, counsel should ensure that the attorney-client privilege is preserved by taking the following steps:

• confirming in writing that the investigation is legal advice to the company;
• separating out general business advice from legal advice related to the investigation; and
• informing interviewees that the purpose of the interview is so that the corporation may obtain legal advice.

Employee Interviews

The employee interview process is critical to any investigation of alleged misconduct. Interviews with officers, agents and high-level management employees are clearly privileged communications. See Upjohn v. United States , 449 U.S. 383, 389 (1981).

In Upjohn, the United States Supreme Court indicated that interviews of low and mid-level employees are protected by attorney-client privilege. Recognizing the fact that a lawyer needs to know all of the facts at issue, the Court noted that it is often those other than the officers and agents of the corporation with that knowledge. In reaching the conclusion that these interviews were privileged, the Court noted that interviewed employees were aware that they were being questioned for the purpose of legal advice; the questions related only to the scope of their corporate duties; the questionnaires they were asked to complete referenced the company's general counsel; a statement of policy accompanying the questionnaire indicated the legal implications of the investigation, and the communications were considered “highly confidential” and the questionnaire responses were not disclosed to anyone except in-house and outside counsel. Id. at 394-95.

The Upjohn decision left open the question of whether communications between corporate counsel and former employees were within the attorney-client privilege. The majority of the courts that have addressed this issue have extended the Upjohn rationale to cover such communications. See , eg , Better Gov't Bureau, Inc., v. McGraw , 106 F.3d 582, 606 (4th Cir. 1997); In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust, 658 F.2d 1355, 1361 n.7 (9th Cir. 1981); Miramar Construction Co. v. The Home Depot Inc. , 167 F. Supp. 2d (D.P.R. 2001). But see Clark Equip Co. v. Lift Parts Mfg. Co., 1985 WL 2917 (N.D. Ill. 1985), and Barrett Ind. Trucks v. Old Republic Ins. Co. , 129 F.R.D. 515 (N.D. Ill. 1990).

Investigative Reports

Investigative reports are traditionally protected by attorney-client privilege. See Robinson v. Time Warner, Inc. , 187 F.R.D. 144, 146 (S.D.N.Y. 1999) (holding that plaintiff was not entitled to discovery of the attorney's notes taken in the internal investigation or to review the final investigative report prepared by counsel as the documents were protected by attorney-client privilege and work product protection).

Waiver Issues

Once attorney-client privilege is established, it may be inadvertently waived by sharing information with employees or management. Attorneys should provide information only on a need-to-know basis. Consistently adhering to a few simple tips will help to preserve privilege:

• Do not discuss theory, strategy, assessments or evidence with any individuals other than those who have a need to know, including management;
• Minimize the presence of those other than counsel during interviews;
• Make sure counsel only interviews low-level and mid-level employees who have pertinent information;
• Refrain from showing privileged documents to employees who are being interviewed;
• Label privileged documents so that they are not inadvertently shared with employees;
• Limit the circulation of privileged documents to those who have a need to review such document;
• Limit the access of privileged documents – keep privileged documents in one place and require those who have a need to see such documents to come to a central location to review the documents. Do not let the privileged documents leave the designated location.

Client Confidences At Issue in Harassment Cases

Attorneys investigating sexual and other harassment cases may face particular challenges. In the Supreme Court decisions in Ellerth and Faragher, the Court provided an affirmative defense for employers who prevent and correct promptly harassing behavior. Pursuant to the Ellerth/Faragher defense, an employer can defend against liability in harassment cases where the employer can demonstrate that it: a) exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and that b) the plaintiff unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise. See Burlington Indust., Inc. v. Ellerth , 524 U.S. 742, 765 (1998), City of Boca Raton v. Faragher , 524 U.S. 775, 807-08 (1998). Employers who argue that their investigations were reasonable as part of their defense, however, may waive any applicable privilege by placing the reasonableness of the investigations at issue. Courts have held that these employers are attempting to use the privilege “as both a sword and a shield.” See Brownell v. Roadway Package Sys. , 185 F.R.D. 19, 25 (N.D.N.Y. 1999).

Privilege waived:
For example, in Harding v. Dana Transport, Inc. , 914 F. Supp. 1084 (D.N.J. 1996), the court held that an attorney's investigation materials in a sexual harassment case were discoverable where the corporation placed the reasonableness of the investigation at issue. The attorney in the Harding case acted as both the company's attorney and investigator into allegations of sexual harassment. Id. at 1094. Although the court determined that the attorney was acting as counsel for the purpose of applying the attorney-client privilege, the court found that the corporation waived the privilege when it relied “upon the investigation as a defense to employer liability under Title VII and the NJLAD.” Id. at 1093. “By asking Mr. Bowe to serve multiple duties, the defendants have fused the roles of internal investigator and legal advisor. Consequently, Dana cannot now argue that its own process is shielded from discovery. Consistent with the doctrine of fairness, the plaintiffs must be permitted to probe the substance of Dana's alleged investigation to determine its sufficiency. … Consequently, this court finds that Dana has waived its attorney-client privilege with respect to the content of Mr. Bowe's investigation of the plaintiff's allegations. ” Id. at 1096. The court concluded its analysis by stating: “Corporate litigants hoping to counter charges of respondeat superior liability may easily avoid this result in the future either by separating the role of investigator from that of litigator, or by refraining from defending themselves on the basis of reasonable investigation.” Id. at 1099. Accord Payton v. New Jersey Turnpike Auth. , 148 N.J. 524, 691 A.2d 321 (1997) (the fact that an attorney participated in an internal investigation of sexual harassment did not require a “blanket protection” against disclosure of the materials; the court conducted an in camera review of the documents to determine the applicability of the attorney-client and work product doctrines).

Privilege was not waived:
In contrast, in Robinson v. Time Warner, Inc. , 187 F.R.D. 144 (S.D.N.Y. 1999), the court found that the investigation was protected by both attorney-client privilege and work product protection and that the company did not waive privilege by relying on the investigation as a defense to the Title VII discrimination lawsuit. In reaching its decision, the court recognized that the attorney's investigation was for a legal purpose and was conducted in anticipation of litigation, and thus, fell within attorney-client privilege. Therefore, the court found that the plaintiff was not entitled to discover the notes taken by the attorney during the internal investigation, nor allowed to review the final investigative report prepared by the attorney.

What To Do in Advance Regarding Privilege

In summary, for an investigation to remain privileged the attorney must:

• conduct the investigation
• ensure that the investigation is for legal, and not business, purposes
• inform the client that they may not defend the lawsuit on the basis that the investigation was reasonable or on the basis of the results of the investigation, or else risk waiving the privilege.

Conclusion

With so many issues, there may never be a perfect investigation but that is no excuse for a shoddy investigation that can harm your company. People expect fair and thorough investigations into workplace misconduct. By following the principles discussed above, counsel can go a long way to ensuring that an adequate investigation is conducted in a fair manner and in ways that do not waive important privileges.

Jeffrey I. Pasek is a Senior Member of Cozen O'Connor, where he chairs the firm's national labor and employment practice group. E-mail: [email protected]; telephone 215-665-2072.