A recent decision of the Southern District of New York should give pause to companies cooperating with the government during ongoing internal investigations. Voluntary disclosures of privileged communications to the government, even with a confidentiality agreement in place, are highly vulnerable to allegations of waiver of attorney-client privilege. In Gruss v. Zwirn, 2013 WL 3481350 (S.D.N.Y. July 10, 2013), on motion for clarification, 296 F.R.D. 224 (2013), the district court framed the issue as one of first impression in the Second Circuit: “Whether voluntary disclosure of privileged documents to a governmental agency such as the SEC constitutes a waiver of the privilege as to underlying documents and vis-à-vis third parties, where the disclosing party and the governmental agency entered into the type of confidentiality agreement at issue here.” Id. at *5. After a highly critical exposition of case law surrounding the doctrine of “selective waiver,” the court ultimately found the confidentiality agreement inadequate to protect against waiver of privilege.
The defendants were the entities and its principal owner who operated several profitable billion-dollar hedge funds. After receiving reports of financial irregularities, defendants hired two law firms to conduct internal investigations. Interviews were conducted with numerous employees, including plaintiff Perry A. Gruss, the former CFO, who was blamed for the irregularities and resigned. Outside counsel then made voluntary disclosures to the Securities and Exchange Commission (SEC) via two presentations, relying on the protections of a previously executed confidentiality agreement with the SEC stating, in relevant part, that the company did not intend to waive the attorney-client privilege or the work-product privilege through its disclosure and that the SEC “will maintain the confidentiality of the Protected Materials pursuant to this agreement and will not disclose them to any third party, except to the extent that the [SEC] determines that disclosure is required by law or would be in furtherance of the [SEC’s] discharge of its duties and responsibilities.” Id. at *3. After the investigation, Gruss sued the hedge fund ownersalleging, inter alia, that their statements about him were false and defamatory. Gruss sought attorney notes and summaries of all witness interviews conducted by both law firms. Defendants objected and Gruss moved to compel. On July 10, 2013, the district court refused to accept the magistrate judge’s ruling that the documents were protected by the attorney-client privilege and the work-product privilege.
The Court’s analysis of privilege waiver began with Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc), which introduced the “selective waiver doctrine,” holding that disclosure to the SEC of attorney-client privileged materials pursuant to a subpoena did not waive any privilege because “[t]o hold otherwise may have the effect of thwarting the developing procedure of corporations to employ independent outside counsel to investigate and advise them in order to protect stockholders, potential stockholders and customers.” The Second Circuit expressly rejected this premise in In re Steinhardt Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993), holding that the “allegation that a party facing a federal investigation and the prospect of a civil fraud suit must make difficult choices”—i.e., between cooperating with the government and risk waiving privilege or not cooperating—“is insufficient justification for carving a substantial exception to the waiver doctrine.” The Second Circuit declined to adopt a per se rule that all voluntary disclosures to the government waived any privilege, stating that a “rigid” rule would “fail to anticipate situations in which the disclosing party and the government may share a common interest in developing legal theories and analyzing information, or situations in which the SEC and the disclosing party have entered into an explicit agreement that the SEC will maintain the confidentiality of disclosed material.” Id. (emphasis added).
Unlike Steinhardt, there was a confidentiality agreement in Gruss. However, the Gruss court stated that, “[a]t least in the context of precedential decisions, the Courts of Appeal have uniformly rejected the argument that a producing party can preserve the attorney-client privilege and work product protection as to documents produced to an adverse government agency through use of a confidentiality agreement.” 2013 WL 3481350, at *6. Although leaving open the question whether a confidentiality agreement could ever protect privilege in the Second Circuit, the court specifically held that the confidentiality agreement between defendants and the SEC was “illusory” because it gave the SEC the unilateral right to disclose these documents. Id. at *8. Holding that such a “fig leaf” confidentiality agreement justified a finding of non-waiver would “exalt form over substance.” Id. Further, although the notes and summaries had not actually been disclosed to the SEC, “[w]hen a party selectively discloses attorney-client communications to an adverse government entity, the privilege is waived not only as to materials provided, but also as to the underlying source documents.” Id. at *12. The court ordered that defendants provide all notes and summaries to the court for in camera inspection, and expressed the intent to order production of all interview notes and summaries for witnesses whose statements were disclosed to the SEC except for opinion work product.
Corporations should now evaluate their own procedures and strategies for internal investigations, including most importantly, the efficacy of confidentiality agreements governing the voluntary disclosure of privileged material. With Steinhardt’s rejection of Diversified, cooperation is not a legally cognizable basis for selective waiver. And some courts, including the Sixth Circuit in In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 302 (6th Cir. 2002), and the Ninth Circuit in In re Pacific Pictures Corp., 679 F.3d 1121, 1128-29 (9th Cir. 2012), have held that confidentiality agreements entered with governmental agencies do not preserve privilege. Other courts, including the Third Circuit in Westinghouse Electric Corp. v. Republic of Philippines, 951 F.2d 1414, 1427 (3d Cir. 1991), and the Tenth Circuit in In re Qwest Communications International Inc., 450 F.3d 1179, 1192 (10th Cir. 2006), have significantly questioned whether confidentiality agreements can ever preserve privilege. Although the issue has not been explicitly decided in several jurisdictions, including the Second and Eleventh Circuits, we are left with a distinct impression that courts will take a dim view of privilege waiver under any voluntary disclosure and construe the constraints on such waiver narrowly, if they respect them at all. At the very least, a confidentiality agreement with the government must not have any escape clause that permits unilateral discretion to disclose privileged material. Cooperation—as we can see—can definitely have a downside.