As Chief Legal Officer, Why Should I Not Drive the Ship?

When faced with the prospect of a government inquiry, even the Chief Legal Office may feel a little lost at sea. As leaders within the organization, however, they must take the wheel and make several critical decisions throughout the process. Of these decisions, the two that will likely draw the most attention are:

  • Your role in any internal investigation
  • Whether or not the organization should waive the privilege during the course of or at the end of the investigation.

When should the Chief Legal Officer or in-house counsel (collectively, “CLO”) be involved in an investigation?

Regardless of whether the CLO is involved in the actual investigation, their presence and moderate oversight helps the ship sail smoothly. In addition to adding efficiency to the process, one of the primary reasons why special counsel should be engaged to conduct an internal investigation is to add credibility to the results of the investigation. This does not mean that the CLO could not effectively conduct the investigation, but depending on the issues involved and how high up the chain of command the alleged violation touches, government investigators will place more credibility in an investigation conducted by an outside, independent counsel. Still, the CLO will need to be tangentially involved in the process since outside counsel, especially outside counsel hired specifically to conduct the investigation, will not be as familiar with the company’s operations, departments, internal workings, or even the basics of how the company functions. To ensure that the independent counsel’s time is well spent and efficient, the CLO may be needed to assist in creating the broad plan of action. Internal company information can help focus the investigation on the areas that were potentially involved in the alleged misconduct.

However, the CLO’s presence cannot conflict with direction of the investigation or the route that independent counsel decides it needs to travel. But if the investigation starts to stray into areas of the organization that are not remotely related, then as CLO, you should step in to keep the investigation from veering off course. Still, the key is that for the investigation to remain credible, therefore the CLO cannot be directly involved, pressure, or attempt to limit the scope of the investigation from areas of inquiry that may be related to the alleged wrongdoing.

Independent counsel will be well aware of the fact that the CLO will be left with, and need to live with, the condition of the organization after the investigation. Therefore, it’s important to help independent counsel understand the layout and operations of the organization so they can determine the proper areas of investigation, which will be appreciated.

After recognizing that as CLO you will have limited involvement in the investigation, you need to know when the CLO should actually conduct without outside counsel. The basic rule of thumb and question to ask is how high up in the organization does the alleged violation go? For larger organizations, the higher up the greater the consideration should be to engage independent counsel. Smaller organizations should think about independent counsel immediately.

As CLO, if your organization is facing a government inquiry, you will likely have the desire to jump in, get involved, throw the life preserver and be the hero. However, most of the time you are better suited and needed more back at headquarters to manage the indirect costs and consequences associated with an investigation. This includes dealing with:

  • The costs of conducting the investigation itself
  • Employees/witnesses and their respective requests
  • Management distractions as a result of the investigations
  • The company’s clients or potential clients raising concerns about the investigation
  • Employee discipline issues as a result of the investigation
  • What to report to regulators
  • Privilege issues

Accordingly, the impact of a government investigation will require your attention and skills as CLO, but the organization is better served with your attention not directly involved in the actual conducting of the investigation.

When or Why Should The Organization Waive the Attorney-Client or Work Product Privilege?

Waiving privilege, as stated at the outset of this article, is a critical and complicated decision to evaluate. The decision must weigh the anticipated value and benefit of cooperation that a waiver might reward your organization against the exposure to private litigants and the plaintiffs.

Historically, the government has demanded that organizations waive the privilege in order to be considered as cooperative in the investigation. Cooperation was, and still is, heavily weighed by the government in its charging decisions. This “culture of waiver” was further advanced when the Department of Justice (DOJ) released the Thompson Memorandum in January 2003. Since its release, the Thompson Memorandum has faced harsh criticism by the bar, courts, and Congress.

This criticism was recently fueled by Judge Lewis Kaplan’s decision in June 2006 in the United States v. Stein. In Stein, Judge Kaplan held that prosecutor’s use of the Thompson Memorandum was unconstitutional in its inducement of KPMG to stop paying the legal fees of its former partners and employees.

Additionally, Senator Arlen Spector introduced a bill in the Senate the (Attorney-Client Privilege Protection Act of 2006 (ACPPA)) that would disallow the government from requesting that an organization waive its privilege or considering in its charging decision, an organization’s decision to pay the legal fees the of employees under investigation.

Shortly after the ACPPA was introduced, the DOJ acted and Deputy Attorney General Paul McNulty released a memorandum (the “Mc- Nulty Memorandum”), which was intended to replace the Thompson Memorandum.

The McNulty Memorandum was released approximately five days after the introduction of the ACPPA was introduced. While similarly titled, “Principles of Federal Prosecution of Business Organizations” like the Thompson Memorandum, the McNulty Memorandum supersedes Thompson.

The McNulty Memorandum re-writes the provisions of the Thompson Memorandum dealing with privilege waiver and advancement of attorneys’ fees but keeps in tact other factors that prosecutors must consider when determining whether to charge an organization.

For privilege issues, the McNulty Memorandum states “waiver of the attorney-client and work product protections is not a prerequisite to a finding that the company has cooperated in the government’s investigation.” Further, the McNulty Memorandum states that a request for a waiver may only be made when there is a “legitimate need for the privileged information to fulfill the legal obligations.”

To establish a “legitimate need”, prosecutors under McNulty, must show:

  • Likelihood and degree to which the privileged information will benefit the government investigators;
  • Whether the information sought can be obtained in a timely and complete fashion by an alternative means;
  • The completeness of voluntary disclosure already provided by the organization; and
  • The collateral consequences to the organization in requiring a waiver.

McNulty goes further in its attempts to fix the Thompson Memorandum and establishes two tiers of privileged information and standards for approval for requesting waiver of each category of information.

Category I (factual information): This includes witness statements, factual interview memorandum without attorneys’ thoughts or impressions, chronologies, and fact summaries.

Category II (non-factual attorney-client communications): This includes legal advice or non-factual attorney work product, attorney’s notes, legal determinations resulting from the internal investigation, and legal advice given to the organization.

Before a government investigator may seek the waiver of Category I information, they must seek the approval of their U.S. Attorney who then must consult with the Assistant Attorney General for the Criminal Division. McNulty allows for a prosecutor to consider an organization’s response to a waiver of Category I information in its charging decision.

A request for a waiver of Category II information needs prior written approval of the Deputy Attorney General and is to be reserved for “rare circumstances.” However, a prosecutor is not allowed to consider an organization’s refusal to waive privilege on Category II information in its charging decision. But a prosecutor may favorably consider an organizations waiver in determining cooperation.

Thus, while the goal of the McNulty Memorandum was to “quiet” the criticism of the Thompson Memorandum, it has essentially created a “carrot and stick” approach to a waiver that you, as CLO, must weigh in determining whether or not to waive privilege. While the government cannot consider a refusal to waive Category II information to punish the organization, it can favorably view a waiver as cooperation.

While the benefit of cooperation is important and heavily weighed during an investigation, it must be balanced against the risk of exposure to private litigants, competitors, customers, and the plaintiff’s bar.

The majority of courts take the position that when an organization waives its attorney-client communication and work product privilege to one party, i.e. a governmental agency, the organization has effectively waived the privilege for all.

Leading cases out the of D.C., Federal, Third, Fourth, Sixth, and Tenth Circuit Courts of Appeal all have declined to adopt a rule of “selective waiver” in such situations. In essence the waiver of the privilege during a government investigation will be risking exposure to all.

One option to consider is entering into a confidentiality agreement with the investigating agency. Even in this situation, courts are split on whether a confidentiality agreement is enough to protect the privilege and exposure outside of the investigation. Courts range from the Sixth Circuit rejecting “selective waiver” in any form regardless of whether a confidentiality agreement exists or not, to the other end of the spectrum where several federal district courts recognize a difference between disclosing information to a government agency and to a private litigant. Thus, a careful analysis of current position in your jurisdiction is necessary.

These two decisions, (1) the CLO’s role in the investigation; and (2) whether the Company should waive privilege, are two of the most critical choices that must be made during an investigation. While it is best that the CLO does not “drive the ship”-- the decisions to these questions will greatly impact how to navigate the course.