Preserving privilege when undertaking internal investigations - should it remain a priority?

November 11, 2014

While traditionally seen as a strong shield against discovery requests, recent developments have shown the extent of protection offered by privilege is limited. It may be the time to rethink whether preservation of privilege should remain a top priority in internal investigations.

Privilege in the corporate context

A long-established principle, attorney–client privilege is probably the most common form of evidentiary privilege relied upon by companies to reject discovery requests. As the name suggests, assertion of attorney–client privilege covers documents and communications between a client and an attorney for which the primary purpose is to obtain legal advice. Thus, there are four basic elements in asserting attorney–client privilege:

  • attorney
  • client
  • confidential communication
  • legal advice as primary purpose.

Despite these elements being seemingly straightforward, upon closer inspection of each component in a corporate context, some are not so clear-cut.

One may think the definition of ‘attorney’ is unambiguous, but the breadth of responsibilities borne by today’s in-house counsel means it is often unclear whether advice is given in a legal capacity or in an executive capacity. Furthermore, in an international context, communications between a company and its in-house counsel may not be protected by privilege in jurisdictions such as France and Indonesia.

Perhaps the greyest area is the legal advice requirement, as the purpose of communications is often ambiguous. While certain courts require the rendering of legal advice to be the sole purpose of the communication for privilege to apply, others appear to consider it sufficient for the rendering of legal advice to be one of multiple significant purposes. In any event, this is at the discretion of the courts when taking into account the specific facts of each case.

Once the four elements are established privilege attaches to the client, but within a corporation who exactly is ‘the client’? It would be farfetched to consider every employee within the company to be the client, but what about senior executives or the board of directors?

The courts have adopted different tests in determining who within a company would qualify as ‘the client’. While some courts may approach the issue by looking at who is in a position to make decisions based on the legal advice obtained (control group test), other courts adopt a wider, more flexible approach and would look at the communication itself to decide whether it is relevant to the seeking of legal advice (subject matter test). Regardless, companies wanting to assert privilege will find themselves restrained with whom they can share information with since the passing of privileged information to a third party (essentially anyone who is not the client) would likely be considered a waiver of privilege.

Because of these complications and lack of certainty, companies have gone to great lengths to ensure privilege is maintained, which in turn has meant that a number of investigation best practices have arisen. These include:

  • substantially limiting the group of employees counsel may discuss the subject matter with
  • keeping detailed privilege records, such as meeting minutes that clearly specify the topics discussed
  • appointing external counsel as soon as an allegation arises and an investigation is anticipated.

Evidently, these restraints impair investigation effectiveness and impose additional costs.

Despite the restrictions, the matter of privilege preservation may still be at the top of the list of internal investigation plans for many companies; however, while privilege considerations have historically been critical to any internal investigations, developments over the years have eroded its significance.

The Delaware Supreme Court decision

The recent Delaware Supreme Court decision in the Wal-Mart case, which involved Wal-Mart shareholders requesting to inspect the company’s books and records after the Walmex bribery allegations, saw the court confirm application of the fiduciary exception to attorney–client privilege.

Just as the Wal-Mart shareholders in the case wanted to acquire more documents relating to internal investigations into potential FCPA violations, companies facing corporate misconduct allegations are also likely to face discovery requests from their own shareholders for examining whether the fiduciary duties of management have been breached.

In essence, the Delaware Supreme Court has opened the doors for shareholders with legitimate interests to discover documents arising from internal investigations into corporate misconduct. Without a doubt this decision renders corporate investigations prone to exposure and lessens the protection of privilege.

Waiver requests from regulators

Possibly a more fatal factor limiting the importance of privilege is what is sometimes known as ‘a culture of waiver’: policies adopted by regulators that pressure companies under investigation to waive their privilege in order to be credited for being fully cooperative.

In the past, authorities such as the United States Department of Justice and the Securities and Exchange Commission held the position that waiver of privilege was required by companies to show cooperation – an important factor when considering whether lenient treatment should be given. Following strong criticism for undermining the very reason for the existence of privilege, the authorities scaled back their stance by changing their policies; however, the consensus today is that the correlation between waiving privilege and cooperation still exists. Essentially, while companies no longer face overt pressure to waive privilege, most would feel compelled to voluntarily do so to appear to be more cooperative.

Should preserving privilege remain a priority?

Taking into account the extra steps and costs of conducting a privileged internal investigation and the possibility of losing that privilege, it may be wise to adopt a more pragmatic approach when tackling the issue of privilege during the course of planning for an investigation.

Rather than blindly rushing to assert privilege, it may be preferable to balance the benefits and costs and consider the gravity of the issue concerned before deciding whether to implement additional measures to preserve privilege. If it is decided that privilege protection is necessary, it is important to keep in mind that documents and communications that are seemingly shielded from discovery may still be exposed.

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