Selective Privilege Waiver and Proposed FRE 502

Rule 502(b)(3) arises from the legal debate over 'selective waiver.' The SEC has twice promoted codification of selective waiver, asserting the strong policy of encouraging corporations to conduct internal investigations and to cooperate with federal investigative agencies. In 1984, Congress rejected the SEC's proposed amendment to the Securities and Exchange Act of 1934, which would have established selective waiver of materials when in furtherance of cooperation with the SEC. The SEC also included selective waiver in the final draft of its Sarbanes-Oxley (SOX) regulations, but did not ultimately adopt the provision because of concerns regarding its authority to do so: under the Rules Enabling Act of 1934, 28 U.S.C. ” 2071-2077, Congress reserved for itself the sole authority to approve any rules of court 'creating, abolishing, or modifying an evidentiary privilege.'

Although courts have split on whether waiver by production can be selective, the majority disfavors the retention of privilege after voluntary disclosure to the government. The result is not only uncertainty when corporations cooperate with government agencies, but also costly motion practice when corporations face discovery in the lawsuits by private litigants that often follow upon a government investigation.

Circuit Courts

Only two courts have approved selective waiver to the government. The Eighth Circuit upheld the protection for attorney-client communications previously disclosed to the SEC in a lawsuit by a private litigant who argued waiver. Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8^th Cir. 1977). The Fourth Circuit, while rejecting selective waiver of attorney-client communications and fact work product, upheld the protection of opinion work product disclosed to the government because of its 'especial protection' under Federal Rule of Civil Procedure 26(b)(3).

Reluctance to adopt selective waiver in furtherance of governmental investigations has come from the First, Third, Sixth, Tenth and D.C. Circuits. These courts have acknowledged that cooperating with the government is 'laudable,' but hold that encouraging such cooperation has little to do with the purpose of the attorney-client privilege and work product doctrine, ie, to protect the confidential nature of the attorney-client relationship and the attorney's case preparation. Indeed, because the investigating government authority is a potential litigation adversary, upholding the protection for materials disclosed to the government squarely contradicts the well-established authority that disclosure to an adversary establishes a clear case of waiver.

According to the Sixth Circuit, the decision between maintaining the confidence inherent in case preparation or revealing privileged documents as a means to forestall prosecution or obtain lenient treatment from a government agency is a 'tactical litigation decision' that is 'quintessential litigation strategy.' In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 306-07 (6^th Cir. 2002). The Tenth Circuit recently stated its view that the selective waiver would not be so much an exception to the rules of waiver but, rather, an entirely new 'government-investigation privilege.' (In re Quest Communications Int'l Inc. Sec. Litig., CV No. 06-1070 (10th Cir., June 19, 2006). The Sixth and Tenth Circuits both have held that a confidentiality agreement between the producing corporation and investigating authority does not prevent waiver. In contrast, the First, Second and Fourth Circuits have left open whether a confidentiality agreement with the government can protect the documents from discovery by others.

FRE 502

Now enter proposed FRE 502. As mentioned above, only Congress may enact rules of evidentiary privilege. Here, an act of Congress is desirable, because the proposed rule would alter the balance between two conflicting aspects of public policy. Congress can override the conflicting case law and even reach beyond the Federal Rules to enact a statute applicable in state courts and other forums not governed by the Federal Rules of Evidence.

The legislative process will provide an opportunity for input that practitioners should not miss. For example, paragraph (b)(3) of proposed Rule 502 raises concerns that should receive some attention during the public comment phase.

Individuals facing criminal prosecution in the wake of a corporate investigation will want clarification on how a government agency's agreement to confidentiality may limit, if at all, the rules of criminal procedure. Pursuant to Federal Rule of Criminal Procedure 16 and Brady v. Maryland, 373 U.S. 83 (1963), criminal defendants are entitled to information in the government's possession material to the defense. If the government refuses to produce based on Rule 502(b)(3), and the corporation refuses to produce on privilege grounds, the language of 502(b)(3) as it now stands leaves open for the courts whether the defense may compel production. The broad language of provision (b)(3) by itself, however, offers no guidance or comfort in favor of the interpretation that Rule 502 yields to Rule 16 or Brady and its progeny.

On the other hand, corporations may welcome Rule 502 because it will let them cooperate with government investigations without the side effect of opening their files to discovery by private litigants. In particular, the proposed rule would permit corporations to avoid costly and time-consuming privilege reviews at the investigations stage and make it safer and easier to provide evidence that charging the corporation would be inappropriate.

The rule does not address the situation of an individual who is or was a corporate executive and who finds himself a defendant in a civil suit brought by the government or by shareholders. Is that individual entitled to the privileged materials provided to the government in a prior investigation? The vague clause in provision (b)(3) that permits disclosure to 'persons involved in the investigation' arguably includes persons who participate in a corporation's internal investigation, but the Committee Notes do not say so. And what if the individual was implicated by the investigation although he did not participate in it? Furthermore, in the case of derivative litigation, the individual defendant is technically an adversary to the corporation on whose behalf the shareholder has brought suit. Because the case law from which Rule 502 arises holds that disclosure to an adversary waives all privilege, the corporation risks subject matter waiver by subsequently providing privileged investigation materials to the individuals who are nominal co-defendants. It would be better to nail down these loose ends before any rule is enacted than to wait for them to be resolved by perhaps conflicting judicial decisions.

Conclusion

Adding language to the rule or the committee notes clarifying that FRE 502 does not alter the discovery now available under the Federal Rules of Criminal Procedure should not be controversial. Perhaps more so would be a provision that allows discovery by individual defendants of the privileged documents turned over to the government. This would be an expansion of the selective waiver currently proposed, and it is difficult to see how such an expansion furthers either cooperation with government investigations or the relationship between the attorney and his corporate client. Fundamental fairness to criminal defendants, however, argues in favor of permitting all persons implicated by the company's cooperation with the government to have access to the materials that resulted in the civil or criminal prosecution.

Since the proposed rule is structured as a 'waiver by disclosure' with 'exceptions,' it may leave unresolved the questions and conflicts in the case law on waiver that are not directly answered by the text. On the other hand, the Tenth Circuit has said that proposed FRE 502(b)(3) would effect a new 'government investigation privilege.' If other courts agree, the new rule might sweep away the muddled case law and encourage courts to write on a clean slate.

Lauren Rosenblatt is an associate in the Washington, DC, office of McGuireWoods LLP. She practices with the securities litigation group of the firm's commercial litigation section.

This summer, the standing committee on the federal rules of the Supreme Court's Judicial Conference will propose for public comment Federal Rule of Evidence 502 and Committee Notes, initially drafted and recommended by the Advisory Committee on Evidence Rules. http://www.uscourts.gov/rules/. Proposed Rule 502 addresses the waiver of privilege arising from the production of documents: the effect of inadvertent production, the scope of the waiver arising from both inadvertent and intentional production, and ' the subject of this article ' the effect on future claims of privilege of producing documents to the government in the course of an investigation.

In its current form, proposed FRE 502, 'Attorney-Client Privilege and Work Product: Waiver by Disclosure,' states that a person or entity waives privilege by voluntarily disclosing protected information unless that disclosure is made 'to a federal, state, or local governmental agency during an investigation by that agency, and is limited to persons involved in the investigation.'

Proposed Rule 502(b)(3)

Rule 502(b)(3) arises from the legal debate over 'selective waiver.' The SEC has twice promoted codification of selective waiver, asserting the strong policy of encouraging corporations to conduct internal investigations and to cooperate with federal investigative agencies. In 1984, Congress rejected the SEC's proposed amendment to the Securities and Exchange Act of 1934, which would have established selective waiver of materials when in furtherance of cooperation with the SEC. The SEC also included selective waiver in the final draft of its Sarbanes-Oxley (SOX) regulations, but did not ultimately adopt the provision because of concerns regarding its authority to do so: under the Rules Enabling Act of 1934, 28 U.S.C. ” 2071-2077, Congress reserved for itself the sole authority to approve any rules of court 'creating, abolishing, or modifying an evidentiary privilege.'

Although courts have split on whether waiver by production can be selective, the majority disfavors the retention of privilege after voluntary disclosure to the government. The result is not only uncertainty when corporations cooperate with government agencies, but also costly motion practice when corporations face discovery in the lawsuits by private litigants that often follow upon a government investigation.

Circuit Courts

Only two courts have approved selective waiver to the government. The Eighth Circuit upheld the protection for attorney-client communications previously disclosed to the SEC in a lawsuit by a private litigant who argued waiver. Diversified Industries, Inc. v. Meredith , 572 F.2d 596 (8 th Cir. 1977). The Fourth Circuit, while rejecting selective waiver of attorney-client communications and fact work product, upheld the protection of opinion work product disclosed to the government because of its 'especial protection' under Federal Rule of Civil Procedure 26(b)(3).

Reluctance to adopt selective waiver in furtherance of governmental investigations has come from the First, Third, Sixth, Tenth and D.C. Circuits. These courts have acknowledged that cooperating with the government is 'laudable,' but hold that encouraging such cooperation has little to do with the purpose of the attorney-client privilege and work product doctrine, ie, to protect the confidential nature of the attorney-client relationship and the attorney's case preparation. Indeed, because the investigating government authority is a potential litigation adversary, upholding the protection for materials disclosed to the government squarely contradicts the well-established authority that disclosure to an adversary establishes a clear case of waiver.

According to the Sixth Circuit, the decision between maintaining the confidence inherent in case preparation or revealing privileged documents as a means to forestall prosecution or obtain lenient treatment from a government agency is a 'tactical litigation decision' that is 'quintessential litigation strategy.' In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 306-07 (6^th Cir. 2002). The Tenth Circuit recently stated its view that the selective waiver would not be so much an exception to the rules of waiver but, rather, an entirely new 'government-investigation privilege.' (In re Quest Communications Int'l Inc. Sec. Litig., CV No. 06-1070 (10th Cir., June 19, 2006). The Sixth and Tenth Circuits both have held that a confidentiality agreement between the producing corporation and investigating authority does not prevent waiver. In contrast, the First, Second and Fourth Circuits have left open whether a confidentiality agreement with the government can protect the documents from discovery by others.

FRE 502

Now enter proposed FRE 502. As mentioned above, only Congress may enact rules of evidentiary privilege. Here, an act of Congress is desirable, because the proposed rule would alter the balance between two conflicting aspects of public policy. Congress can override the conflicting case law and even reach beyond the Federal Rules to enact a statute applicable in state courts and other forums not governed by the Federal Rules of Evidence.

The legislative process will provide an opportunity for input that practitioners should not miss. For example, paragraph (b)(3) of proposed Rule 502 raises concerns that should receive some attention during the public comment phase.

Individuals facing criminal prosecution in the wake of a corporate investigation will want clarification on how a government agency's agreement to confidentiality may limit, if at all, the rules of criminal procedure. Pursuant to Federal Rule of Criminal Procedure 16 and Brady v. Maryland , 373 U.S. 83 (1963), criminal defendants are entitled to information in the government's possession material to the defense. If the government refuses to produce based on Rule 502(b)(3), and the corporation refuses to produce on privilege grounds, the language of 502(b)(3) as it now stands leaves open for the courts whether the defense may compel production. The broad language of provision (b)(3) by itself, however, offers no guidance or comfort in favor of the interpretation that Rule 502 yields to Rule 16 or Brady and its progeny.

On the other hand, corporations may welcome Rule 502 because it will let them cooperate with government investigations without the side effect of opening their files to discovery by private litigants. In particular, the proposed rule would permit corporations to avoid costly and time-consuming privilege reviews at the investigations stage and make it safer and easier to provide evidence that charging the corporation would be inappropriate.

The rule does not address the situation of an individual who is or was a corporate executive and who finds himself a defendant in a civil suit brought by the government or by shareholders. Is that individual entitled to the privileged materials provided to the government in a prior investigation? The vague clause in provision (b)(3) that permits disclosure to 'persons involved in the investigation' arguably includes persons who participate in a corporation's internal investigation, but the Committee Notes do not say so. And what if the individual was implicated by the investigation although he did not participate in it? Furthermore, in the case of derivative litigation, the individual defendant is technically an adversary to the corporation on whose behalf the shareholder has brought suit. Because the case law from which Rule 502 arises holds that disclosure to an adversary waives all privilege, the corporation risks subject matter waiver by subsequently providing privileged investigation materials to the individuals who are nominal co-defendants. It would be better to nail down these loose ends before any rule is enacted than to wait for them to be resolved by perhaps conflicting judicial decisions.

Conclusion

Adding language to the rule or the committee notes clarifying that FRE 502 does not alter the discovery now available under the Federal Rules of Criminal Procedure should not be controversial. Perhaps more so would be a provision that allows discovery by individual defendants of the privileged documents turned over to the government. This would be an expansion of the selective waiver currently proposed, and it is difficult to see how such an expansion furthers either cooperation with government investigations or the relationship between the attorney and his corporate client. Fundamental fairness to criminal defendants, however, argues in favor of permitting all persons implicated by the company's cooperation with the government to have access to the materials that resulted in the civil or criminal prosecution.

Since the proposed rule is structured as a 'waiver by disclosure' with 'exceptions,' it may leave unresolved the questions and conflicts in the case law on waiver that are not directly answered by the text. On the other hand, the Tenth Circuit has said that proposed FRE 502(b)(3) would effect a new 'government investigation privilege.' If other courts agree, the new rule might sweep away the muddled case law and encourage courts to write on a clean slate.

Lauren Rosenblatt is an associate in the Washington, DC, office of McGuireWoods LLP. She practices with the securities litigation group of the firm's commercial litigation section.