The Corporate Attorney-Client Privilege Survives

As awareness of the assault on the privilege spreads, the natural result is that employees and principals of corporate clients are less willing to trust it and, consequently, less willing to be frank with the company's attorneys. “An uncertain privilege,” the Supreme Court has said, “is little better than no privilege at all.” Upjohn Co. v. United States, 449 U.S. 383, 393 (1981). The situation was graphically described in a cover story in Business Week: “When really tough issues arise — involving risky deals, aggressive regulators, or gray-area accounting — CEOs have always been able to turn to board members and professionals for advice. Now, piety reigns supreme, and candid conversations are virtually taboo.” (“The Boss on the Sidelines,” April 25, 2005.)

Faced with this circumstance, we lawyers should emphasize to our clients that the corporate attorney-client privilege remains viable. Two recent federal court decisions indirectly reinforce its efficacy and importance and act as a reminder to prosecutors that successful pursuit of alleged criminal activity is not the only value in the criminal justice system.

United States v. BDO Seidman, LLP

United States v. BDO Seidman, LLP, 2005 WL 742642, 2005 U.S. Dist. LEXIS 5555 (N.D. Ill. March 30, 2005), involved a widely publicized IRS investigation into alleged abusive tax shelters purportedly marketed by BDO. At issue were claims by BDO customers that communications between them and the company were privileged. The government raised two chief arguments against applying the attorney-client or the statutory tax practitioner privilege. First, it invoked the crime/fraud exception. Second, it pointed to consulting agreements between BDO and its customers in which BDO stated (in a “No Warranty” section) that it was not providing legal or tax opinions. Briefly, the government's theory was that BDO, together with law firms and other organizations, were in the business of marketing prepackaged illegal tax shelters, and that the claim of privileged relations was part of a cover-up of the fraudulent conduct.

The court rejected the government's arguments. Regarding the crime/fraud argument, the court stated: “The fact that the IRS characterizes a business or individual's transactions as abusive and unlawful cookie cutter tax shelters does not mean that this characterization is a proper conclusion as a matter of law.” Nor did the court find it conclusive that essentially identical opinion letters were provided to different clients, because form or boiler-plate documents “are often used as the basis in providing professional services.” Prosecutorial allegations were not enough to overcome the claim of privilege. Instead, each document would have to be examined individually, based on the totality of the circumstances.

With respect to the “No Warranty” language, the court had previously ruled that the consulting agreements containing them did not establish an attorney-client or tax practitioner relationship. However, the court did not agree with the government that its earlier decision necessarily precluded finding privilege with regard to other communications between BDO and its clients. It examined the documents in camera and determined that only one might fall within the crime/fraud exception. It gave the client involved the opportunity to demonstrate that the document was in fact privileged and the exception inapplicable. On all the other documents, it ruled against the government. The court in BDO Seidman took the value of privilege as a given.

In re Grand Jury Investigation

In In re Grand Jury Investigation, 399 F.3d 527 (2nd Cir. Feb. 22, 2005), the Second Circuit addressed the purpose of the attorney-client privilege directly. The case involved a federal investigation into alleged corruption under former Connecticut Governor John Rowland. The grand jury subpoenaed former chief legal counsel to the Governor's Office, Anne George, who appeared but refused to answer questions, claiming attorney-client privilege. The district court issued an order compelling her to answer. Rowland and the Governor's Office appealed, and the Second Circuit reversed.

The central question was whether the attorney-client privilege protects government officials who consult a government lawyer. The prosecutor contended that, because the witness was counsel to the Office of the Governor, her loyalty should be to the Office, and thus to the public, not the individual incumbent. That loyalty, according to the prosecution, required her to testify before the grand jury.

To resolve this question, the court began by setting out the function of the privilege. It concluded that “the generally acknowledged purpose of the 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 the administration of justice.” It added that “a consistent application of the privilege over time is necessary to promote the rule of law by encouraging consultation with lawyers, and ensuring that lawyers, once consulted, are able to render to their clients fully informed legal advice.”

The court recognized the essential circularity of the prosecution's argument, which simply assumed that disclosure of communications between a public official and a government lawyer was in the public interest. “We cannot accept the Government's unequivocal assumption as to where the public interest lies.” While uncovering crime is undoubtedly a valid public interest, so too is the availability of candid legal exchanges between government officials and counsel. The court highlighted the importance of “a culture in which consultation with government lawyers is accepted as a normal, desirable, and even indispensable part of conducting public business.” To maintain this culture, the court held that the privilege applied to the Governor's counsel.

Although the Second Circuit's opinion deals with government attorneys, these same arguments apply in the private corporate context. In the corporate world, too, “a consistent application of the privilege over time is necessary to promote the rule of law by encouraging consultation with lawyers, and ensuring that lawyers, once consulted, are able to render to their clients fully informed legal advice.” There, too, it cannot be taken for granted that disclosure of confidential information necessarily, in the long run, furthers the public interest or the interest of the shareholders of the corporation generally. It is in the public interest to encourage “a culture in which consultation with … lawyers is accepted as a normal, desirable, and even indispensable part of conducting … business.” Privilege, in brief, is not an obstacle to the promotion of law-abiding behavior, but an important tool towards that goal.

What is particularly noteworthy, and encouraging, about this opinion is that the court need not have issued it. A month before the opinion was delivered, former Governor Rowland pleaded guilty as part of a plea bargain. By the time of the decision, the grand jury no longer was seeking Ms. George's testimony, and so the government moved to dismiss the appeal as moot. The court, however, found that the mootness of the appeal did not “require” withholding the opinion. It chose, as a matter of discretion, to issue the opinion anyway. The Second Circuit made that choice because it had a message it wanted heard.

Conclusion

For practitioners facing pressure from the government to waive their corporate clients' attorney-client privilege, these two recent cases may help persuade both the government official involved and the client that the corporate attorney-client privilege has inherent value that should not be discarded lightly.

The dangers to the proper functioning of the corporate attorney-client privilege in the wake of recent federal and state law enforcement activities have been well-documented and widely discussed. The year is not yet half over and already two reports on the issue have been produced and a third major inquiry is underway. A survey by the Association of Corporation Counsel disclosed that 30% of the respondents' corporate clients had 'personally experienced an erosion in protections offered by privilege/work product.' (http://www.acca.com/Surveys/attyclient.pdf). A similar survey of outside counsel conducted by the National Association of Criminal Defense Lawyers reported 47% of corporate clients had experienced such an erosion (http://www.criminaljustice.org/ public.nsf/freeform/publicwelcome?opendocument). Both organizations have taken up the difficult task of 'debunking the myth' that assertion of the privilege is inappropriate or a sign of guilt.

Meanwhile, the American Bar Association Presidential Task Force on the Attorney-Client Privilege has already held two public hearings as part of its mission “to educate policymakers and the general public on the importance of preserving the attorney-client privilege” (http://www. abanet.org/buslaw/attorneyclient/home.shtml.) Speakers indicated their concern at “the erosion of the protection of the attorney client and work product privilege,” described the privilege as “frayed and challenged,” and denounced “governmental efforts to weaken” it.

'Piety Reigns Supreme'

As awareness of the assault on the privilege spreads, the natural result is that employees and principals of corporate clients are less willing to trust it and, consequently, less willing to be frank with the company's attorneys. “An uncertain privilege,” the Supreme Court has said, “is little better than no privilege at all.” Upjohn Co. v. United States , 449 U.S. 383, 393 (1981). The situation was graphically described in a cover story in Business Week: “When really tough issues arise — involving risky deals, aggressive regulators, or gray-area accounting — CEOs have always been able to turn to board members and professionals for advice. Now, piety reigns supreme, and candid conversations are virtually taboo.” (“The Boss on the Sidelines,” April 25, 2005.)

Faced with this circumstance, we lawyers should emphasize to our clients that the corporate attorney-client privilege remains viable. Two recent federal court decisions indirectly reinforce its efficacy and importance and act as a reminder to prosecutors that successful pursuit of alleged criminal activity is not the only value in the criminal justice system.

United States v. BDO Seidman, LLP

United States v. BDO Seidman, LLP, 2005 WL 742642, 2005 U.S. Dist. LEXIS 5555 (N.D. Ill. March 30, 2005), involved a widely publicized IRS investigation into alleged abusive tax shelters purportedly marketed by BDO. At issue were claims by BDO customers that communications between them and the company were privileged. The government raised two chief arguments against applying the attorney-client or the statutory tax practitioner privilege. First, it invoked the crime/fraud exception. Second, it pointed to consulting agreements between BDO and its customers in which BDO stated (in a “No Warranty” section) that it was not providing legal or tax opinions. Briefly, the government's theory was that BDO, together with law firms and other organizations, were in the business of marketing prepackaged illegal tax shelters, and that the claim of privileged relations was part of a cover-up of the fraudulent conduct.

The court rejected the government's arguments. Regarding the crime/fraud argument, the court stated: “The fact that the IRS characterizes a business or individual's transactions as abusive and unlawful cookie cutter tax shelters does not mean that this characterization is a proper conclusion as a matter of law.” Nor did the court find it conclusive that essentially identical opinion letters were provided to different clients, because form or boiler-plate documents “are often used as the basis in providing professional services.” Prosecutorial allegations were not enough to overcome the claim of privilege. Instead, each document would have to be examined individually, based on the totality of the circumstances.

With respect to the “No Warranty” language, the court had previously ruled that the consulting agreements containing them did not establish an attorney-client or tax practitioner relationship. However, the court did not agree with the government that its earlier decision necessarily precluded finding privilege with regard to other communications between BDO and its clients. It examined the documents in camera and determined that only one might fall within the crime/fraud exception. It gave the client involved the opportunity to demonstrate that the document was in fact privileged and the exception inapplicable. On all the other documents, it ruled against the government. The court in BDO Seidman took the value of privilege as a given.

In re Grand Jury Investigation

In In re Grand Jury Investigation, 399 F.3d 527 (2nd Cir. Feb. 22, 2005), the Second Circuit addressed the purpose of the attorney-client privilege directly. The case involved a federal investigation into alleged corruption under former Connecticut Governor John Rowland. The grand jury subpoenaed former chief legal counsel to the Governor's Office, Anne George, who appeared but refused to answer questions, claiming attorney-client privilege. The district court issued an order compelling her to answer. Rowland and the Governor's Office appealed, and the Second Circuit reversed.

The central question was whether the attorney-client privilege protects government officials who consult a government lawyer. The prosecutor contended that, because the witness was counsel to the Office of the Governor, her loyalty should be to the Office, and thus to the public, not the individual incumbent. That loyalty, according to the prosecution, required her to testify before the grand jury.

To resolve this question, the court began by setting out the function of the privilege. It concluded that “the generally acknowledged purpose of the 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 the administration of justice.” It added that “a consistent application of the privilege over time is necessary to promote the rule of law by encouraging consultation with lawyers, and ensuring that lawyers, once consulted, are able to render to their clients fully informed legal advice.”

The court recognized the essential circularity of the prosecution's argument, which simply assumed that disclosure of communications between a public official and a government lawyer was in the public interest. “We cannot accept the Government's unequivocal assumption as to where the public interest lies.” While uncovering crime is undoubtedly a valid public interest, so too is the availability of candid legal exchanges between government officials and counsel. The court highlighted the importance of “a culture in which consultation with government lawyers is accepted as a normal, desirable, and even indispensable part of conducting public business.” To maintain this culture, the court held that the privilege applied to the Governor's counsel.

Although the Second Circuit's opinion deals with government attorneys, these same arguments apply in the private corporate context. In the corporate world, too, “a consistent application of the privilege over time is necessary to promote the rule of law by encouraging consultation with lawyers, and ensuring that lawyers, once consulted, are able to render to their clients fully informed legal advice.” There, too, it cannot be taken for granted that disclosure of confidential information necessarily, in the long run, furthers the public interest or the interest of the shareholders of the corporation generally. It is in the public interest to encourage “a culture in which consultation with … lawyers is accepted as a normal, desirable, and even indispensable part of conducting … business.” Privilege, in brief, is not an obstacle to the promotion of law-abiding behavior, but an important tool towards that goal.

What is particularly noteworthy, and encouraging, about this opinion is that the court need not have issued it. A month before the opinion was delivered, former Governor Rowland pleaded guilty as part of a plea bargain. By the time of the decision, the grand jury no longer was seeking Ms. George's testimony, and so the government moved to dismiss the appeal as moot. The court, however, found that the mootness of the appeal did not “require” withholding the opinion. It chose, as a matter of discretion, to issue the opinion anyway. The Second Circuit made that choice because it had a message it wanted heard.

Conclusion

For practitioners facing pressure from the government to waive their corporate clients' attorney-client privilege, these two recent cases may help persuade both the government official involved and the client that the corporate attorney-client privilege has inherent value that should not be discarded lightly.