Parallel Criminal Investigations

Given the scope of discovery in federal civil cases, companies involved in complex civil litigation ' often involving anti-trust claims, securities fraud or trade secrets ' frequently seek protective orders to limit the potential disclosure of confidential proprietary information. Under the Federal Rules, civil discovery is broad, but not unlimited. See Fed.R.Civ.P. 26(b)(1). Through a protective order, for “good cause,” a court may limit discovery to protect the producing party against “annoyance, embarrassment, oppression, or undue burden or expense.” Id. Among their safeguards, protective orders allow a court to seal a deposition or document and establish specific mechanisms to prevent the unnecessary disclosure of trade secrets, confidential research, development or commercial information. Id. These safeguards can be advantageous for both sides in a suit by encouraging the full disclosure of all relevant evidence. As such, protective orders have been recognized as “vital” to “secure the just, speedy, and inexpensive determination of civil disputes.” Martindell v. International Tel. and Tel. Corp., 594 F2d 291, 295 (2d. Cir. 1979).

Despite these professed safeguards, companies might be lulled into a false sense of security by protective orders, or fail to recognize that they might also be the subject of a criminal or regulatory investigation. A litigant with a protective order, approved and signed by a federal judge, might be more willing to provide materials demanded in civil discovery that would not otherwise be reachable by subpoena. For example, to prevail in a lawsuit, a litigant might be willing to produce foreign documents held beyond the reach of U.S. courts, or materials that may otherwise be protected under the Fifth Amendment “act of production privilege.” Likewise, with a protective order in place, a corporate officer might be more willing to testify fully at a deposition, rather than consider invoking his Fifth Amendment rights. Unfortunately, this reliance may have severe consequences.

Regulators and law enforcement agencies increasingly “piggy back” off of civil suits by opening a parallel or subsequent investigation, and then issue grand jury subpoenas demanding access to all materials produced during civil discovery. Despite the vital nature of protective orders, courts recognize that grand juries serve a “fundamental government role,” both to determine if there is probable cause to believe that a crime has been committed, and, at the same time, to protect citizens against unfounded criminal prosecutions. See Branzburg v. Hayes, 408 U.S. 665 (1972). Therefore a grand jury's “investigative power must be broad if its public responsibility is adequately to be discharged.” United States v. Calandr', 414 U.S. 338 (1974)

The Three-Way Circuit Split

In the face of these two competing interests, which one prevails? The answer largely depends on the jurisdiction in which you are litigating. Six different circuit courts have addressed the relationship between civil protective orders and grand jury subpoenas. However, their inability to reach a consensus has resulted in three different standards of protection for civil litigants.

The Second Circuit provides the greatest protection. In Martindell v. ITT, 594 F.2d 291 (2d Cir.1979), the Second Circuit held that the terms of a protective order will be honored over a grand jury subpoena unless the government can establish either “improvidence” in the grant of the protective order or some “extraordinary circumstance” or “compelling need.” Id. at 296. The court found that civil protective orders encouraged full disclosure of all evidence that might conceivably be relevant, a process that would be undermined if that same evidence would later be used by the government for criminal investigatory purposes. Id. at 295-96

At the other end of the spectrum, the Fourth, Ninth and Eleventh Circuits have adopted a ” per s'” rule: that protective orders cannot shield discovery from grand jury subpoenas. See In re Grand Jury Subpoena Served on Meserve, Mumper & Hughes, 62 F.3d 1222, 1224 (9th Cir. 1995); In re Grand Jury (Williams), 995 F.2d 1013 (11th Cir.1993); In re Grand Jury Subpoen', 836 F.2d 1468 (4th Cir.), cert. denied, 487 U.S. 1240 (1988). For courts adopting the ” per se” rule, a protective order is viewed merely as a “ facilitating device” that should not be used to limit a grand jury's historically “sweeping powers to investigate allegations of criminal behavior.” Grand Jury Proceedings (Williams) v. United States, 995 F.2d 1013, 1017 (11th Cir. 1993). Here, despite the existence of a protective order, a grand jury subpoena will compel the production of confidential material unless a party can prove actual collusion between a litigant and the government. See In re Grand Jury Subpoenas (White & Case LLP), 627 F.3d 1143 (9th Cir. 2010); In re Grand Jury Subpoena, 646 F.3d 159 (4th Cir. 2011).

The First and Third Circuits, attempting to find some middle ground, have established a third standard: a rebuttable presumption in favor of grand jury subpoenas. See In re Grand Jury Subpoena (Roac'), 138 F.3d 442, 445 (1st Cir.), cert. denied, 524 U.S. 939 (1998); In re Grand Jury, 286 F.3d 153, 158 (3d Cir. 2002). Under this rule, a grand jury subpoena will override a protective order unless the party seeking to avoid the subpoena demonstrates the existence of “exceptional circumstances.” The courts here explained that they sought to create a rule that offers “flexibility” and “allows room for reasoned analysis in a way that does not undermine the public's interest in law enforcement” out of what the court termed a “misplaced deference to private parties.” In re Grand Jury Subpoena (Roach), 138 F.3d 442, 445 (1st Cir. 1998).

In 2011, the Supreme Court missed an important opportunity to finally provide clarity on this issue when it declined to review the Ninth Circuit's decision in In re Grand Jury Subpoenas (White & Case LL'). 627 F.3d 1143 (9th Cir. 2010). The Supreme Court's refusal to consider this case is significant not only because it leaves open to disagreement the relationship between grand jury subpoenas and civil protective orders for the foreseeable future, but also because it leaves undisturbed a ruling that potentially expands the reach of grand jury subpoenas far beyond their traditional geographic limitations. White & Case thus provides a useful case study of the potential dangers for unwary litigants. In next month's newsletter we will take an in-depth look at that case.

Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of Baker Hostetler, where he focuses his practice on white collar criminal and regulatory matters, internal corporate investigations and complex commercial litigation. Brian F. Allen is a litigation associate in the same office.

As law enforcement authorities have ramped up their investigations of businesses and financial institutions in recent years, companies engaged in civil litigation increasingly find themselves targets of related criminal investigations. Navigating through the competing demands of civil discovery and mounting a criminal defense poses unique challenges and potential landmines for corporate counsel. Among other considerations, confidential materials that would have otherwise been outside of the government's reach, in certain instances, may become subject to subpoena if they are produced in the course of civil discovery.

Almost three years after the Supreme Court declined to resolve the issue, tensions persist among federal courts over whether a civil protective order can in fact safeguard confidential corporate materials from compelled disclosure in a subsequent criminal proceeding. Faced with disparate standards, how litigants choose to conduct civil discovery is more vital than ever to safeguarding confidential materials and protecting a company's ability to defend against a criminal or regulatory investigation. Even before any investigation surfaces, corporate counsel must be cognizant of the risks involved, and pursue a litigation strategy that preserves the company's rights and defenses.

The Roots of the Conflict

Given the scope of discovery in federal civil cases, companies involved in complex civil litigation ' often involving anti-trust claims, securities fraud or trade secrets ' frequently seek protective orders to limit the potential disclosure of confidential proprietary information. Under the Federal Rules, civil discovery is broad, but not unlimited. See Fed.R.Civ.P. 26(b)(1). Through a protective order, for “good cause,” a court may limit discovery to protect the producing party against “annoyance, embarrassment, oppression, or undue burden or expense.” Id. Among their safeguards, protective orders allow a court to seal a deposition or document and establish specific mechanisms to prevent the unnecessary disclosure of trade secrets, confidential research, development or commercial information. Id. These safeguards can be advantageous for both sides in a suit by encouraging the full disclosure of all relevant evidence. As such, protective orders have been recognized as “vital” to “secure the just, speedy, and inexpensive determination of civil disputes.” Martindell v. International Tel. and Tel. Corp. , 594 F2d 291, 295 (2d. Cir. 1979).

Despite these professed safeguards, companies might be lulled into a false sense of security by protective orders, or fail to recognize that they might also be the subject of a criminal or regulatory investigation. A litigant with a protective order, approved and signed by a federal judge, might be more willing to provide materials demanded in civil discovery that would not otherwise be reachable by subpoena. For example, to prevail in a lawsuit, a litigant might be willing to produce foreign documents held beyond the reach of U.S. courts, or materials that may otherwise be protected under the Fifth Amendment “act of production privilege.” Likewise, with a protective order in place, a corporate officer might be more willing to testify fully at a deposition, rather than consider invoking his Fifth Amendment rights. Unfortunately, this reliance may have severe consequences.

Regulators and law enforcement agencies increasingly “piggy back” off of civil suits by opening a parallel or subsequent investigation, and then issue grand jury subpoenas demanding access to all materials produced during civil discovery. Despite the vital nature of protective orders, courts recognize that grand juries serve a “fundamental government role,” both to determine if there is probable cause to believe that a crime has been committed, and, at the same time, to protect citizens against unfounded criminal prosecutions. See Branzburg v. Hayes , 408 U.S. 665 (1972). Therefore a grand jury's “investigative power must be broad if its public responsibility is adequately to be discharged.” United States v. Calandr ', 414 U.S. 338 (1974)

The Three-Way Circuit Split

In the face of these two competing interests, which one prevails? The answer largely depends on the jurisdiction in which you are litigating. Six different circuit courts have addressed the relationship between civil protective orders and grand jury subpoenas. However, their inability to reach a consensus has resulted in three different standards of protection for civil litigants.

The Second Circuit provides the greatest protection. In Martindell v. ITT , 594 F.2d 291 (2d Cir.1979), the Second Circuit held that the terms of a protective order will be honored over a grand jury subpoena unless the government can establish either “improvidence” in the grant of the protective order or some “extraordinary circumstance” or “compelling need.” Id . at 296. The court found that civil protective orders encouraged full disclosure of all evidence that might conceivably be relevant, a process that would be undermined if that same evidence would later be used by the government for criminal investigatory purposes. Id. at 295-96

At the other end of the spectrum, the Fourth, Ninth and Eleventh Circuits have adopted a ” per s'” rule: that protective orders cannot shield discovery from grand jury subpoenas. See In re Grand Jury Subpoena Served on Meserve, Mumper & Hughes, 62 F.3d 1222, 1224 (9th Cir. 1995); In re Grand Jury (Williams), 995 F.2d 1013 (11th Cir.1993); In re Grand Jury Subpoen', 836 F.2d 1468 (4th Cir.), cert. denied, 487 U.S. 1240 (1988). For courts adopting the ” per se ” rule, a protective order is viewed merely as a “ facilitating device” that should not be used to limit a grand jury's historically “sweeping powers to investigate allegations of criminal behavior.” Grand Jury Proceedings ( Williams ) v. United States , 995 F.2d 1013, 1017 (11th Cir. 1993). Here, despite the existence of a protective order, a grand jury subpoena will compel the production of confidential material unless a party can prove actual collusion between a litigant and the government. See In re Grand Jury Subpoenas (White & Case LLP), 627 F.3d 1143 (9th Cir. 2010); In re Grand Jury Subpoena, 646 F.3d 159 (4th Cir. 2011).

The First and Third Circuits, attempting to find some middle ground, have established a third standard: a rebuttable presumption in favor of grand jury subpoenas. See In re Grand Jury Subpoena (Roac'), 138 F.3d 442, 445 (1st Cir.), cert. denied, 524 U.S. 939 (1998); In re Grand Jury, 286 F.3d 153, 158 (3d Cir. 2002). Under this rule, a grand jury subpoena will override a protective order unless the party seeking to avoid the subpoena demonstrates the existence of “exceptional circumstances.” The courts here explained that they sought to create a rule that offers “flexibility” and “allows room for reasoned analysis in a way that does not undermine the public's interest in law enforcement” out of what the court termed a “misplaced deference to private parties.” In re Grand Jury Subpoena (Roach), 138 F.3d 442, 445 (1st Cir. 1998).

In 2011, the Supreme Court missed an important opportunity to finally provide clarity on this issue when it declined to review the Ninth Circuit's decision in In re Grand Jury Subpoenas (White & Case LL'). 627 F.3d 1143 (9th Cir. 2010). The Supreme Court's refusal to consider this case is significant not only because it leaves open to disagreement the relationship between grand jury subpoenas and civil protective orders for the foreseeable future, but also because it leaves undisturbed a ruling that potentially expands the reach of grand jury subpoenas far beyond their traditional geographic limitations. White & Case thus provides a useful case study of the potential dangers for unwary litigants. In next month's newsletter we will take an in-depth look at that case.

Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of Baker Hostetler, where he focuses his practice on white collar criminal and regulatory matters, internal corporate investigations and complex commercial litigation. Brian F. Allen is a litigation associate in the same office.