The Board directs the Company’s General Counsel to investigate possible corporate wrongdoing. The General Counsel hires outside counsel to help. Outside counsel interviews witnesses to assess the allegations and provide legal advice to the company. Soon after, the Department of Justice begins its investigation. Class and derivative actions follow, some of which name key corporate executives as defendants. Under pressure to reduce expenses as a result of the economy, the General Counsel retains the same outside counsel to handle the civil litigation because it is already familiar with the issues. Ultimately, the Department of Justice is willing to cut a deal but demands that outside counsel disclose witness statements, some of which may implicate key executives. Now what?
The recent U.S. v. Nicholas1 decision high-lights the “treacherous path” tread by outside corporate counsel conducting an internal investigation while simultaneously representing the company and key officers in parallel civil litigation. In-house counsel should understand the risks of dual representations and how their companies may be negatively impacted if these issues are not properly addressed. The Nicholas case arises from the criminal prosecution of Broadcom Corporation’s former CFO, William J. Ruehle, for his alleged role in backdating stock options. A California District Court Judge, Cormac Carney, ordered the suppression of evidence obtained from Ruehle by Broadcom’s outside counsel, Irell & Manella LLP (“Irell”), during its internal investigation of Broadcom’s stock option granting practices. Judge Carney found that Irell did not properly advise Ruehle that, in the context of the interviews in question, Irell represented Broadcom — and not Ruehle individually — and its disclosure of the statement to the government without Ruehle’s consent was improper.2 The Ninth Circuit Court of Appeals reversed, finding that Ruehle failed to meet his burden of establishing a privilege with respect to information he provided with the full understanding that the information would be disclosed to third parties.3
In mid-May 2006, Broadcom retained Irell in connection with the company’s internal investigation of its stock option granting practices.4 Within a week, civil lawsuits were filed and/or amended that alleged wrong-doing in relation to those same practices.5 The suits named both Broadcom and Ruehle, personally, as defendants. On May 30, 2006, Broadcom’s in-house general counsel sent an e-mail to Ruehle and others advising them of the civil suits and encouraging them to contact either him or Irell attorneys if they had any concerns.6 The same day, Ruehle received an e-mail from an Irell partner, updating Ruehle on the scheduling of employee interviews as part of the internal investigation. The same e-mail asked Ruehle to set up a time when the Irell attorneys could meet with him.7 That meeting occurred June 1, and Ruehle discussed with the attorneys Broadcom’s stock option practices and his role as CFO. According to the Ninth Circuit’s decision, “[a]t no point did the topic of the civil securities lawsuits arise as it might relate to Ruehle personally. Nor did Ruehle ever indicate to the lawyers that he was seeking legal advice in his individual capacity.”8
Before the month was gone, Irell advised Ruehle to get his own attorney with respect both to the investigations and the civil litigation. Ruehle continued to be involved in the company’s internal review. Irell eventually fully disclosed the information gleaned from the equity review to Ernst & Young, Broadcom’s outside auditors, including information obtained from Ruehle. Ruehle participated in some of the meetings with the outside auditors, and Irell kept him abreast of those meetings. The equity review revealed accounting irregularities, and Broadcom restated its earnings to report $2.2 billion in previously undisclosed compensation expenses. The government began formal investigations of several Broadcom executives and, with Broadcom’s permission, interviewed Irell attorneys about the information they obtained from Ruehle. When Ruehle learned that the government might use the information to bring criminal charges against him, he claimed that the statements to Irell attorneys were protected by attorney-client privilege. He also claimed that his written consent was necessary before Irell could disclose anything he said to them, and he had not given that consent.
Ruehle was indicted, and the government requested a hearing to resolve whether Ruehle’s statements to the attorneys were privileged. The district court found that Ruehle intended his statements to be confidential and had no reason to suspect that his conversations with the lawyers would be disclosed to third parties. Irell’s disclosure required Ruehle’s consent because at the time Irell interviewed him — on Broadcom’s behalf — the firm also represented Ruehle individually in two civil lawsuits.9 The court concluded that the statements Irell obtained from Ruehle during the interview were privileged attorney-client communications.
The district court reprimanded Irell for failing to give the CFO a proper Upjohn warning. It held that Irell failed to advise Ruehle that (1) Irell was only representing Broadcom at the interview and not Ruehle individually; (2) Ruehle could, and given the situation probably should, consult his own attorney; and (3) any privilege belonged to Broadcom, and Broadcom could choose to present the information Ruehle provided during the interview to third parties, including the government, in a criminal investigation. The court found that Irell’s “ethical misconduct has compromised the rights of Mr. Ruehle, the integrity of the legal profession, and the fair administration of justice.”10 The court referred the entire Irell law firm to the state bar for discipline.
In its reversal, the Ninth Circuit left open the issue of whether Irell had acted improperly. That court noted that the issue of any misconduct was not part of the appeal and treated the issue of the Upjohn warning as irrelevant to its decision.11 They described as “troubling” the attorneys’ actions in counseling Broadcom to disclose the information without obtaining Ruehle’s written consent, but rejected Ruehle’s argument that any breach of professional duties provided an independent basis to suppress the statements.12
Instead, the Ninth Circuit focused on whether Ruehle’s statements to the Irell attorneys were made in confidence and found they were not.13 Ruehle “frankly admitted” that he understood the information uncovered by Irell would be disclosed to Ernst & Young — “good, bad, or ugly.”14 Ruehle acknowledged that the information he conveyed to the Irell attorneys was largely factual and that this was the type information that would be disclosed to third parties.15 The court specifically noted that “as the head of finance” Ruehle could not credibly claim ignorance of Broadcom’s disclosure obligations “or the need to truthfully report corporate information to the SEC.”16 The court clearly was influenced not only by Ruehle’s sophistication but also by the level of his involvement in the internal investigation. As a member of senior management, Ruehle knew that Broadcom intended to fully cooperate with the outside auditors and the SEC. He met with the audit committee and “remained fully apprised […] of the status of Irell’s investigation and the flow of information.”17 Thus, the “overwhelming evidence” demonstrated that Ruehle did not speak with the attorneys in confidence but rather “for the purpose of outside disclosure.”18
The Upjohn Warning — A Brief Refresher:
The seminal case of Upjohn v. United States, 449 U.S. 383 (1981) established the so-called “Upjohn warning,” the corporate equivalent of the well-known Miranda warnings for criminal actions. In Upjohn, the United States Supreme Court held that communications between corporate counsel and lower-level corporate employees are privileged.19 In the corporate context, Upjohn warnings, also known as “Corporate Miranda,” inform constituent members of an organization that the attorney represents the organization and not the constituent member.20 Thus, the purpose of the warning is to prevent any misunderstanding — a company’s attorney is not an employee’s personal attorney.
A proper Upjohn warning informs a corporate employee that the company controls the privilege and the confidentiality of the communication.21 It also apprises a corporate employee that no attorney-client relationship exists and that any communication between the attorney and the individual may be disclosed to third parties at the company’s discretion.22
The issues of who holds the privilege and who may waive the privilege become particularly important in the context of a governmental investigation. For example, in-house counsel may conduct its own internal investigation of alleged corporate wrongdoings or retain outside counsel for the job. Either way, the attorneys involved will likely interview key employees with knowledge of the allegations. Unless proper Upjohn warnings are given, the company may not have the opportunity to mitigate criminal or civil exposure by producing employee statements collected during the investigation. Indeed, this is exactly what happened to Broadcom in the Nicholas case. The court commented, “I also feel sorry for Broadcom because Broadcom […] will not get the full benefit of cooperation with the government because the government cannot get the bang for their buck for the cooperation.”23 Thus, the importance of a proper Upjohn warning is paramount.
The economy has no doubt increased the need for all companies to minimize expenses. This change in budgeting has led to many in-house counsels’ conducting their own investigations. In doing so, they need to be mindful of the same issues that face outside counsel and must clarify that they represent the company and not individual employees.24
When interviewing key company witnesses, in-house counsel must be aware of Rule 1.13(f) of the ABA’s Model Rules of Professional Conduct which requires:
In dealing with an organization’s directors, officers, employees, members, shareholders, or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.25
Unfortunately, some employees will be surprised at this news. After all, many employees believe that since they are part of the company and because the in-house counsel represents the company, then they too are represented. Such an assumption will quickly change after receiving a cold “Miranda style” warning. Thus, in-house counsel should expect some employees will be skeptical or refuse to cooperate, adding difficulty to any investigation.
Does Nicholas Create a Higher Standard for Upjohn Warnings?
Oral Upjohn warnings have been the standard practice for internal investigations for many years. The Nicholas decision, however, appears to require (or at least strongly encourage) counsel to obtain a written acknowledgment that an Upjohn warning was given.26 Indeed, the Nicholas court had “serious doubts whether any Upjohn warning was given” because “no warning is referenced in [outside counsel’s] notes from the meeting, and no written record of the warning even exists.”27
Whether Nicholas adds anything new is a subject for fair debate, and that issue was not clarified by the Ninth Circuit’s decision. The district court’s opinion nevertheless underscores the importance of securing a written acknowledgement and the consequences that may arise if separate counsel issues are not appropriately and timely addressed at the outset.
Most likely spurred in part by the Nicholas decision, the ABA formed a task force to provide a “best practices” guideline for Upjohn warnings. The report is expected by fall of 2009. For now, below is a sample warning provided by the ABA:
I am a lawyer from Corporation A. I represent only Corporation A, and I do not represent you. I am conducting this interview to gather facts in order to provide legal advice for Corporation A. I am conducting this interview as part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.
Your communications with me are protected by the attorney-client privilege. In order for the communication to be subject to the privilege, it must be kept in confidence. In other words, you may not disclose the substance of this interview to any third party, including other employees or anyone outside of the company.
But the attorney-client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussion to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.
Do you have any questions?
Are you willing to proceed?28
Solutions for In-House Counsel?
When in-house counsel faces potential, threatened, or pending civil litigation (including an internal, regulatory, or criminal investigation), the following points should be considered before interviewing company employees. The facts and circumstances of each case will dictate what constitutes an appropriate Upjohn warning, but Nicholas counsels that caution is the order of the day.Quickly identify those employees whose interests may diverge from the company;
- Quickly address internally and with insurers, if any, the potential need for separate counsel for individual employees;
- Obtain written consent from employees acknowledging that they have received an Upjohn warning and understand that the substance of the interview may be disclosed to third parties at the discretion of the company;
- Ensure at least two attorneys are present during all witness interviews;
- Record all witness interviews of key corporate witnesses;
- Draft detailed memos regarding who participated in interviews and how Upjohn warnings were given to the employees;
- Provide a refresher course for in-house counsel about the importance of Upjohn warnings, including the upcoming ABA best practices guides;
- Review the company’s employment contracts to ensure that employees receive notice that the in-house counsel represents the company or its board of directors, not the employees; also review what options are available for the company if employees fail to cooperate; and
- Insist that outside counsel, if any, provide an engagement letter that clearly outlines the nature and scope of the representation, including exactly who is represented by the firm.
The Nicholas decision highlights dual representation
issues common to most investigations. With unambiguous Upjohn warnings — which should always be in writing — in-house and outside
counsel alike will limit disputes over the extent and nature of the attorney-client
relationship and preserve opportunities for the company.
One can never be too clear about who represents whom.
[i] United States v. Nicholas, 2009 WL 890633 (C.D. Cal. April 1, 2009), rev’d by United States v. Ruehle, 2009 WL 3152971 (9th Cir. Sept. 30, 2009).
[ii] Nicholas, 2009 WL 890633 at *11.
[iii] United States v. Ruehle, 2009 WL 3152971, *10 (9th Cir. Sept. 30, 2009).
[iv] Id. at *1.
[v] Id. at *2.
[ix] Nicholas, 2009 WL 890633 at *7.
[xi] Ruehle, 2009 WL 3152971 at *10.
[xiii] Id. at *6. The Ninth Circuit accepted the District Court’s finding that Ruehle reasonably believed that Irell represented him individually with respect to the civil litigation and assumed that Irell had attorney-client relationships with both Broadcom and Ruehle individually. Id. at *4.
[xiv] Id. at *6-7.
[xv] Id. at *8.
[xvi] Id. at *7.
[xviii] Id. at *10.
[xix] Upjohn, 449 U.S. at 394-95.
[xx] United States v. Nicholas, 2009 WL 890633 (C.D. Cal. April 1, 2009) at *6 citing Decl. of Prof. Adam Winkler.
[xxiii] Feb. 27, 2009, Tr. at 25.
[xxiv] ABA’s Model Rules of Professional Conduct 1.13(a) (“A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents”).
[xxv] Neither Nicholas nor Upjohn addresses Rule 1.13(f), but it is an important ethical consideration for all attorneys.
[xxvi] Id. at *6.
[xxviii] The ABA’s sample warning comes from the Task Force’s March 2, 2009, draft report.
- United States v. Nicholas, 2009 WL 890633 (C.D. Cal. April 1, 2009), rev’d by United States v. Ruehle, 2009 WL 3152971 (9th Cir. Sept. 30, 2009). Jump back to footnote 1 in the text
- Nicholas, 2009 WL 890633 at *11. Jump back to footnote 2 in the text
- United States v. Ruehle, 2009 WL 3152971, *10 (9th Cir. Sept. 30, 2009). Jump back to footnote 3 in the text
- Id. at *1. Jump back to footnote 4 in the text
- Id. at *2. Jump back to footnote 5 in the text
- Id. Jump back to footnote 6 in the text
- Id. Jump back to footnote 7 in the text
- Id. Jump back to footnote 8 in the text
- Nicholas, 2009 WL 890633 at *7. Jump back to footnote 9 in the text
- Id. Jump back to footnote 10 in the text
- Ruehle, 2009 WL 3152971 at *10. Jump back to footnote 11 in the text
- Id. Jump back to footnote 12 in the text
- Id. at *6. The Ninth Circuit accepted the District Court’s finding that Ruehle reasonably believed that Irell represented him individually with respect to the civil litigation and assumed that Irell had attorney-client relationships with both Broadcom and Ruehle individually. Id. at *4. Jump back to footnote 13 in the text
- Id. at *6-7. Jump back to footnote 14 in the text
- Id. at *8. Jump back to footnote 15 in the text
- Id. at *7. Jump back to footnote 16 in the text
- Id. Jump back to footnote 17 in the text
- Id. at *10. Jump back to footnote 18 in the text
- Upjohn, 449 U.S. at 394-95. Jump back to footnote 19 in the text
- United States v. Nicholas, 2009 WL 890633 (C.D. Cal. April 1, 2009) at *6 citing Decl. of Prof. Adam Winkler. Jump back to footnote 20 in the text
- Id. Jump back to footnote 21 in the text
- Id. Jump back to footnote 22 in the text
- Feb. 27, 2009, Tr. at 25. Jump back to footnote 23 in the text
- ABA’s Model Rules of Professional Conduct 1.13(a) (“A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents”). Jump back to footnote 24 in the text
- Neither Nicholas nor Upjohn addresses Rule 1.13(f), but it is an important ethical consideration for all attorneys. Jump back to footnote 25 in the text
- Id. at *6. Jump back to footnote 26 in the text
- Id. Jump back to footnote 27 in the text
- The ABA’s sample warning comes from the Task Force’s March 2, 2009, draft report. Jump back to footnote 28 in the text