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By Kristin Casler, featuring James A. Paone II of Davison Eastman & Muñoz P.A., Stephen Wagner of Cohen Tauber Spievack & Wagner P.C. and William Crosby of Interpublic Group.
As corporate counsel, you wear many hats. Preserving the attorney-client privilege and meeting ethical obligations as you juggle them can be a challenge. Three attorneys who regularly deal with multi-chapeau dilemmas consider a few scenarios that might trigger a privilege or ethics issue and offer solutions that could help protect privilege and you.
An Internal Audit Department review uncovers $500,000 in accounting irregularities—cash advances and off-shore transfers without supporting documentation—at the Malaysian division of NeverFear Covers, an international cell phone case manufacturer. You’re a NeverFear in-house lawyer. NeverFear does 70% of its work for the Malaysian Health Ministry. The head of Internal Audit says he is just keeping you in the loop. His department will conduct an investigation and bring in outside auditors to assist with the volume of document review. He’ll keep you posted.
The concern at this early stage is that the counsel needs to be more than in the loop; he needs to be very much involved, said William Crosby of Interpublic Group. In fact, the lawyer should be the client and hire the outside auditors. The outside auditors should have a formal retainer letter, specifically stating that the work being done is to assist the legal department in connection with the potential risks of litigation, Crosby said. You can’t do it after the fact.
“You can’t delegate every part of the investigation to auditors, even if it is something within their typical area of expertise,” Crosby said. If the work involves search parameters, the attorney needs to be closely involved in determining the limits of the search. The attorney also needs to be conscious of the privilege rules that apply in the jurisdiction.
An email review has been done, and it is discovered that someone at NeverFear has been communicating with a junior person at the Health Ministry about how the company could give a volume rebate back to the ministry. They discuss diverting funds to an offshore account in Thailand, and the employee offers to give fake invoices. The auditors want to interview the employee and plan to fire him.
Crosby asked, “Should the forensic accountant do the interview? He/she certainly has the expertise and should be part of the interview team. But, at a minimum, the lawyer needs to take an active role in developing the questions and the interview strategy in order to maintain the privilege down the road.
Additionally, Crosby reminded that the employee must be given the Upjohn warning (Upjohn v. U.S. (449 U.S. 383 ), so he knows that the attorney represents the company, not him, and that the privilege belongs to the company, not him. The employee also must be told to keep the conversation confidential. Talking to others about it can destroy the privilege. This warning, Crosby said, should be part of the written record of the interview. The attorney also should document all impressions and conclusions reached, without creating a literal transcript, as those impressions, rather than the underlying facts, would be privileged. Further, the legal department should create any final report. Any such report should be shared on a need-to-know basis.
“Remember, the purpose of the investigation is to assist in providing legal advice. Be careful not to include any non-legal conclusions in the report, such as those concerning termination,” Crosby said.
The Malaysian government has been separately investigating and is aware of the company’s investigation. It offers to look the other way on any potential legal violations by the company if the company shares the results of the investigation.
While that sounds like a pretty good deal, Crosby cautioned that doing so could constitute a waiver of the privilege. To the extent you provide any information, it should be limited to the underlying facts, which are not protected. The best case would be if the facts could be provided verbally, but that may not always be realistic.
“Look at it this way,” Crosby said. “Don’t turn over anything to anyone that you would not be willing to turn over to a U.S. agency, such and the Securities and Exchange Commission or Department of Justice.”
You are in-house general counsel for a company with a wildly successful product. You and a handful of competitors, for a variety of reasons, including but not limited to government regulation, do not compete on price. You compete on market share. The government investigates and prosecutes a competitor for improper marketing techniques. The techniques are common throughout your industry.
Your competitor pleads guilty and pays a fine in the hundreds of millions of dollars.
Your CEO asks you to determine whether or not your company is susceptible to prosecution and asks for an evaluation of your company’s marketing practices. Because of the size of the task, employees from outside of the Law Department are brought on to your staff to assist in the project.
You and your competitors are sued in a class action lawsuit. During discovery, you are directed by the company to use the ESI vendor that was in place prior to the litigation. The plaintiff subpoenas the vendor seeking details of conversations you, your subordinate lawyers and staff had with the vendor about the case. You move to quash based on attorney-client privilege.
Upjohn provides privilege to communications between counsel and employees. So what happens in the case of a third-party vendor that is not an employee?
“Normally, communications between a client’s agent and the attorney would be protected only if the communications are authorized or ordered by the attorney or otherwise created in the course of the attorney-client privilege,” said James A. Paone, II of Davison Eastman & Muñoz P.A.
The issue was recently addressed by a Florida Appeals Court in Las Olas River House Condominium v. Lorh (181 So. 3d 556 ). The Los Olas test is whether:
1) The communication would not have been made but for the contemplation of legal services. 2) The employee making the communication did so at the direction of his/her corporate superior . 3) The superior made the request to the employee as part of the corporation’s effort to support legal services or advice. 4) The content of the communication relates to the legal services being rendered and the subject matter of the communications is within the scope of the employee’s duties. 5) The communication is not disseminated beyond those persons who, because of the corporate structure, need to know its contents.
Paone said that, in the scenario, there may only be some limited privilege attaching to the communications with the third-party vendor. Even if it already is a general vendor of the company, a separate engagement letter as a consultant to the attorney should be drafted, and it should make clear that the vendor is being specifically engaged to provide litigation support services for the lawyer, either in anticipation of litigation or in assisting with actual litigation.
“A great many vendors are in the gray area of whether they are privileged or not,” Paone said.
It comes out during the latter phases of discovery that one of the employees on loan to your department was under the impression that it was his job to protect the company to the fullest extent possible. Therefore, unbeknownst to you, but perhaps through the negligent supervision of one of your assistant general counsels, this employee took otherwise discoverable and damaging information and forwarded it to your assistant general counsel in a confidential memorandum.
It was his opinion and his intent that forwarding this memorandum converted the documents to privileged documents, a number of which appeared on a privilege log and were withheld during the litigation. As a result, an ethics grievance is filed against you and the assistant general counsel for violating Rule of Professional Conduct 5.3—responsibilities regarding non-lawyer assistants.
What are you, as general counsel, to do? “You hire an outside lawyer to represent you,” Paone said. “Every study has shown that, on average, the quantum of discipline is 25% greater in cases in which lawyers represent themselves.”
Your law department is authorized to practice law, and you have to take reasonable action to supervise non-lawyers. “You can’t leave a young lawyer under your supervision to sink or swim,” Paone said. In this case, does the young lawyer’s unlawful conduct flow up to you?
“Attorneys having direct supervisory authority over non-lawyer assistants must take reasonable action to oversee their conduct and may be held responsible for failing to do so,” Paone said.
“When I show up to investigate this, everything that you have is discoverable,” Paone said. “What I’m going to look at is your processes. You’re not liable for the violation, just for the failure to undertake efforts to prevent it. What process did you set up when all of these outside personnel were brought in? Did you give them training about privilege and document retention? These are all things that will help preserve your license.”
Further, Paone suggested that repeated training programs will help prevent such violations, particularly when there is high turnover. “Bringing people in and just assigning them tasks is a recipe for trouble,” he said.
For 20 years you have been general counsel of a large, multi-national corporation with many subsidiaries and affiliates. One such subsidiary is facing extensive litigation, in which you have been actively involved. The subsidiary CEO wants to fight; the parent company wants to settle. In addition, the parent company decides to sell the subsidiary in a management buyout, and wants you to structure the deal.
Who is your client? Stephen Wagner of Cohen Tauber Spievack & Wagner P.C. pointed out that in a corporate family, both the parent and each subsidiary and affiliate is your client, and all enjoy the protection afforded by the attorney-client privilege. But in this situation, you cannot represent all of them.
“You have to pick your client,” Wagner said. “There is a conflict of interest at the spinoff level. There could be future litigation involving your future client and former client. When they take your deposition, how do you maintain privilege?”
Wagner said a conflict remains even after the sale, because you still owe a duty of loyalty to your former client.
He cited a similar case in which a general counsel of a parent company thought that by representing the parent company and the subsidiary in the buyout that the deal would go smoothly. He provided both sides with advice at every level of the transaction.
“The general counsel made a cardinal mistake,” Wagner said. “It’s ethics 101—the general counsel did not determine from the outset the entity that he would represent. He was practicing under an intentional veil of ignorance.”
He put his entire legal staff, and their licenses in jeopardy, Wagner said. As soon as there was even a thought of selling the subsidiary, the general counsel should have said, “Who do you want me to represent?” And whoever was not represented should have been advised to get independent counsel. The general counsel should then have put it in writing. In the end, the issue was flagged by the assistant general counsel, who initially let the situation play out because she didn’t want to make waves and was loyal to her boss.
When complex interrelationships are at play, Wagner said it helps to already have a mechanism in place, such as an internal ethics and regulatory person or committee that can address these issues. You also should ensure informed waivers are signed and followed and that there is a limited scope of representation.
“This is the plight of in-house counsel,” Wagner said. “You don’t always know who you are representing. The advice is to discuss the situation with the management team and decide which entity you will represent, and stick with it.
This article is based on a panel presentation at HB Litigation Conference’s Northeast Corporate Counsel Forum.