To Share or Not to Share: The Ever-Present Risk of Selective Waiver of Attorney-Client Privilege and Work Product

Corporate entities that find themselves in litigation after a negative announcement or embarrassing event often conduct internal investigations to get to the root of the problem.  Outside law firms, usually not the company’s regular counsel, typically conduct these investigations to ensure objectivity and avoid a cloud forming over the investigation.  Where intentional or willful wrongdoing is suspected, the company (i.e., management) or the board typically authorizes the investigating counsel to share their findings and supporting evidence with appropriate governmental agencies, particularly the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), which typically have primary interest among federal agencies in these events.  From the company’s standpoint, doing so shows the company’s desire to be a good corporate citizen and willingness to cooperate with the government in rooting out wrongdoing.  It also potentially gets them credit for cooperating.  Such credit can be beneficial if legal violations are later found, as it may result in the government granting a degree of leniency in whatever punishment may be appropriate for the identified violations.

Because information gathered by counsel during these investigations derives from interviews of company employees, agents and review of company documents, a collective body of information generally protected from disclosure by the attorney-client privilege and the attorney work-product doctrine (which protects counsel’s thought processes and intellectual work product), it is not usually available to investigating authorities.  As companies want to receive cooperation credit that may help spare them harsh sanction or public opprobrium, however, they are often willing to share privileged and protected documents and information.  Doing this obviously puts the company in a precarious position, as sharing or allowing their lawyers to share the information with the government, a potential adversary, waives the company’s privileges and protections and, with them, its right to shield the information from other adversaries.

Some courts have allowed cooperating companies to preserve their right to invoke privilege as to litigation adversaries, even though they may have shared evidence with the government.  This is known as “selective waiver,” a principle not generally favored by the federal appellate courts, but which was recently reaffirmed as a discretionary exercise by the courts in connection with the internal investigation conducted in the Volkswagen emissions case.  See In re financialright GmbH, 2017 WL 2879696 (June 23, 2017) (SDNY June 23, 2017), citing Police & Fire Ret. Syst. Of Detroit v. SafeNet, Inc., No. 06 Civ. 5797 (PAC), 2010 WL 935317, at * 2 (SDNY March 12, 2010) (recognizing a strong public interest in encouraging disclosure and cooperation with law enforcement agencies).  The majority of federal appeals courts generally do not support or permit selective waiver.  In fact, all but one of those that have considered the issue have expressly rejected it.  Compare, e.g., Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 606 (8th Cir. 1977) (en banc) with In re Steinhardt Partners, LP et al., 9 F.3d 230, 235 (2nd Cir. 1993).  This is because the concept of selective waiver sits at the intersection of several longstanding legal doctrines and doesn’t fit nicely with any of them.  The Supreme Court has yet to take up the issue.

The first doctrine is that the legal process is entitled to every person’s evidence and any impediment to receiving that evidence must yield or, in the case of certain privileges, be narrowly construed to permit disputes to be decided on the greatest amount of evidence available.  The second is that for justice to prevail, every litigant must have the unabridged freedom to speak candidly and openly with their advocate without fear of disclosure or recrimination so as to be able to receive the best and most fully informed counsel concerning the consequences of what they said, saw, heard and did and the likely rights and risks attaching thereto.  Lastly, the law does not permit a person to use evidence as both a sword, to advance their own interests, and a shield, to prevent adversaries from gaining access to the same evidence for possible use against them.  As a result, a privilege, once waived, ordinarily is lost forever.  Steinhardt Partners, 9 F.3d at 235.

Courts that have permitted selective waivers have typically done so when the company has entered into a signed agreement with the government agency with which it intends to share information, acknowledging that in sharing, the company is not intending to waive any privilege or other legal protection to which it is entitled and the government intends to preserve the confidential nature of the company’s information.  See In re financialright GmbH; In re: Cardinal Health, Inc. Securities Litigation, 2007 U.S. Dist. LEXIS 36000.  The practice of selective waiver became so common after the accounting, option backdating and other corporate scandals of the early aughts, when the DOJ and SEC each identified cooperation as an element they would consider when assessing a company’s culpability for wrongdoing, see DOJ’s Thompson memo and SEC’s Seaboard Report that, in 2015, the federal courts adopted a new rule, Evidence Code section 502, and specifically 502(a), to “limit waiver of the privilege normally to the communication or materials disclosed, and not to the entire subject matter of the communication.”  In other words, the courts will “normally” recognize a cooperating company’s invocation of privilege as to all evidence on a particular subject save that directly shared with the government.  The inclusion of normally leaves open the possibility of there being instances where the courts may find a full subject-matter waiver.

Adoption of 502(a) reflects a recognition by the courts that, notwithstanding the doctrinal disfavor for the sword-and-shield effect of selective waivers, a strong public policy favors companies voluntarily doing as much as they can to efficiently maintain and self-police a business environment conducive to timely and accurate reporting, and free of wrongdoing.  Where potential issues arise, companies should err on the side of sharing, giving effect to this judicially recognized public policy, but only to the extent necessary, and with a non-waiver/non-disclosure agreement to cover whatever is shared with the government.  Even taking this prophylactic step, however, a selectively waiving company must be mindful of the risk that oversharing could lead an aggressive civil adversary to urge a full subject-matter waiver, in which case the protections of 502(a) would have to yield to the weight of doctrinal history.

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood