Attorney-Client Privilege for the Compliance Officer: Who has it? When do you have it? How do you keep it? April 22, 2014 Marsha Gerber (Moderator) Partner Norton Rose Fulbright (713) 651-5296 Marsha.gerber@nortonrosefulbright.com Panelists Steven Smart Associate General Counsel Israel Chemical, Ltd. Advocacy Chairperson ACC Compliance & Ethics Committee (314) 983-7812 Steven.smart@icl-group.com Michael Kallens Associate General Counsel Booz Allen Hamilton Inc. (703) 377-6222 Kallens_michael@bah.com
Agenda v v v v The Attorney-Client Privilege in the US Application to In-House Counsel Exceptions The Attorney-Client Privilege Abroad The European Union Countries Outside of the European Union The Role of the Compliance Officer Understanding the Differences Between the General Counsel and Compliance Officer Compliance Personnel Serving a Legal Function The Attorney-Client Privilege as Applied to the Compliance Officer When Does the Privilege Arise? When do Compliance Personnel Communications Allow the Privilege to be Invoked? How is the Privilege Protected? 2
The Attorney-Client Privilege in the US
The Attorney-Client Privilege in the US Attorney-Client Privilege v Generally, the attorney-client privilege protects: (1) communications; (2) made between attorney and client; (3) in confidence; (4) for the purpose of seeking, obtaining, or providing legal advice or services. v Acts to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). 4
The Attorney-Client Privilege in the US Cont d. Attorney-Client Privilege (Cont d.) v Protects only communications, and not underlying facts, which may be discoverable. v Agents of an attorney The privilege also protects communications made to and from an agent of an attorney, that is an individual acting at the direction of an attorney to assist in seeking, obtaining, or providing legal advice. 5
The Attorney-Client Privilege in the US Cont d. Work Product Privilege v Protects from disclosure: v (1) documents and other tangible things; v (2) prepared in anticipation of litigation or enforcement action; v (3) by or for another party or its representative. 6
Application to In-House Counsel v v v Because outside counsels business communications with corporate clients almost always relate to seeking, obtaining, or providing legal advice or services, the attorney-client privilege is broadly applied to their communications. However, courts scrutinize the application of the privilege to inhouse counsels communications with corporate clients because these individuals often perform both legal and business functions, so communications may be for purposes other than providing legal advice. As a result, courts have held that although communications with in-house counsel may be privileged, the privilege does not attach to communications simply because they are made by or to a person who happens to be a lawyer. Diversified Industries Inc. v. Meredith, 572 F.2d 596, 602 (8th Cir. 1977). 7
Application to In-House Counsel Cont d. v For communications with counsel (both inhouse and outside counsel) to be protected by the attorney-client privilege, the corporate client asserting that privilege applies must show the communications were: Made for the primary purpose of seeking, obtaining, or providing legal advice; and Intended to be, and were in fact, kept confidential. 8
Application to In-House Counsel Cont d. v Seeking, obtaining, or providing legal advice Communications containing solely business discussions or advice are not privileged. For communications that contain both legal and business discussion, courts are split as to what standard applies: In some jurisdictions, the legal communication must be the but for purpose of the communication. That is, the communications are not privileged unless the corporate client can show the communications would not have been made but for the contemplation of legal services. In other jurisdictions, the corporate client must show that one of the significant or primary purposes of the communication was seeking, obtaining, or providing legal advice. 9
Application to In-House Counsel Cont d. v Seeking, obtaining, or providing legal advice (Cont d.) Generally, the communication should be made between the corporate client and its attorney (or agent acting at the attorney s direction). Which employees are covered as part of the corporate client? The attorney-client privilege protects covered communications between counsel and all employees, not just executive management, so long as the communication is within the scope of the employee s responsibility ( Covered Employees ). Communications between employees that carbon copy the attorney to keep him or her in the loop are often not privileged. Some courts have held that these communications weigh in favor of a conclusion that the discussion is business related, and not legal, and therefore not privileged. 10
Application to In-House Counsel Cont d. v Confidential By permitting certain individuals access to a privileged communication, a corporate client may waive its right to assert the attorney-client privilege. These individuals include those other than: The attorney (and his or her agents); The employees of the corporate client that are essential to the matter; and Agents or representatives of the corporate client that are essential to the matter. Communications should be disseminated only to those employees that need to know the information to assist counsel in seeking, obtaining, or providing legal advice. Similarly, some courts have held that communications concerning legal advice that carbon copy a non-essential employee raise a question as to the confidentiality of the communications. Although documents should be marked as confidential or privileged, such a marking will not guarantee the document becomes or remains privileged. 11
Exceptions v Exceptions to the attorney-client privilege have arisen that may impact the privilege. v The Crime-Fraud Exception The United States Supreme Court has held that the attorneyclient and work product privileges do not apply to communications in which a client seeks legal advice or services from an attorney, whether outside or internal, for the purpose of engaging in a crime or fraud. See Clark v. United States, 289 U.S. 1, 15 (1933); United States v. Zolin, 491 U.S. 554 (1989). 12
Exceptions Cont d. v The Crime-Fraud Exception (Cont d.) A party seeking to invoke the crime-fraud exception must provide prima facie evidence that: (1) The client was committing or intending to commit a crime or fraud at the time he or she consulted the attorney; and (2) The client used the legal advice or services in furtherance of the intended crime or fraud. 13
Exceptions Cont d. The Crime-Fraud Exception (Cont d.) v Courts are split on what constitutes prima facie evidence. Some courts have held that the evidence must be sufficient to allow the court to require the privilege holder to come before the court with an explanation for the evidence offered against the privilege. Other courts have sought to determine whether the evidence, if believed by a fact-finder, would establish the elements of an imminent or ongoing crime or fraud. 14
Exceptions Cont d. The Crime-Fraud Exception (Cont d.) v Other courts, including the Third Circuit Court of Appeals, have held that to invoke the crime-fraud exception, a party must offer evidence providing a reasonable basis to suspect that the attorney's advice or services were used by the client to commit a crime or fraud. v Applying this test, the Third Circuit has held that the crime-fraud exception can apply even when the attorney, whether outside or in-house, does not have knowledge of, and is not implicated in, the alleged crime or fraud. 15
Exceptions Cont d. The Crime-Fraud Exception (Cont d.) v Case analysis: In re Grand Jury, Nos. 12-1697 & 12-2878 (3d Cir. Dec. 11, 2012). Facts: ABC Corp. (a pseudonym used by the court) and two of its principals were subjects of an ongoing grand jury investigation into an illegal tax scheme. As part of its investigation, the federal government subpoenaed three former ABC Corp. in-house attorneys to obtain communications and testimony related to advice the attorneys had provided ABC Corp. regarding the acquisition of certain companies. After using the attorneys advice to acquire such companies, ABC Corp. then, without informing the attorneys, engaged in the illegal acts. ABC Corp. and its former in-house attorneys asserted attorney-client and work-product privileges, and the government invoked the crimefraud exception in response. 16
Exceptions Cont d. The Crime-Fraud Exception (Cont d.) v Case analysis: In re Grand Jury, (Cont d.) Holding: The court held that although the advice the attorneys provided concerned the acquisition of certain companies, which was not a criminal act in and of itself, and the attorneys did not have knowledge of the illegal tax scheme at the time the advice was given, the crime-fraud exception applied to ABC Corp. s assertion of attorney-client privilege because: The advice concerned acts that were an essential component of ABC Corp. s illegal tax scheme; ABC Corp. intended to execute the scheme when it sought advice from the attorneys; and ABC Corp. used the attorneys advice in furtherance of the scheme. 17
Exceptions Cont d. The Crime-Fraud Exception (Cont d.) v Case analysis: In re Grand Jury, (Cont d.) Although the court did not address ABC Corp. s work product claims, it noted that there may be circumstances in which an attorney, without knowledge of his client's illegal activity, might properly claim and prevail in asserting a work-product privilege even when his client cannot. 18
Exceptions Cont d. The Garner Exception The Fifth Circuit Court of Appeals created a fiduciary exception to the attorney-client privilege, finding that shareholders of a corporation may invade the corporation's attorney-client privilege to prove fiduciary breaches by those in control of the corporation upon a showing of good cause. Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970). Some courts have expanded this holding to apply to ERISA fiduciaries as well. 19
Exceptions Cont d. The Garner Exception (Cont d.) v Case analysis: Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, NO. 614, 2013., 2014 WL 3638848, Supreme Court of Delaware (July 23, 2014). Facts: Under title 8, section 220 of the Delaware Code, which grants shareholders the right to inspect the books and records of a company, plaintiff shareholders requested inspection of various categories of Wal-Mart s books and records relating to an internal investigation into bribery allegations. Following that request, Wal-Mart declined to produce certain documents that were protected by attorney-client privilege and the workproduct doctrine. 20
Exceptions Cont d. The Garner Exception (Cont d.) v Case analysis: Wal-Mart Stores, Inc. (Cont d.) Holding: Finding that the Garner exception to the attorneyclient privilege also applies to plenary shareholder proceedings and proceedings under title 8, section 220 of the Delaware Code, the court required Wal-Mart to produce the privileged documents because: The documents were necessary and essential to the plaintiffs claim as evidence suggested that the internal investigation was conducted by individuals in audit and legal who should have been subjects of the investigation; and The plaintiffs showed good cause to order the privileged documents to be produced. 21
Exceptions Cont d. Other Exceptions That May Apply The Self-Defense Exception: Some courts have determined that the attorney-client privilege does not apply when the attorney is sued for malpractice or ineffective assistance of counsel, charged with misconduct by a client or former client, or brings suit to recover a fee. Longo v. Premo, 326 P.3d 1152, 1158-9 (Or. May 30, 2014). The Joint Client Exception: Although it appears to be the minority view, some courts have held that in litigation between a corporation and a former officer of the corporation, the corporation cannot assert the attorney-client privilege to protect communications that the former officer had access to while employed by the corporation. Rush v. Sunrise Sr. Living, Inc., 2008 WL 1926766 (Va. Cir. Ct. Feb 12, 2008). 22
The Attorney-Client Privilege Abroad
The Attorney-Client Privilege Abroad v Although some countries recognize some concept of privilege or confidentiality concerning communications between attorney and client, many do not. v Of the countries that do recognize some privilege, many do not extend such privilege to in-house attorneys. In some countries, such as France, outside and in-house attorneys are members of separate professions that carry different rights and responsibilities. In many countries, the issue has recently arisen or is expected to arise in the near future due to important discussion concerning the growing trend of robust internal legal departments. 24
European Union v Broadly speaking, the legal professional privilege, is the European equivalent to the US attorney-client privilege. Because the relevant EU treaty does not address the privilege, the boundaries of the privilege have been developed through case law, and thus differ between the jurisdictions of the EU s member states. v At the EU regulatory level, communications between lawyer and client are protected only if the communications: Were made for the purposes, and the interests of, the client s right to defense; and Emanate from an independent lawyer who is entitled to practice in Europe. 25
European Union Cont d. v As applied to EU regulatory investigations, the privilege does not protect communications between in-house attorneys and corporate clients. In Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. Commission, Case C-550/07 P (September 14, 2010), the European Court of Justice has held that in-house lawyers do not have the ability to exercise the proper level of professional independence from their corporate client required to assert the privilege because: v As employees of their corporate client, in-house attorneys are economically dependent on their client to an extent greater than outside counsel; and In-house attorneys cannot ignore the commercial strategies pursued by their employer. Nevertheless, EU member states are not bound by the Akzo decision in framing privilege rules in their own respective jurisdictions. Member state jurisdictions differ on whether the privilege is extended to inhouse communications. 26
European Union Cont d. v A majority of EU countries recognize some sort of confidentiality obligation for communications between outside lawyer and client, but do not recognize a privilege for in-house counsel. These Include: Austria Bulgaria Czech Republic Finland France Greece Italy Poland Sweden 27
European Union Cont d. v Other member states do recognize such a privilege for in-house counsel. These include Germany, UK, Netherlands, Denmark, Belgium, Spain, and Portugal. v UK The UK s privilege covers confidential communications between in-house attorney and client that come into existence for the purpose of giving or receiving legal advice, in respect to the client s legal rights and obligations. However, because client is narrowly defined, the privilege does not extend to communications between in-house counsel and many classes of the corporate client s employees, nor does it extend to in-house counsel s communications with third parties associated with the corporate client. 28
European Union Cont d. v Germany Parties are permitted to withhold facts detrimental to their case if such information does not change the facts presented to the court. v Parties have no duty to produce documents. Attorneys can refuse to testify concerning confidential information that was received during the attorney-client relationship. This refusal can also cover in-house attorneys if acting in their authority as a legal advisor. Belgium Legal advice, whether provided by in-house or outside counsel, is confidential from production, even in investigations of national competition proceedings. The Brussels Court of Appeals expressly rejected the applicability of the EU s Akzo case. The confidentiality extends to requests for advice, related communications, and preparation materials. However, the confidentiality only protects in-house attorneys if they are members of the Belgian Institute for Company Lawyers. 29
Countries Outside of the European Union v Many other countries do not recognize an attorney-client privilege, or do recognize such a privilege, but do not extend that privilege to in-house attorneys. These include: Russia & India Recognize an attorney-client privilege, but do not extend that privilege to inhouse attorneys. China Does not recognize an attorney-client privilege. 30
Countries Outside of the European Union Cont d. v Other countries do recognize a privilege for in-house counsel, but to different degrees. These include: Canada Similar to the US, Canada protects confidential communications between an employee and an individual acting within his or her capacity as an attorney, whether outside or in-house. South Africa Recognizes a privilege for counsel, whether inhouse or outside, when (a) the adviser was acting in his or her capacity as a lawyer, (b) the communication was made in confidence, and (c) the communication was not made for the purpose of committing a crime or fraud. Brazil Enacted a statutory provision addressing privilege that protects communications between attorney and client, including in-house attorneys. 31
The Role of the Compliance Officer
The Role of the Compliance Officer v v The increasing complexity of laws, regulations, licensing and permits increases the need for compliance officers and employees (collectively Compliance Personnel), who design and implement business processes intended to ensure organizations are adhering to internal policies and regulatory requirements. Duties of the Compliance Department Compliance Personnel serve a very unique and important role within organizations. Their duties may include: Preventing corporate misconduct by creating, managing, and updating policies and procedures for employees to ensure compliance with laws and regulations; Investigating corporate misconduct, legal or ethical, as a neutral finder of fact and reporting findings to the board; and Reviewing and responding to investigative allegations of non-compliance. 33
Understanding the Differences Between the General Counsel and Compliance Officer v Because the roles of the General Counsel and Compliance Officer overlap to some extent, there has been much discussion over the autonomy of the two positions. The ABA has stated that the General Counsel should have the primary responsibility for assuring the implementation of an effective legal compliance system under the board s oversight. v There is no legal requirement that the General Counsel and the Compliance Officer be two different individuals, and many companies have combined the positions. 34
Understanding the Differences Between the General Counsel and Compliance Officer Cont d. v Many arguments have been advanced in support of combining the two positions, including: The General Counsel, with the legal department, has substantive expertise in the regulatory requirements that form the basis of a compliance program; In order for the General Counsel to provide advice to management and the Board on compliance related matters as they arise, he or she must be familiar with the business processes that ensure compliance; and In smaller organizations in unregulated industries, the cost of having two positions and departments is not justified. 35
Understanding the Differences Between the General Counsel and Compliance Officer Cont d. v Critics of combining the two positions argue: Legal and compliance represent two distinct viewpoints, both of which need to be represented in the executive suite at the same level; Combining the roles of General Counsel and Compliance Officer creates a conflict of interest, because the General Counsel defends the organization s interests whereas the Compliance Officer ensures compliance with laws; Compliance Personnel need functional independence in order to be able to perform their duties without interference; and The Federal Sentencing Guidelines for Organizations require that the Compliance Officer have direct access to and communication with the maximum governing authority of an organization. 36
Understanding the Differences Between the General Counsel and Compliance Officer Cont d. v Surveys indicate that compliance practitioners believe the two positions should be separate. In January 2013, the Society of Corporate Compliance and Ethics surveyed 800 compliance and ethics professionals and discovered: 80 percent responded that Compliance Personnel should not report to the General Counsel s office; and 88 percent felt that the General Counsel should not try to also serve as the Compliance Officer. 37
Compliance Personnel Serving a Legal Function v v v There is no legal requirement that Compliance Personnel be attorneys. Compliance Personnel may come from many fields including audit, accounting, finance, management, law, etc. Compliance Personnel are commonly attorneys because these individuals possess skills that may assist in the effective creation, implementation, and management of compliance programs. These skills may include: A knowledge of laws, regulations, and common fact patterns of violations; and A familiarity with regulatory enforcement authorities and actions. 38
The Attorney-Client Privilege as Applied to the Compliance Officer
When Does the Privilege Arise? v Under what circumstances would Compliance Personnel benefit from the attorney-client privilege? Similar to in-house counsel, Compliance Personnel who are attorneys or working at the direction of an attorney may seek to invoke the attorney-client privilege, as they may be conducting investigations into matters that may spawn future litigation or a future regulatory investigation. In providing these services, Compliance Personnel may find themselves: Interviewing witnesses and making determinations regarding credibility; Communicating with individuals concerning potential claims and defenses should litigation or an enforcement action arise; Conducting other tasks to assist in providing of legal services or advice. 40
When Does the Privilege Arise? Cont d. v Under US law, only Compliance Personnel who are acting in a professional legal capacity may qualify to have communications privileged as providing legal advice to the corporate client. That is, either: An individual who is an attorney, and is providing legal advice to a Covered Employee; or An individual who is acting at the direction of an attorney to assist the attorney in providing legal advice to a Covered Employee. 41
When Does the Privilege Arise? Cont d. v In determining whether Compliance Personnel are acting in a professional legal capacity, some courts have considered: The company s organizational structure, including whether the Compliance Person reports to the legal department or attends the legal department s meetings; Whether the Compliance Person indicated to others that he or she is acting in a legal capacity; Whether the Compliance Person was explicitly instructed to assist an attorney in providing legal advice; and The extent of the authorizing attorney s oversight regarding the Compliance Person. 42
When do Compliance Personnel Communications Allow the Privilege to be Invoked? v Compliance Personnel acting in a professional legal capacity may qualify to have communications privileged only when providing legal advice is: In some jurisdictions, the but-for purpose of the communication; or In other jurisdictions, a significant or primary purpose of the communication. v A communication may be privileged even if it was made for both legal and business purposes. v Exceptions In certain actions involving a breach of a fiduciary duty by those in control of a company, the privilege may not apply. The privilege will not apply if the client uses the advice in furtherance of an intended crime or fraud. 43
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. v Significant or primary purpose test The significant or primary purpose test was recently upheld by the Court of Appeals for the DC Circuit in In re Kellogg Brown & Root, Inc. This test provides a lower threshold to protect communications than the but for test, as a communication may be protected even though it has multiple purposes that are both legal and nonlegal. 44
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. v Case analysis: In re Kellogg Brown & Root, Inc., No. 14-CV-5055 (D.C. Cir. June 27, 2014). Facts: Arguing attorney-client privilege and work product protection, KBR refused to produce 89 documents to a False Claims Act relator. These documents related to internal audits and investigations conducted by KBR s Code of Business Conduct Department, allegedly under the oversight of its internal legal department. Holding: Reversing the district court s finding that the documents must be produced because the primary purpose of the investigation was to comply with federal defense contractor regulations, the court held that the documents were protected by the attorney-client privilege since one of the significant purposes of the COBC department s investigation was to assist the legal department in providing legal advice. 45
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. v Significant or primary purpose test (Cont d.) Applying this test, courts have held that the following communications are protected by attorney-client privilege: Communications between a Compliance Person and another employee undertaken in internal investigations that were conducted, at least in part, for the purpose of providing legal advice. Interview notes taken by a Compliance Person during the course of an investigation that was done at the request of counsel. Notes and Memoranda created by outside counsel during an internal investigation, even though the purpose of the investigation was not exclusively legal. 46
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. v But-for purpose test This test applies a stricter standard than the significant or primary purpose test. Under this test, courts have applied greater scrutiny to communications and required that the legal purpose of the communications be the sole purpose. 47
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. v Applying the but-for purpose test, courts have refused to protect the following communications: Emails and attachments arising out of audits conducted by Compliance Personnel that did not have an attorney in the to or from fields. Unsolicited allegations of violation of a compliance policy sent from an employee to Compliance Personnel. Documents that indicated they were drafted to facilitate the provision of compliance advice. Documents prepared for simultaneous review by legal and non-legal personnel. Preexisting forms that were not privileged in their own right, but were tendered through a lawyer. A compliance department s log of compliance issues that needed to be investigated, which was sent between Compliance Personnel and another employee and did not discuss previous legal advice. 48
When do Compliance Personnel Communications Allow the Privilege to be Invoked? Cont d. Shared considerations between the tests v Courts that have applied the significant or primary purpose test have considered some of the same factors as courts applying the but-for purpose test, including: Whether the communication from the employee to Compliance Personnel explicitly sought legal advice and comment; The extent of the legal purpose of the communications, and the relation of that purpose to the business purpose of the communications; Whether the communication was sent to or from the individual acting in legal authority or whether that individual was merely incidentally carbon copied; and The breadth of the recipient list in assessing the centrality of potential legal advice generated by the communication. 49
How is the Privilege Protected? v As discussed above, the attorney-client privilege is frequently extended to communications made to or from individuals, other than in-house counsel, that are acting at the direction of an attorney to provide legal advice or services. v Because attorney-client privilege determinations are fact specific, and even more so when involving individuals that are not outside or in-house counsel, Compliance Personnel should take proper steps to preserve and strengthen their ability to claim the attorney-client privilege in the future. 50
How is the Privilege Protected? Cont d. v When acting in a professional legal capacity (or at the direction of an attorney) to provide legal advice or services, Compliance Personnel should: Formalize such in writing and, if necessary, obtain a signature from the authorizing attorney; Clearly indicate such in every communication with other employees concerning the matter for which the legal services are being provided; If interviewing individuals pursuant to the matter for which the legal services are being provided, inform the interviewee, in writing, that the interview is being conducted for the purpose of providing legal advice; Mark all communications relevant to the matter for which the legal services are being provided as privileged and confidential, and keep those communications separate from other non-privileged communications; If the matter involves an internal investigation, ensure that the employees conducting the investigation are completely independent from the conduct being investigated; When advice is provided regarding whether future conduct under consideration may be in violation of law, in appropriate circumstances, inform the client that if the advice being provided is interpreted to have been used in furtherance of a crime, the crime-fraud exception may negate the privilege; 51
How is the Privilege Protected? Cont d. v v v v Instruct employees to take care in cc ing Compliance Personnel on communications that do not have a legal purpose, as this may call into question other communications for which privilege is sought; Ensure that a clear distinction is made on communications to Compliance Personnel that are for business purpose rather than legal purpose; Communicate with a supervising attorney in writing, periodically providing updates of the matter for which the legal services are being provided; and Consider involving outside counsel: When the legal purpose of the matter is unclear; To hire third-party representatives (such as accountants, auditors, etc ) to ensure that communications with those representatives are cloaked in attorney-client privilege as representatives of outside counsel; and When the matter for which the legal services are being provided is of sufficient scope to invoke an analysis of the fiduciary responsibility of corporate officers or directors. 52
Special Thank You! For assisting in preparation of these materials, the panelists wish to thank: Cristina Lunders, Christian Menefee, and Ilana Sinkin. Cristina Lunders is a Senior Associate at Norton Rose Fulbright s Houston office who focuses her practice on international anti-corruption compliance and investigations, including Foreign Corrupt Practices Act investigations, as well as litigation matters. Christian Menefee is an Associate at Norton Rose Fulbright s Houston office who also focuses his practice on international anti-corruption compliance and investigations, and litigation matters. Ilana Sinkin is an Associate at Norton Rose Fulbright s Washington, D.C. office who focuses her practice on government investigations and white collar crime. 53