Internal investigations have always posed vexing issues for in-house counsel. Investigations arise in many different ways. They can involve relatively small, to bet-the-company risks. In-house counsel need to make difficult decisions on matters such as scope and purpose of the investigation, who will conduct the investigation, how costs will be controlled, and the work product that they will generate.
But perhaps the toughest issue pertains to protecting the attorney-client and other applicable privileges. By now, most counsel are familiar with the risks associated with attorneys, whether in-house or outside counsel, interviewing employees. To ensure that the company maintains its attorney-client privilege, and that they do not unintentionally create an attorney-client relationship with the employee, company counsel must give “corporate Miranda” or Upjohn warnings, which take their name from Upjohn Co. v. United States, 449 U.S. 383 (1981).
Privilege issues in internal investigations rarely end with an appropriate Upjohn warning. Further complications loom, including the effect of disclosure to a governmental agency, the effect of involvement of third-party contractors such as investigators and e-discovery personnel, the appropriateness of conditioning an employee’s continued employment on participation and confidentiality, the viability of partial or selective waiver in your jurisdiction, and many others.
In-house counsel can now add one more complication: the Department of Justice’s (DOJ) recently issued “Yates Memorandum.” Taking its name from Deputy Attorney General Sally Yates, the memo is an update to the DOJ’s Principles of Federal Prosecution of Business Organization, which are memorialized within the United States Attorney’s Manual (USAM), the principal internal policy guide for DOJ attorneys across the nation. The Yates Memo actually marks just the latest chapter in a long history of DOJ wrestling internally with how to treat the attorney-client privilege in the context of corporate investigations and credit for those businesses that cooperate with the government.
While the Yates Memo makes no formal changes to the DOJ’s position on privilege with respect to cooperation credit for businesses, its practical implications could be far-reaching. To address those implications fully, a little history is in order.
The Yates Memo:
The Yates Memo is just the latest DOJ policy announcement related to the prosecution of business organizations over the last 17 years, and privilege issues have loomed large in each of the policy’s iterations.
The Holder Memo (1999)
In 1999, then-Deputy Attorney General Holder issued the first official guidance related to prosecution of business organizations. The Holder Memo noted that many of the same factors that DOJ followed when considering whether to charge an individual (e.g., sufficiency of evidence, likelihood of success at trial, deterrent, rehabilitative, and other consequences at trial) applied equally to the charging decision for business organizations. The Holder Memo also set out the following eight principles that prosecutors should consider when dealing with corporate targets: 1) The nature and seriousness of the offense; 2) The pervasiveness of wrongdoing within the corporation, including complicity or condoning by management; 3) The corporation’s history of similar conduct and enforcement; 4) The timely and voluntary disclosure of wrong doing, including, if necessary, waiver of the attorney-client privilege and the work product protection; 5) Adequacy of the corporation’s compliance program; 6) The corporation’s remedial actions; 7) The collateral consequences to shareholders and employees; and 8) The adequacy of non-criminal remedies. Holder Memo, § II (emphasis added).
The Holder Memo noted that privilege waiver was not an “absolute requirement,” but prosecutors could request a waiver in “appropriate circumstances” and could consider “the willingness of a corporation to waive the privileges when necessary to provide timely and complete information as only one factor in evaluating the corporation’s cooperation.” Holder Memo, § VI.B.
Thompson Memo (2003)
In 2003, the DOJ revised the Holder Memo in the wake of well-publicized corporate scandals such as Enron and WorldCom. The revisions were generally modest, but the pointed and skeptical tone toward corporate cooperation had a significant effect on attorney-client privilege issues.
The Holder Memo was advisory and characterized as guidance that should generally inform a prosecutor’s charging decision. By contrast, the revised policy — authored by Deputy Attorney General Larry Thompson and known as the Thompson Memo — made consideration of the factors mandatory. The Thompson Memo also noted that the “main focus of the revisions” was “increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation.” Thompson Memo, 1. While the revised policy retained the Holder Memo’s language about attorney-client privilege waiver not being an “absolute requirement,” it ushered in a new era in which fear of being labeled uncooperative — and the charging and sentencing implications attendant to such a stigma — led to more waivers requested and more waivers obtained.
McCallum Memo (2005)
Criticism of the Thompson Memo and its erosive effect on the attorney-client privilege grew over the next two years. In response, DOJ issued a memorandum from then-acting Assistant Attorney General Robert McCallum, titled “Waiver of Corporate Attorney-Client and Work-Product Protections.” The one-page McCallum Memo directed U.S. Attorneys and other DOJ department heads to establish a written review process in their districts or divisions, a directive apparently designed to ensure supervisory approval before requesting a privilege waiver.
Whatever the intent, the McCallum Memo did nothing to quell criticism of the DOJ waiver policy. That criticism grew louder as the late U.S. Sen. Arlen Specter (R-PA) introduced legislation to prohibit waiver of the attorney-client privilege as a prosecutorial consideration. See 152 Cong. Rec S11439 (Dec. 7, 2006). Equally important, abuse of a related aspect of the policy came to light in United States v. Stein, 435 F. Supp. 2d (S.D.N.Y. 2006). In a series of rulings, the Stein court eventually dismissed indictments against KPMG employees after finding that prosecutors violated the employees’ Fifth and Sixth Amendment rights by coercing KPMG to condition its payment of employees’ legal fees on the employees’ willingness to cooperate with the government.
McNulty Memo (2006)
In December 2006, the DOJ changed course with the McNulty Memo. Written by then-Deputy Attorney General Patrick McNulty, the memo explicitly superseded and replaced the Thompson and McCallum Memos. With respect to privilege waivers, the revamped policy created a two-tiered system distinguishing between “purely factual information, which may or may not be privileged, relating to the underlying conduct” (Category I) and “attorney-client communications or non-factual attorney work product” (Category II). McNulty Memo § VII.B.2.
The new policy set out a cumbersome procedure, including a multi-factor balancing test, for line prosecutors to obtain privilege-waiver approval when they had a “legitimate need” for the information to carry out their duties. Id. Once a prosecutor performed that balancing test, the memo required a further two-step process: For Category I information, the prosecutor must obtain written authorization from the U.S. Attorney, who must consult with the Assistant Attorney General before granting the request. For Category II information, the prosecutor must complete the first step, but also obtain written approval from the Deputy Attorney General — the DOJ’s second in command.
Filip Memo (2008)
Less than two years later, Deputy Attorney General Mark Filip issued his own eponymous memo that again changed DOJ’s privilege-waiver policy in the context of corporate investigations. Amid several modest changes, the Filip Memo explicitly prohibited prosecutors from requesting attorney-client communications or non-factual attorney work product (the McNulty Memo’s “Category II information”). The only exceptions were if defendants asserted an advice-of-counsel defense or where counsel-corporation communications were in furtherance of a crime.
In addition, the Filip Memo provided that a corporation’s cooperation credit no longer depended on the waiver of privilege and work-product protections. Instead, such credit turned on the willingness and sufficiency of the corporation’s disclosure of relevant facts to aid the government’s investigation.
Coincidentally, on the same day the Filip Memo was released, the U.S. Court of Appeal for the Second Circuit issued a unanimous opinion affirming the district court’s decision in Stein to dismiss criminal charges against former KPMG employees. United States v. Stein, 541 F.3d 130 (2d Cir. 2008). The court upheld the district court’s ruling that the U.S. Attorney’s Office violated the employees’ Sixth Amendment rights by requiring KPMG to condition paying the employees’ legal fees on the employees’ cooperation. Id.
Yates Memo (2015)
The Filip Memo’s changes remained undisturbed until Sept. 9, 2015, when Deputy Attorney General Yates issued a new memorandum revising DOJ’s policy in corporate investigations. The Yates Memo set out “six key steps” intended to enhance DOJ’s effort to identify culpable individuals in corporate cases, specifically: 1) To qualify for any cooperation credit, a company must disclose all relevant facts about culpable individuals. 2) Criminal and civil investigations will focus on individuals from the start. 3) Criminal and civil investigators should routinely communicate. 4) Absent extraordinary circumstances, DOJ will not release individuals from liability as part of a corporate resolution. 5) Corporate cases should not be resolved unless individual cases can be resolved before the statute of limitations. 6) In civil cases, attorneys should focus on individuals and determine whether to bring suit regardless of ability to pay.
The first step has received the most attention because it now makes full disclosure of all relevant facts a threshold for any credit, rather than just one of several factors. Likewise, the sixth step constitutes an aggressive counterpart to the first step, establishing that inability to pay will not insulate individuals from civil enforcement. Several of the other steps do not mark a change in DOJ policy and appear to be directed internally to DOJ lawyers.
The Yates Memo is silent regarding privilege, and ostensibly does not alter DOJ’s policy toward privilege waiver. The only mention of privilege is an indirect reference that companies seeking cooperation credit must cooperate completely “within the bounds of the law and legal privileges.” Yates Memo, § 1.
Two months after release of the policy, Yates addressed privilege issues more specifically in a speech, noting that “there is nothing in the new policy that requires companies to waive attorney-client privilege or in any way rolls back protections that were built into the prior factors.” Remarks by Sally Yates to American Banking Association and American Bar Association Money Laundering Enforcement Conference, Nov. 16, 2015, Washington, DC. (“11/16/15 Yates Speech”). She continued: “Facts are not [privileged]. If a law firm interviews a corporate employee during an investigation, the notes and memos generated from that interview may be protected, at least in part, by attorney-client privilege or as attorney work product.” In that situation, Yates noted that a company need not turn over the protected material with an important caveat: “[T]o earn cooperation credit, the corporation does need to produce all relevant facts – including the facts learned through those interviews — unless identical information has already been provided.” 11/16/15 Yates Speech.
Yates’s remarks and privilege analysis did little to allay concerns that the Yates Memo may be encouraging, if not requiring, waivers indirectly just as the prior policies did so directly.
Status of the Privilege Now
Despite assurances that the DOJ is not altering its stance toward privilege waiver, the Yates Memo and Ms. Yates’ public remarks raise several thorny, unanswered questions:
1. Can you provide all relevant facts without a privilege waiver? The decision on whether a company should cooperate is now more complicated. Given the “all-or-nothing” policy in the first step, companies must consider carefully whether they can meet that standard. It is not clear, for example, how this policy would affect a company that turns over what it believes are all of the relevant facts, but has a good-faith disagreement with the DOJ over an individual’s culpability. If, based on that disagreement, the company does not accede to the DOJ’s view of the case, will it still be eligible for cooperation credit?
The breadth of required disclosure also implicates the privilege. Put simply, the DOJ’s “facts are not privileged” statement is overly simplistic and does not solve the matter. Indeed, while the Yates Memo focuses solely on non-privileged information, it is easy to envision how a disagreement over privilege could jeopardize a company’s ability to receive cooperation credit.
2. What are the implications for potential partial or selective waiver? It appears that the DOJ now takes a rather formalistic view toward privilege waiver, one that courts may not follow in collateral matters that put cooperating companies at risk. For example, it appears the DOJ would expect that, after privileged employee interviews, a company would segregate in some way the “pure facts” from other information obtained and disclose the former. But even if that were done, the privilege still protects the underlying communication from which the company obtained those facts, and separating pure facts from employees’ communications to corporate counsel is, at best, difficult.
As a result, it appears that the Yates Memo effectively requires a de facto waiver. While one may characterize that waiver as a partial waiver (waiving it for purposes of just one particular subject), such waivers create an inherently slippery slope and the scope of the waiver can be subject to various and potentially damaging interpretations. Likewise, to the extent the waiver is a selective waiver (waiving for purposes of just one party, the DOJ), this characterization is of little help, as the majority of courts do not recognize selective waiver.
3. How does the new approach affect Upjohn warnings and providing counsel to individual employees? One clear effect of the Yates Memo is that in-house counsel must give even greater thought to their Upjohn warnings and when to secure separate counsel for individual employees. Given the policy’s focus on individuals, many employees may want separate representation before deciding whether to cooperate with an internal investigation.
In turn, investigations will be slowed, and company counsel may be limited in what they can learn absent a joint-defense agreement, which could prove difficult to obtain. Moreover, while the contours of an Upjohn warning remain unchanged, those warnings will take on enhanced meaning. Counsel usually try to balance an appropriately robust Upjohn warning with a facilitating approach that does not chill an employee from providing information. A more conservative, formal approach to the content of the Upjohn warning and interviewing employees may be required, which in turn could result in less information obtained
Republished with permission. This article first appeared in The Corporate Counselor, Volume 21, Number 3, in June 2016.