Protecting Privilege in Internal Investigations

Delicate Balancing (and a Backbone) Required

Rarely does a week pass in white collar and investigation or SEC-regulatory outside counsel life that an auditor or government enforcement attorney does not request some form of interim or final read-out or update. These requests for information can encompass investigative process and factual findings, lists of search terms, interview outlines, or similar investigative materials. However, this information, if provided, presents a very real risk of privilege waiver. This article encourages pushback against the “nobody else ever fights us on this” contention often heard from government enforcers and outside auditors wanting to “better understand” a client’s internal investigation making these requests.

Rarely does a week pass in white collar and investigation or SEC-regulatory outside counsel life that an auditor or government enforcement attorney does not request some form of interim or final read-out or update. These requests for information can encompass investigative process and factual findings, lists of search terms, interview outlines, or similar investigative materials.

However, this information, if provided, presents a very real risk of privilege waiver. This article encourages pushback against the “nobody else ever fights us on this” contention often heard from government enforcers and outside auditors wanting to “better understand” a client’s internal investigation making these requests.

The Never-Ending Quest for Investigative Search Terms

The problem is real. Between enforcers and the outside auditors, in virtually every internal investigation there will be a request to review a copy of the search term list. In almost every case, lawyers who acceded to such a request do so at their clients’ peril.

To understand why counsel’s tailored and carefully thought-out search term list can reveal an attorney’s strategy and thinking, consider this list: (John /2 Doe) w/50 (brib! or FCPA or corrupt!) /50 government! w/2 offic! w/50 (Prague or “Czech Republic” and da(2020)). Even this short Boolean string provides more than a subtle clue that the attorney who drafted it believes there might be evidence that John Doe, in or around 2020, engaged in bribery of a foreign official in the Czech Republic. Using the parlance of Federal Rule of Civil Procedure 26, can there be a real dispute that this search term list reveals the attorney’s “mental impressions, conclusions, opinions, [and] legal theories”?

Law on Work Product and Attorney-Client Privilege

Federal Rule of Evidence 502(g) states:

(1) “attorney-client privilege” means the protection that applicable law provides for confidential attorney-client communications; and

(2) “work-product protection” means the protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial.

The work-product privilege is of course more comprehensive than attorney-client privilege. Whereas the attorney-client privilege includes only communications between an attorney and the client, work product includes materials prepared or collected by persons other than the attorney or someone working for them with an eye towards the realistic possibility of impending litigation.

Classic opinion work product thus includes documents like investigative work plans and memoranda of interview, not mere lists of words and phrases connected by Boolean search operators. As noted, however, these search term lists, not unlike interview outlines, can reveal a great deal about the attorney’s legal theories and factual suspicions. Because these records typically would not exist but for the fact that the company anticipates potential legal action, attorneys should consider pressing the position that work-product protection should apply.

Who Are the Company’s Actual Adversaries?

Can there be a real argument that the investigative materials frequently requested by outside auditors invoking Section 10A of the Securities and Exchange Act of 1934 are not also extremely attractive to potential hostile downstream litigants, including employees terminated as a result of the investigative findings, governmental authorities, or shareholders? It is worrying that legal protection might be considered waived if the protected materials are shared with a party later deemed an adversary. See S.E.C. v. Roberts, 254 F.R.D. 371, 381 (N.D. Cal. 2008).

Government Enforcers

When government enforcers work with outside counsel and their publicly traded client, are they adversaries for the purposes of the attorney work-product doctrine? The answer for government enforcers like the DOJ and SEC is often “yes,” even if the company is now working with government parties. See generally Wadler v. Bio-Rad Laboratories, et al., 212 F. Supp. 3d 829 (N.D. Cal. 2016) (ruling in the context of an FCPA internal investigation that, pursuant to the well-settled “general waiver” principle, privileged communications cannot be shared selectively).

Outside Auditors

The trickier question comes in the context of outside auditors. Aren’t they there to help the company and aren’t their interests consequently aligned? Although not in the majority, courts have concluded that independent auditors in fact have an inherently adversarial relationship with the companies they audit. Compare Medinol, Ltd. v. Boston Scientific Corp., 214 F.R.D. 113, 116 (S.D.N.Y. 2002).

Consequently, companies have a solid basis for fearing a downstream assertion that they waived work product protection over the subject of the information disclosed to their outside auditors. These cases, and the more generally unsettled state of the law on this key issue, create a non-trivial risk that turning over their search terms today could create privilege waiver arguments tomorrow.

This fight has been fought—most frequently with success. Although privilege waiver arguments are inherently fact-dependent, being prepared to identify and fight even unwitting efforts by third parties to put privilege in jeopardy is a skillset that should be part of every careful and experienced outside counsel’s toolkit.

Doing it the Right Way—Minimizing the Risk of Successful Future Privilege Waiver Claims

Here are actions outside counsel and their clients should consider maximizing privilege over investigative search term lists and minimize the risk of future privilege-waiver claims:

Properly document that search term lists and other investigative materials were created “in anticipation of litigation.”

For investigation-related materials to fall under the protection of the work-product doctrine, they must have been prepared in anticipation of litigation. It is important, therefore, that diligent counsel think about, and contemporaneously memorialize, the best argument for why litigation is “anticipated.” Simply adding a header or footer stating that the list comprises attorney work product is, without more information, unlikely to persuade a court down the line.

Develop your argument that search terms are opinion work product.

Counsel should resist requests to turn over search term lists. Though almost always initially skeptical, it will not take much persuading to convince an experienced attorney that you are right in drawing this line. But for those who remain recalcitrant, we suggest that you put the burden on them by sharing your (or, if we may, our) analysis of the opinion they have developed supporting the assertion that the privilege waiver argument is not legitimate. The dearth of current case law on this specific issue will make sustaining that burden of persuasion challenging.

Consider appropriate steps short of turning over the full search term list and similar materials.

Outside auditors and enforcement attorneys are motivated to ask for investigative search term lists to help them determine whether the investigating attorney may have “missed” anything important. As with other questions concerning the investigatory “process,” there is nothing unreasonable about that. To help ensure these third parties that your approach to the electronic data review process is/was appropriately complete, consider, alternatively, providing verbal summaries of the subject areas covered by the search terms, or offering the third parties an opportunity to provide their own lists, against which you can compare your terms to verify whether anything needs to be added. While perhaps not ideal, such an approach considerably mitigates the risk of a subsequent privilege-waiver argument.

If you must disclose to your outside auditor (or possible joint venture or acquiring partner), do so pursuant to a confidentiality agreement spelling out the non-adversarial relationship between the parties and the common interests involved in sharing the information.

Let’s consider the scenario under which the client decides to take on the calculated risk of disclosing its investigative search terms to its outside auditor or to parties interested in understanding the full scope of the investigation prior to entering into a joint venture agreement or purchasing the company. In those cases, the company should only do so subject to a confidentiality agreement that spells out why there is, in fact, a common interest between the parties (rather than an adversarial relationship).

Manage your client and expectations

Many public companies may be used to semi-reflexively handing over to their auditors whatever information they request. As noted, the outside auditors are likely to respond to a denial for information with “an everyone gives it to us” or “we absolutely need it to sign off” on an upcoming SEC report.

You will need to manage expectations with the company’s SEC reporting team, which may feel tremendous pressure to comply with auditor requests and with in-house counsel (who may be feeling the heat from the financial reporting team, auditors, and even the CFO or Audit Committee). You will need to understand the “deadlines” for the next upcoming SEC report and work to complete the above-referenced verbal summary with the outside auditors in advance of that date to allow the auditors to consider whatever information can be shared without losing privilege. It is also beyond crucial that you keep your client’s key constituencies updated on the discussion with the auditors to avoid surprises or delays in a company’s SEC filing timeline. Nothing is worse than the CFO hearing directly that the outside auditor may need to hold up their audit, consent, or 10-Q sign off because the auditor is awaiting information on an internal investigation. (Of course, it also pays for outside counsel to have a personal relationship with their client’s audit partners so that you can have direct and frank conversations.)

These proposed steps are naturally not a one-size-fits-all solution, nor do they work in all circumstances. That said, by getting sensitized to these important issues and working with experienced investigative counsel you can ward off the serious problems flowing from unwitting privilege waivers.

This is a summary of a white paper previously published by Perkins Coie and published here by permission. To read the full version, click here.

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T. Markus Funk, PhD, who from 2016–2021 served as the firmwide chair of Perkins Coie’s White Collar & Investigations practice, is a decorated former federal prosecutor in Chicago, and a former section chief with the U.S. State Department-Balkans. He earned a PhD (DPhil) in law from Oxford University, where he started his career as a lecturer in law. In 2021, Chambers ranked him “Band 1” for Litigation: White-Collar Crime & Government Investigations – Colorado and included him in the rankings for FCPA – USA – Nationwide (a first for a lawyer based in Colorado/the Rocky Mountain Region).

Dr. Funk can be contacted at (312) 324-8681 or by e-mail to MFunk@perkinscoie.com.

Jason Day is the firmwide chair of Perkins Coie’s Corporate practice and a member of the firm’s Executive Committee. Jason serves as a trusted advisor to public companies on their most sensitive securities and corporate governance matters. He regularly counsels public company boards of directors and management on SEC disclosure obligations, fiduciary duties, internal investigations, proxy advisory firm standards and stockholder activism matters.

Mr. Day can be contacted at (303) 291-2384 or by e-mail to JDay@perkinscoie.com.

Sean Solis, Associate, an attorney in Perkins Coie’s White Collar & Investigations practice, represents clients in high-stakes internal investigations and in government enforcement proceedings pending before the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC). He has investigated and defended numerous high-profile matters, both criminal and civil, involving alleged accounting and securities fraud, violations of the Foreign Corrupt Practices Act (FCPA), and violations of the Controlled Substances Act (CSA).

Mr. Solis can be contacted at (303) 291-2384 or by e-mail to SSolis@perkinscoie.com.