A New Jersey federal district court recently ordered Merck & Co. to hand over privileged documents to plaintiffs in a shareholder derivative action. Merck had disclosed the documents to the Department of Justice (DOJ) under a confidentiality and non-disclosure agreement in connection with a government investigation concerning its drug Vioxx. In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., No. 2:05-2367 SRC, 2012 WL 4764589 (D.N.J. Oct. 5, 2012). The court was not persuaded by Merck's claim of privilege in the subsequent ancillary litigation. The privileged documents were disclosed to the DOJ pursuant to a confidentiality and non-waiver agreement in which the corporation had expressly reserved the right to assert the privilege as to third parties. Refusing to adopt the "selective waiver" doctrine, which preserves privilege where the disclosing party entered into an express confidentiality and non-waiver agreement in connection with the government investigation, the court ruled that Merck's voluntary production of the documents to the government, despite the existence of a confidentiality and non-waiver agreement, operated as a complete waiver of any applicable privilege.
Current Law Concerning Waiver of Privilege when Complying with Government Investigations
From a business perspective, the court's order to produce the privileged documents appears to be a disincentive for a corporation to cooperate with government investigations. Yet the New Jersey court's decision aligns with the majority of case law on the subject. In Permian Corp. v United States, 665 F.2d 1214 (D.C. Cir. 1981), the D.C. Circuit Court found that a full waiver of the attorney-client privilege occurred when the corporation disclosed confidential information to the Securities and Exchange Commission (SEC) at its request. Other circuits followed suit, and now the First, Third, Fourth, Fifth, Sixth, Tenth and Eleventh Circuits follow the traditional view that disclosures to government agencies negate any other assertions of privilege.
If the Merck case had been decided in a different jurisdiction, the result may have come out differently. Advocating a more lenient stance on waiver, the Eighth Circuit, in Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc), held that employee interviews given during an internal investigation conducted by outside counsel are entitled to the attorney-client privilege and further, that this privilege was not waived when the company voluntarily surrendered the investigation materials to the SEC in accordance with a subpoena. The Eighth Circuit recognized that allowing such material to be disclosed to third parties would thwart efforts of corporations to protect stockholders by employing independent outside counsel to investigate allegations of wrongdoing. Id. at 611.
The Eighth Circuit's view is the minority. While most circuit courts follow the same reasoning as the New Jersey district court, some courts recognize the incentives for corporations to cooperate with government investigations and have allowed exceptions to the traditional waiver rule. For example, rather than employing a per se rule that all voluntary disclosures to the government constituted a total waiver of privilege, the Second Circuit stated it would craft rules on privilege in matters of governmental investigations on a case-by-case basis. In re Steinhardt Partners, L.P. 9 F.3d 230 (2d Cir. 1993). The Second Circuit explained it would look to two issues to determine whether privilege was preserved: 1) whether parties have a common interest and 2) whether the parties have entered into a confidentiality agreement. Id. at 236. The Ninth Circuit has also left open the possibility of selective waiver. Although the court found in McMorgan & Co. v. First California Mortg. Co., 931 F. Supp. 703 (N.D. Cal. 1996) that the corporation waived any privilege when it disclosed privileged documents to the U.S. Department of Labor, it suggested it might have come to a different conclusion regarding waiver if instead of handing over the documents "without a second thought," the corporation had entered into a protective order or stipulation with the Department of Labor regarding non-waiver of the privilege. Id. at 708. Decisions such as Steinhardt and McMorgan & Co. encourage corporations to take affirmative steps to ensure that documents provided to the government are protected from disclosure to third parties.
The Seventh Circuit has not yet taken a definitive stance on selective waiver. While the court acknowledged that the majority of courts reject the selective waiver doctrine, in Dellwood Farms, Inc. v. Cargill, Inc., 128 F.3d 1122, 1126-27 (7th Cir. 1997), it opened the door to the possibility of preserving privilege under the existence of an express non-disclosure agreement. The issues presented in these cases highlight the tension between the adversarial system's objective to find the truth, the purpose of the attorney-client privilege to encourage frank discussion between clients and their counsel, and the government's interest in protecting citizens by investigating and reducing potential corporate misconduct. Corporations must be aware of this tension when forced to determine when and how to cooperate with a government investigation.
Carefully Consider the Consequences of Disclosure
The recent Merck decision is an important reminder of the need for caution when faced with a decision to voluntarily disclose documents to a government entity. Often the first step in reacting to a corporate scandal is to embark on an independent internal investigation to understand what happened and prevent further problems. Moreover, if a federal criminal prosecution occurs, cooperation with the prosecution is a factor that may be used to reduce a corporation's fine. While there may be several advantages to providing documents at the request of the government, this decision must be weighed carefully. To illustrate, a corporation may understand that disclosure of a document summarizing an internal investigation by outside counsel would result in swift resolution of the government's case against that corporation. However, the result of disclosure of such materials could be any number of ancillary claims in the making. When faced with the decision to disclose or not, astute corporate counsel should assume that disclosure of the documents to the government is effectively full disclosure to any subsequent litigants.
Take Affirmative Steps to Preserve Your Privilege
If you must disclose privileged documents to a government entity, be smart and strategic. The trend disfavoring the selective waiver doctrine cannot be ignored; thus, corporate counsel should take the following actions to increase the likelihood that a court is persuaded to recognize privilege. The first step is to clearly show the existence of attorney-client and work product privileges. The corporation must establish a record that shows the purpose of conducting an internal investigation is the rendering of legal advice.
Next, the corporation must negotiate an express confidentiality and non-waiver agreement with the particular government entity requesting the documents. The written, signed agreement must be unambiguous and comprehensive: routine confidentiality provisions or a confidentiality warning stamp on its own is insufficient to preserve privilege. In addition to clearly stating that the documents to be disclosed are confidential and privileged, the agreement must also expressly state that disclosure of the privileged documents is limited to the specific government entity that made the request. A statement by the government entity that it will take affirmative steps to enforce the confidentiality agreement in any subsequent litigation would give the agreement even more force. Finally, the agreement must also insist that production of the requested privileged documents will not occur until after the disclosing party has obtained and memorialized the agreement with the government entity.
In addition to drafting a clear and complete confidentiality and non-waiver agreement, a corporation may be able to protect privileged documents by showing that it has been generous with producing other non-privileged documents. Allowing access to the underlying non-privileged factual documents used in preparing the privileged documents might ease the court's worry that a civil litigant will be prejudiced if denied the opportunity to discover the privileged documents.
Another way to preserve privilege of certain documents provided to the government is to argue that the corporation and government are not adversaries. If a corporation is not the subject of the government investigation, it needs to clearly establish that the government is not its adversary. Because any disclosures would be involuntary, the court's concern in preserving privilege where a party discloses information based on self-interest would be alleviated.
What This Means for Your Corporation
There is no guarantee that a court will decide (against the weight of authority) to allow selective waiver. Nevertheless, the above suggestions should be followed by any corporation that has made the important decision to disclose privileged documents to the government. The recent Merck decision shows that even in the face of an express confidentiality and non-waiver agreement a corporation may be compelled to produce privileged documents. Merck attempted to protect its privileged documents by insisting on an express confidentiality and non-waiver agreement to govern its disclosure, but was still ordered to produce. Hence, the ultimate lesson to take from the Merck decision: weigh disclosures to the government very carefully.