Featured Expert Contributor, White Collar Crime and Corporate Compliance
Greg Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP practicing in its Washington, D.C. and Reno and Las Vegas, NV offices. He serves on WLF’s Legal Policy Advisory Board. Adam E. Lyons is a Shareholder with the firm practicing in its Denver, CO office.
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A recent decision from the U.S. Court of Appeals for the Sixth Circuit demonstrates the limited showing necessary to assert attorney-client privilege and work-product protections in the context of internal investigations. In reversing a district court decision to allow discovery, a unanimous three-judge panel, led by Chief Judge Jeffrey Sutton, observed that “[w]hat matters for attorney-client privilege is not what a company does with its legal advice, but simply whether a company seeks legal advice.” Citing to precedent, the court clarified that the question to be considered by a court is whether there was a decision to solicit legal advice irrespective of a company’s reason for wanting that legal advice. Similarly, the court found that the question of whether the work-product doctrine applies hinges on whether there is any evidence to support the finding that anticipation of litigation was reasonable. This decision provides useful guidance for protecting the attorney-client privilege and work-product doctrine in internal investigations of all types.
Background
The case at issue, In re: FirstEnergy Corporation Security Litigation, arises from one of the most significant public corruption schemes in U.S. history. Following the indictment and arrest of then-Ohio House Speaker Larry Householder and several others on federal charges related to their alleged involvement in a bribery scheme also involving Ohio’s largest utility company, FirstEnergy Corporation (FirstEnergy, identified as “Company A Corp” in the indictment), FirstEnergy engaged outside counsel to investigate the involvement of the company and its employees and agents in the alleged scheme.
Not long after the arrest, the U.S. Department of Justice sent a subpoena to FirstEnergy, and several lawsuits and government investigations followed. The recent Sixth Circuit decision comes from one of those cases, a securities class action, in which counsel for the class sought production of materials from FirstEnergy’s internal investigations. FirstEnergy resisted, arguing that those materials were protected from disclosure by the attorney-client privilege and work product doctrine. Plaintiffs sought to compel production, arguing that the materials were prepared “primarily” for business and human resources purposes, not to provide legal advice or in anticipation of litigation.
In opposition to the motion, FirstEnergy argued that the investigations were conducted because “FirstEnergy was facing sudden and extraordinary legal risk” thus supporting its position that the materials were protected from discovery. FirstEnergy primarily supported this argument through the declaration of one of its board members who explained that the company conducted the investigations because of potential criminal and civil liability. However, a special master, appointed to make findings and recommendations in the matter, found that the declaration was defective in that it did not contain all the language required by 28 U.S.C. § 1746. Specifically, the declaration did not state that its contents were true. In addition, the special master found that the plaintiffs had presented evidence that the subject investigation related to the “business and human resources/public relations arena, even if those same issues also logically overlap with anticipated litigation.” Accordingly, the special master held that the discovery sought was not protected by the attorney-client privilege or work-product doctrine.
FirstEnergy filed objections to the special master’s decision with the district court, but the district court overruled the objections. FirstEnergy then sought a stay from the Sixth Circuit, which after a delay of a year, granted that request. The core of the decision is the finding that the materials were protected, such that FirstEnergy was likely to succeed on the merits of its claim.
The Attorney-Client Privilege Protects Documents that Have a Business Purpose if the Company Sought Legal Advice
The Sixth Circuit rejected the district court’s determination that the documents were not protected by the attorney-client privilege because they were used for a “business purpose.” In that regard, the district court noted that privilege claims are narrowly construed, and, where there is both legal and business purpose, the question is whether the “predominant purpose” is to render legal advice. Dist. Ct. Order at 18-19. Because the investigation had been prepared in the ordinary course of business pursuant to SEC requirements and for non-litigation human resources/public relations purposes, the district court found that the materials were not attorney-client privileged.
By contrast, the Sixth Circuit found little support for the challenge. It set forth the standard for attorney-client privilege as where there are “confidential communications between a client and his attorney if the purpose of the communication is to obtain legal advice,” and determined that it “doesn’t matter what a company does with its legal advice, but simply whether a company seeks legal advice.” That is a much broader reading of the privilege than the district court applied and one that all but dismisses any consideration of whether the purpose for seeking the materials was the provision of legal advice. Understanding the opinion to create a broad protection seems by design: the court flatly stated that “it is the rare company faced with such criminal and civil allegations that would not have a business-related reason for seeking such critical and essential legal advice.” In other words, a business is expected to have a business-related reason for seeking legal advice.
Thus, the Sixth Circuit’s reading of the law appears to be that evidencing a mixed purpose for the communication is largely moot. Where counsel is involved both for business reasons and to provide legal advice, it is not a sufficient challenge to point to the mixed purpose Instead, where the business can show that it did in fact go to counsel, regardless of whether the purpose of the inquiry was for legal reasons or for business purposes, the protection can be upheld.
Surrounding Circumstances Can Prove Work Product Protection
As for the work product question, the district court agreed with the special master that the proper test was to determine whether the primary purpose for creating the materials in question was anticipation of litigation. However, the Sixth Circuit construed that test in a unique way, instead looking purely at the situation in which the documents were created, without any direct evidence of FirstEnergy’s subjective intent. The court noted that “[t]he deluge began when the [DOJ] subpoenaed FirstEnergy immediately following the arrest for Householder, whose criminal complaint implicated FirstEnergy in wrongdoing.” Within weeks after that, “eight lawsuits loomed over various FirstEnergy directors and officers, along with multiple investigations into FirstEnergy ….” By the Sixth Circuit’s reasoning, this timeline alone demonstrated that the company conducted the investigations in anticipation of litigation. Facing an “onslaught” of external investigations, FirstEnergy was entitled to a de facto presumption that its internal investigation was initiated in anticipation of litigation.
The Sixth Circuit’s decision is significant in part because the court engaged in an “abuse of discretion” review. That level of review looks to whether the trial court “relies on erroneous finding of fact, applies the wrong legal standard, misapplies the correct legal standard when reaching a conclusion, or makes a clear error of judgment.” The opinion does not make it clear which of these elements the trial court violated. Whichever one it did, the point is that the relative timing and significance of oncoming litigation can be sufficient to demonstrate this degree of error.
Discovery Practices May Have Contributed to the Result
When considering the opinion’s future impact, litigants should assess how two specific aspects of the plaintiffs’ litigation strategy influenced the Sixth Circuit’s opinion. The class used a broad discovery request, seeking “production of all previously withheld documents … related to the internal investigation.” Additionally, the class agreed that FirstEnergy did not need to provide a privilege log for “any” documents exchanged with outside counsel that were created after Householder’s arrest. Those factors, common in litigation, were key to the Sixth Circuit’s decision. The class argued that FirstEnergy’s failure to provide details supporting its claims of protection defeated its claims of privilege. The Sixth Circuit, however, excused the failure to provide details because the class had agreed that no details need be provided and, additionally, seemed to chide the class for its broad request: “FirstEnergy’s failure to identify any specific documents as privileged matched the plaintiffs’ broad and undifferentiated request for ‘all previously withheld documents … related to the internal investigation.’” Although broad requests and agreements not to provide privilege logs for communications with outside counsel after the beginning of litigation are common, such agreements can inform the outcome of a subsequent discovery dispute.
Conclusion and Suggestions for Best Practice
The FirstEnergy decision calls into question several seemingly well-settled principles. First, it seems no longer necessary to prove that a communication was made for the purpose of seeking legal advice. Instead, the fact of seeking legal counsel seems sufficient to establish the attorney-client privilege. Second, a party’s determination that a document was prepared in anticipation of litigation can be supported solely through evidence of the circumstances surrounding the creation of the document. Third, common discovery practices such as seeking broad document production and agreeing that a privilege log is not required for communications with outside counsel can be compelling evidence of a privilege claim. Fourth, with all the foregoing said, attention to detail regarding procedural points (here, the proper procedure for making an unsworn declaration) can avoid subsequent issues. Even if the standards are in fact less onerous than previously seemed to be the case, exceeding those standards can bolster a litigant’s chances of success in overcoming a challenge to its assertion of privilege.