Cooperation, Confidentiality and Waiver: Is There a Solution?

Much has been written, in this newsletter and elsewhere, about the dilemma faced by corporations that want to cooperate with a government investigation by acceding to government “requests” for information protected by the attorney-client and work product privileges, while at the same time attempting to protect the otherwise privileged information from disclosure to the litigious world at large. Recent turf battles between federal and state prosecutors and regulators have only made more difficult any attempt to resolve the tension between two perceived needs: to cooperate, and to preserve confidentiality.

A 'State of Hopeless Confusion'

The continuing, tortured development of the law gives little guidance to counsel who must advise clients about the risks in disclosing privileged information to the government. Counsel is operating in an arena in which the case law “is in a state of hopeless confusion.” In re M&L Business Machine Company, Inc. 161 B.R. 689, 696 (D. Colo. 1993). As one federal circuit court judge has noted, even where the company has entered into a confidentiality agreement with the government, the circuit courts of appeal are “deeply split” on whether a disclosure waives privilege “as to all other parties.” In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289, 308 (6th Cir. 2002) (Boggs, J., dissenting). “The resulting decisions cover the entire spectrum — from protection of work product in the absence of a confidentiality agreement to no protection of work product even when a disclosure was secured by a confidentiality agreement.” Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. 2002).

Given the current state of affairs, what's a lawyer to do? Because of the unsettled state of the law, the prudent advice is that privileged information should be disclosed to the government only if the client is prepared to see it in the hands of a potential plaintiff. The balance should be struck in favor of disclosure only when the otherwise unavoidable cost of adverse government action — criminal prosecution or civil enforcement threatening enormous fines, harm to reputation, and sometimes a “corporate death sentence” — outweighs the cost of civil litigation.

Possible Solutions

Is there a solution? Here are some possibilities, as well as a brief analysis of the odds of success.

First, counsel could ask that the requested information be provided to the government only in response to a grand jury subpoena, thereby attempting to cloak the information in grand jury secrecy. Waiver, after all, must be voluntary, and productions compelled by subpoena are not “voluntary.”

The problems with the approach are a least three: 1) litigants as a matter of course resist subpoenas on privilege grounds, and the failure to object and to take steps to protect the privilege is uniformly considered a waiver; 2) grand jury secrecy is not absolute, and grand jury materials can be furnished to third parties – including civil litigants – pursuant to a court order “preliminarily to or in connection with a judicial proceeding.” Fed. R. Crim. P. 6(e)(3)(c)(i), United States v. Sells Engineering, 463 U.S. 418 (1983); and 3) the approach is not even an option when the “government” is the SEC or another agency with only civil enforcement authority.

Second, counsel can seek agreement with the government that the requested information will be disclosed only pursuant to a confidentiality order entered by the court. As noted above, confidentiality agreements between the government and a party disclosing otherwise privileged information have had limited success in preventing judicial findings of waiver. While the Second Circuit left open the possibility that such agreements could be effective, In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993), and they have been found effective by a number of courts, at least as to the work product privilege, several other courts have found a waiver of privilege despite such agreements. e.g., In re Columbia/HCA Healthcare; Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (3d Cir. 1991). See also, United States v. Massachusetts Institute of Technology, 129 F.3d 681 (1st Cir. 1997).

Unlike confidentiality agreements, which reflect only the parties' expectations and are not necessarily entitled to recognition by a court, see, e.g., Saito v. McKesson HBOC, Inc. (upholding such an agreement), court orders are a recognized means of facilitating disclosure of otherwise confidential information and, obviously, have the advantage by definition of being endorsed by the court. In the seminal case of Martindell v. International Telephone and Telegraph Corp., 594 F.2d 291 (2d Cir. 1979), the district court had denied a government motion to gain access for the purpose of a criminal investigation to deposition testimony that had been given pursuant to a stipulation of confidentiality between the parties and a protective order issued by the court. The Second Circuit affirmed, holding that the trial court's order appropriately balanced the competing interests. There is no reason why a so-called Martindell order could not be used in the context of a party seeking to cooperate with a government investigation while protecting privilege vis-a-vis the world at large. A court could reasonably find that the balance is appropriate: The public has an interest in facilitating the corporation's cooperation, and the private litigants are no worse off because they would not have had access to the information in the absence of cooperation.

For a number of reasons, however, even a confidentiality order entered by the court is not a complete resolution to the tension between cooperation and confidentiality. Although a confidentiality order was a factor in a number of the cases upholding work product privilege, see Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981); United States v. AT&T, 642 F.2d 1285 (D.C. Cir. 1980); Saito v. McKesson HBOC, it is highly unlikely that a trial court in a jurisdiction that rejects “selective waiver” will be willing to enter such an order, or that such an order will be effective if entered. Indeed, in Westinghouse a complete waiver of attorney client and work product privilege was found even in the face of a court order. Moreover, whether a federal court's confidentiality/non-waiver order has to be honored in a state court proceeding to determine whether privilege has been waived under state law — when the federal courts themselves are at war with each other on the waiver issue — is an unusually challenging question of constitutional federalism and conflicts of law, which only the Supreme Court can resolve.

A third solution to examine is federal legislation. Here again, the problems seem insuperable. Attempts to legislate privilege and waiver have already failed. The original Federal Rules of Evidence submitted to Congress contained specific non-constitutional rules of privilege, including attorney-client privilege, and rules governing waiver by voluntary disclosure. The specific rules, however, were rejected in favor of Fed. R. Evid. 501, which provides that “[e]xcept as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of common law as they may be interpreted by the courts of the United States in the light of reason and experience …” See Rule 501 and Advisory Committee Notes with respect to 1974 Enactment. In addition, in 1984, Congress specifically rejected legislation proposed by the SEC that would have allowed documents to be furnished to the SEC without waiving privilege. See Westinghouse at 1425.

Moreover, there is a significant question whether such legislation would be effective in all circumstances. At least in the context of a request by a criminal defendant for potentially exculpatory information, disclosure may be constitutionally required. Once disclosure is made, the information may be available to the world at large, particularly if the defendant uses it at trial.

Finally, as a political matter, the prospect of enacting legislation to permit selective waiver is unlikely for the same reason that has prevented any significant legislative measures to reduce the excesses of civil RICO — there simply is no political mileage in legislation seen as protecting scoundrels. When the scoundrels are corporations faced with multiple investigations, the public probably thinks they deserve whatever they get, and most often their cooperation can be coerced without offering confidentiality as an inducement.

Much has been written, in this newsletter and elsewhere, about the dilemma faced by corporations that want to cooperate with a government investigation by acceding to government “requests” for information protected by the attorney-client and work product privileges, while at the same time attempting to protect the otherwise privileged information from disclosure to the litigious world at large. Recent turf battles between federal and state prosecutors and regulators have only made more difficult any attempt to resolve the tension between two perceived needs: to cooperate, and to preserve confidentiality.

A 'State of Hopeless Confusion'

The continuing, tortured development of the law gives little guidance to counsel who must advise clients about the risks in disclosing privileged information to the government. Counsel is operating in an arena in which the case law “is in a state of hopeless confusion.” In re M&L Business Machine Company, Inc. 161 B.R. 689, 696 (D. Colo. 1993). As one federal circuit court judge has noted, even where the company has entered into a confidentiality agreement with the government, the circuit courts of appeal are “deeply split” on whether a disclosure waives privilege “as to all other parties.” In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289, 308 (6th Cir. 2002) (Boggs, J., dissenting). “The resulting decisions cover the entire spectrum — from protection of work product in the absence of a confidentiality agreement to no protection of work product even when a disclosure was secured by a confidentiality agreement.” Saito v. McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. 2002).

Given the current state of affairs, what's a lawyer to do? Because of the unsettled state of the law, the prudent advice is that privileged information should be disclosed to the government only if the client is prepared to see it in the hands of a potential plaintiff. The balance should be struck in favor of disclosure only when the otherwise unavoidable cost of adverse government action — criminal prosecution or civil enforcement threatening enormous fines, harm to reputation, and sometimes a “corporate death sentence” — outweighs the cost of civil litigation.

Possible Solutions

Is there a solution? Here are some possibilities, as well as a brief analysis of the odds of success.

First, counsel could ask that the requested information be provided to the government only in response to a grand jury subpoena, thereby attempting to cloak the information in grand jury secrecy. Waiver, after all, must be voluntary, and productions compelled by subpoena are not “voluntary.”

The problems with the approach are a least three: 1) litigants as a matter of course resist subpoenas on privilege grounds, and the failure to object and to take steps to protect the privilege is uniformly considered a waiver; 2) grand jury secrecy is not absolute, and grand jury materials can be furnished to third parties – including civil litigants – pursuant to a court order “preliminarily to or in connection with a judicial proceeding.” Fed. R. Crim. P. 6(e)(3)(c)(i), United States v. Sells Engineering , 463 U.S. 418 (1983); and 3) the approach is not even an option when the “government” is the SEC or another agency with only civil enforcement authority.

Second, counsel can seek agreement with the government that the requested information will be disclosed only pursuant to a confidentiality order entered by the court. As noted above, confidentiality agreements between the government and a party disclosing otherwise privileged information have had limited success in preventing judicial findings of waiver. While the Second Circuit left open the possibility that such agreements could be effective, I n re Steinhardt Partners, L.P. , 9 F.3d 230 (2d Cir. 1993), and they have been found effective by a number of courts, at least as to the work product privilege, several other courts have found a waiver of privilege despite such agreements. e.g., In re Columbia/HCA Healthcare; Westinghouse Electric Corp. v. Republic of the Philippines , 951 F.2d 1414 (3d Cir. 1991). See also, United States v. Massachusetts Institute of Technology , 129 F.3d 681 (1st Cir. 1997).

Unlike confidentiality agreements, which reflect only the parties' expectations and are not necessarily entitled to recognition by a court, see, e.g., Saito v. McKesson HBOC, Inc. (upholding such an agreement), court orders are a recognized means of facilitating disclosure of otherwise confidential information and, obviously, have the advantage by definition of being endorsed by the court. In the seminal case of Martindell v. International Telephone and Telegraph Corp. , 594 F.2d 291 (2d Cir. 1979), the district court had denied a government motion to gain access for the purpose of a criminal investigation to deposition testimony that had been given pursuant to a stipulation of confidentiality between the parties and a protective order issued by the court. The Second Circuit affirmed, holding that the trial court's order appropriately balanced the competing interests. There is no reason why a so-called Martindell order could not be used in the context of a party seeking to cooperate with a government investigation while protecting privilege vis-a-vis the world at large. A court could reasonably find that the balance is appropriate: The public has an interest in facilitating the corporation's cooperation, and the private litigants are no worse off because they would not have had access to the information in the absence of cooperation.

For a number of reasons, however, even a confidentiality order entered by the court is not a complete resolution to the tension between cooperation and confidentiality. Although a confidentiality order was a factor in a number of the cases upholding work product privilege, see Permian Corp. v. United States , 665 F.2d 1214 (D.C. Cir. 1981); United States v. AT&T, 642 F.2d 1285 (D.C. Cir. 1980); Saito v. McKesson HBOC, it is highly unlikely that a trial court in a jurisdiction that rejects “selective waiver” will be willing to enter such an order, or that such an order will be effective if entered. Indeed, in Westinghouse a complete waiver of attorney client and work product privilege was found even in the face of a court order. Moreover, whether a federal court's confidentiality/non-waiver order has to be honored in a state court proceeding to determine whether privilege has been waived under state law — when the federal courts themselves are at war with each other on the waiver issue — is an unusually challenging question of constitutional federalism and conflicts of law, which only the Supreme Court can resolve.

A third solution to examine is federal legislation. Here again, the problems seem insuperable. Attempts to legislate privilege and waiver have already failed. The original Federal Rules of Evidence submitted to Congress contained specific non-constitutional rules of privilege, including attorney-client privilege, and rules governing waiver by voluntary disclosure. The specific rules, however, were rejected in favor of Fed. R. Evid. 501, which provides that “[e]xcept as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of common law as they may be interpreted by the courts of the United States in the light of reason and experience …” See Rule 501 and Advisory Committee Notes with respect to 1974 Enactment. In addition, in 1984, Congress specifically rejected legislation proposed by the SEC that would have allowed documents to be furnished to the SEC without waiving privilege. See Westinghouse at 1425.

Moreover, there is a significant question whether such legislation would be effective in all circumstances. At least in the context of a request by a criminal defendant for potentially exculpatory information, disclosure may be constitutionally required. Once disclosure is made, the information may be available to the world at large, particularly if the defendant uses it at trial.

Finally, as a political matter, the prospect of enacting legislation to permit selective waiver is unlikely for the same reason that has prevented any significant legislative measures to reduce the excesses of civil RICO — there simply is no political mileage in legislation seen as protecting scoundrels. When the scoundrels are corporations faced with multiple investigations, the public probably thinks they deserve whatever they get, and most often their cooperation can be coerced without offering confidentiality as an inducement.