Presented by

Thomas H. Segars

Jeremy M. Falcone

Warn and Be Forewarned:

The Importance of Clear Upjohn Warnings

www.elliswinters.com

Jeremy M. Falcone

Jeremy Falcone is a trial lawyer with experience

representing individuals and companies in all stages of

litigation. He has taken cases to verdict in state and federal

courts in several states.

Jeremy has litigated many different types of claims. His

current practices focuses on products liability and

complex commercial cases, including claims involving

contracts, intellectual property, securities, and allegations of

fraud. Jeremy also litigates employment matters, including claims involving trade

secrets and breach of covenants not to compete. Jeremy also defends professionals

in malpractice claims and before licensing boards.

Jeremy's legal experience has been shaped by his unique background. After law

school, Jeremy joined one of the country's largest law firms. In Skadden Arps' New

York office, Jeremy defended clients in putative class action securities claims that

arose out of the mortgage-backed securities crisis.

Jeremy also practiced in a small law office in Pittsboro, North Carolina, with former

Judge Wade Barber. During his time in Pittsboro, Jeremy represented individuals

in all types of legal matters. Through his interactions with clients, he learned the

importance of providing excellent service efficiently.

These unique experiences litigating from Times Square to the Pittsboro Circle have

focused Jeremy on continuing to provide excellent and efficient representation of his

clients.

Jeremy and his wife, Ashley, live in the Triangle with their daughter and son. A

native of Tennessee, Jeremy is a long-suffering Tennessee Volunteer football fan.

Awards and Honors

North Carolina Super Lawyers Magazine, "Rising Stars" list, Business

Litigation (2013-2016)

Business North Carolina, Legal Elite, Young Guns (2014)

Professional Memberships and Associations

Susan G. Komen North Carolina Triangle to the Coast, Board of Directors

(2014-Present)

Defense Research Institute

o Young Lawyers, Steering Committee (2013-Present)

o Medical Liability and Health Care Law Committee, Membership Chair

(2013-Present)

North Carolina Association of Defense Attorneys

o Vice-Chair of the Commercial Litigation Practice Group (2016)

Leadership Raleigh Participant, Greater Raleigh Chamber of Commerce

(2014)

Prior Legal Experience

Associate, Skadden Arps Slate Meagher & Flom LLP, New York, 2006-2007;

2008-2009

Judge Wade Barber, Pittsboro, North Carolina, 2007-2008

Admissions

New York, 2008

North Carolina, 2007

United States District Courts

o Western District of North Carolina, 2010

o Eastern District of North Carolina, 2010

o Middle District of North Carolina, 2010

United States Courts of Appeals

o Fourth Circuit, 2010

United States Supreme Court, 2014

Thomas H. Segars

Tom Segars helps individuals and entities litigate significant

and complicated business disputes. He represents both

plaintiffs and defendants in a wide variety of business cases

that range from fraud claims to embezzlement investigations

to corporate governance conflicts to intellectual property

disputes. He also represents clients in civil rights litigation,

construction disputes, and insurance coverage matters.

A significant portion of Mr. Segars’s cases arise from the departure and subsequent

competition of key employees, officers, business partners, and/or sellers of

businesses. Mr. Segars has litigated many so-called “departing employee” cases

that involve bids for emergency injunctive relief, expedited forensic discovery,

covenants not to compete or solicit, tortious interference claims, fiduciary duty

claims, and unfair and deceptive trade practice claims. From that experience, Mr.

Segars has become familiar with the law and strategic considerations that

frequently come into play in this context.

Mr. Segars recognizes that litigation is often a useful means to an end, but rarely a

core business strategy for his clients. With that in mind, he believes that litigators

must not lose sight of their clients' broader business goals and needs. He counsels

clients in developing and maintaining litigation strategies that are consistent with

their overall business objectives. When presented with opportunities to accomplish

those objectives before trial—or even before litigation—Mr. Segars helps his clients

evaluate and pursue those opportunities in order to save substantial legal expenses

while reaching favorable business outcomes.

When resort to the legal process is necessary, however, Mr. Segars has the

experience to help clients navigate all stages of litigation, including trial. Mr.

Segars has had primary responsibility for conducting pleading, discovery, and pre-

trial motion practice in more than one hundred federal and state court matters. He

has several weeks of arbitration, jury trial, and bench trial experience. Mr. Segars

has also handled appeals in state and federal courts—both in cases in which he was

involved at the trial court level and in initial engagements on appeal.

Mr. Segars graduated from Wake Forest University (B.A., magna cum laude, 1997)

and the University of North Carolina School of Law (J.D., with High Honors, Order

of the Coif, 2000). During 2001 and 2002, he served as a law clerk to the Honorable

Jane R. Roth of the United States Court of Appeals for the Third Circuit.

Awards and Honors

North Carolina Super Lawyers Magazine, Litigation (2010-present)

The Best Lawyers in America®, Commercial Litigation (2013-present)

Business North Carolina, Legal Elite, Litigation (2013)

Peer review rating of AV® in Martindale-Hubbell

Prior Legal Experience

Associate, Moore & Van Allen, PLLC, 2000-2001 & 2002-2003

Research Assistant to Professors Marion G. Crain and Thomas L. Hazen,

University of North Carolina School of Law, 1998-2000

Clerkship, United States Court of Appeals for the Third Circuit, Hon. Jane R.

Roth, 2001-2002

Admissions

North Carolina, 2000

United States District Courts

o Eastern District of North Carolina, 2003

o Middle District of North Carolina, 2003

o Western District of North Carolina, 2003

United States Court of Appeals for the Fourth Circuit, 2006

United States Supreme Court, 2012

Upjohn Warnings During Internal Investigations:

Practical Benefits and Hidden Risks

Thomas H. Segars and Jeremy M. Falcone

Ellis & Winters LLP

January 2017

Most internal company investigations are designed to thoroughly and

adequately evaluate an issue and to offer any necessary plans of action. Several

practical and ethical considerations can threaten to compromise these objectives.

Importantly, efforts must be made to control the attorney-client privilege so

that the company alone can determine whether to share the information learned or

to resist disclosure. A major factor in preserving the corporation’s privilege is

whether interviewees were provided sufficient Upjohn warnings. Upjohn warnings

protect the corporation by preserving confidentiality and preventing the interviewed

witness from forming an attorney-client relationship with the interviewing

attorney.

This manuscript provides some of the legal and ethical issues surrounding

Upjohn warnings and internal investigations. While there is no single script for all

interviews, an understanding of the various considerations can help tailor a plan

that carefully traverses what courts have called both a “treacherous path” and an

ethical “mine field.”

I. Who will conduct the investigation?

As a threshold matter, a company must determine who should perform the

investigation and conduct witness interviews. The considerations include whether

to utilize attorneys or non-legal personnel, and if attorneys, whether to use in-house

or outside counsel.

In most cases attorneys will be the most appropriate investigators because of

their ability to attach the attorney-client privilege and work-product protection to

investigative communications. See, e.g., Sandra T.E. v. S. Berwyn School Dist., 600

F.3d 612, 619 (7th Cir. 2010) (“[F]actual investigations performed by attorneys as

attorneys fall comfortably within the protection of the attorney-client privilege.”).

Who will lead the investigation?

Early in an investigation, a company must decide which kind of counsel to

use. There are three primary choices: in-house counsel, “regular” outside counsel,

and specially-retained outside counsel.

1. Choosing between in-house and outside counsel

A company may turn to its in-house counsel in the interests of synergy or

efficiency. In-house attorneys have the significant advantage of familiarity with a

company’s inner workings and, often, its key players. In-house attorneys will know

how to best navigate those relationships and, frequently, will be able to use their

unique knowledge of company systems, practices, and policies (written and

unwritten) to conduct the investigation effectively and efficiently.

There are some risks that should be carefully controlled when using in-house

lawyers to conduct the investigation. At the outset, there should be a determination

made whether in-house counsel is at all implicated in the investigation—or could

reasonably be suspected by someone outside the organization. If so, outside counsel

may be necessary to avoid any concerns about conflicts of interest.

In addition, when in-house counsel leads an internal investigation,

protections should be put in place to minimize the risk that the attorney-client

privilege may not attach to communications made during the investigation.

Because non-legal communications with in-house counsel are not subject to

privilege protection as a general matter, an investigation by in-house counsel

creates an opening for opponents to attack the privilege. See, e.g., N.C. Elec.

Membership Corp. v. Carolina Power & Light Co., 110 F.R.D. 511, 517 (M.D.N.C.

1986) (requiring the party asserting privilege to show that in-house counsel’s advice

“was given in a legal, rather than business, capacity”). The perceptions of bias have

led some courts to hold companies to a stricter standard before allowing privilege

protection. See, e.g., United States v. Singhal, 800 F. Supp. 2d 1, 6–7 (D.D.C. 2011)

(“Where business and legal advice are intertwined, the legal advice must

predominate for the communication to be protected.”); Bank Brussells Lambert v.

Credit Lyonnais (Suisse), 220 F. Supp. 2d 283, 286 (S.D.N.Y. 2002) (“In cases

involving corporations and in-house counsel, courts have maintained a stricter

standard for determining whether to protect confidential information through the

attorney-client privilege. The stricter standards are the result of suspicion that

because they are employees of their client, and their livelihood depends on that

single corporate client, in-house counsel are not as independent as outside counsel.”

(internal citation and quotation marks omitted)).

A recent case from the D.C. Circuit rejected the idea that the involvement of

in-house counsel necessarily suggested a non-legal purpose. In Kellogg Brown &

Root, the district court denied the privilege protection to a company that had

conducted an internal investigation. United States ex rel. Barko v. Halliburton Co.,

37 F. Supp. 3d 1 (D.D.C.), vacated sub nom. In re Kellogg Brown & Root, Inc., 756

F.3d 754 (D.C. Cir. 2014), cert. denied sub nom. U.S. ex rel. Barko v. Kellogg Brown

& Root, Inc., 135 S. Ct. 1163 (2015). The district court, in part, denied the

protection by noting the use of in-house counsel. The use of in-house counsel

suggested that the investigation was being conducted for a business or regulatory—

rather than legal—purpose. Id. at 5. On appeal, the D.C. Circuit rejected this

approach and held that “Upjohn does not hold or imply that the involvement of

outside counsel is a necessary predicate for the privilege to apply. On the contrary,

the general rule, which this Court has adopted, is that a lawyer’s status as in-house

counsel ‘does not dilute the privilege.’” In re Kellogg Brown & Root, Inc., 756 F.3d

754, 758 (D.C. Cir. 2014).

2. Choosing between “regular” outside counsel and

specially retained counsel

Like in-house counsel, outside attorneys who have previously represented the

company share the advantage of insight into the company’s policies and procedures.

Such “regular” outside counsel may have long-standing personal relationships with

members of management, which can facilitate the planning and execution of the

investigation—not to mention candid discussions with witnesses.

Nevertheless, reliance on “regular” outside counsel can pose risks to the

independence of the investigation—both real and perceived.

The company is a likely source of future revenue, and regular outside

counsel may have the perceived incentive to keep from harming its

relationship with management by posing tough questions or pushing

too hard on sensitive issues. This conflict, whether real or perceived,

can be cause for concern among government investigators.

Members of regular outside counsel’s firm may have offered advice on

issues pertinent to the investigation. Therefore, not only might

regular outside counsel have a self-preserving motive to avoid critical

examination of those issues, but members of that firm may themselves

become necessary witnesses to the present or subsequent

investigations, whether internal or external.

As discussed below with respect to the Ruehle decision, large firms

may even have acquired ownership interests in their corporate clients.

That lack of independence can be an obstacle to preserving privilege.

Finally, using “regular” outside counsel will increase the likelihood

that the person conducting the investigation may have a pre-existing

attorney-client relationship with the very witnesses he or she intends

to interview. This can lead to thorny conflicts of interest.

See Mark Pollack & Emily Seymore, Conducting Effective Internal Investigations:

Practice Points and Privilege Considerations (Practising Law Inst. June 9, 2015),

available at https://www.privacyandsecurityforum.com/wp-

content/uploads/2015/10/PLI-Internal-Investigations-Outline-2015114281946_2-

3.pdf; Am. Coll. of Trial Lawyers, Recommended Practices for Companies and Their

Counsel in Conducting Internal Investigations (Feb. 2008), available at

http://www.acc.com/chapters/charlotte/upload/Conducting-Internal-

Investigations.pdf.

Using non-lawyers during the investigation

For the privilege to attach, attorneys must be in charge of conducting the

investigation. While it is generally preferable to use lawyers, it can be helpful to

utilize non-lawyers in interviews for certain purposes, such as outside accountants.

Problems can arise from using non-lawyers, and particular actions should be taken

to protect the privilege.

The district court in Kellogg Brown & Root denied the privilege protection, in

part, because non-attorneys had conducted many of the witness interviews. The

district court reasoned that the interviewees would be less likely to infer the legal

nature of the inquiry given the nature of the interviewer. On appeal, the D.C.

Circuit rejected the district court’s rationale because the non-legal interviewers

were conducting the interviews “at the direction of the attorneys” and were “serving

as the agents of attorneys.” Kellogg Brown & Root, 756 F.3d at 758.

The district court’s opinion—while ultimately overturned—should provide

some caution in utilizing non-lawyers. If non-lawyers are needed to conduct or

assist the interviews, it is crucial that the interviewer expressly state that the

interview is being conducted at the direction of attorneys for the company for the

purposes of rendering legal advice to the company. Moreover, there should be some

written memorandum from the attorney leading the investigation that “deputizes”

the non-lawyer personnel.

II. Conducting the Investigation and Providing Upjohn Warnings

Regardless of who conducts the interviews, it is essential that the interviewer

provide each interviewee with Upjohn warnings, sometimes also known as

“corporate Miranda warnings.” Without these, the employee may be entitled to the

protection of the privilege on an individual basis and can thereby effectively bar the

company from disclosing documents and communications in question—even where

such disclosure would be in the company’s best interest.

The purpose of the investigation

In order for the corporate interviews to be protected by the attorney-client

privilege, the investigation should be undertaken “in order to secure legal advice

from counsel.” Upjohn Co. v. United States, 449 U.S. 383, 394 (1981). Therefore, it

should be made clear from the outset that the investigation is being conducted for

the purpose of securing legal advice (and compliance with the law, if relevant).

Some courts have taken a liberal approach to identifying the purpose of the

investigation. For instance, the D.C. Circuit has held that “[i]n the context of an

organization’s internal investigation, if one of the significant purposes of the

internal investigation was to obtain or provide legal advice, the privilege will apply.

That is true regardless of whether an internal investigation was conducted

pursuant to a company compliance program required by statute or regulation, or

was otherwise conducted pursuant to company policy.” Kellogg Brown & Root, 756

F.3d at 760.

Other courts, such as the district court in Kellogg Brown & Root, have

required a narrower purpose for the privilege to attach. In a stricter formulation,

“[t]he party invoking the privilege must show the communication would not have

been made ‘but for’ the fact that legal advice was sought.” Halliburton, 37 F. Supp.

3d at 5.

The legal purpose of the investigation should be stated in broad terms and

memorialized in writing. If the company is relying on in-house counsel for the

investigation, an internal memorandum about the scope of the investigation should

make its legal purpose evident. If the company is engaging outside counsel for the

investigation, this legal purpose should be made clear in the engagement letter. In

one case, the reviewing court found that “the most important piece of evidence” of

the purpose of the investigation was outside counsel’s “engagement letter.” Sandra

T.E., 600 F.3d at 619.

The content of the Upjohn warnings

Upjohn warnings do not require any particular “magic words.” Kellogg

Brown & Root, 756 F.3d at 758. However, comprehensive Upjohn warnings will

encompass the following points:

counsel represents the corporation and does not represent the

employee individually;

the employee is being interviewed to assist counsel in providing legal

advice to the company;

the statements made by the employee during the interview can and

will be shared with the company;

communications between counsel and the employee are confidential,

and should not be disclosed by the interviewee to others outside the

company;

although the communications in the interview are covered by the

attorney-client privilege, this privilege is owned by the company, not

the employee;

the company alone can decide to waive the privilege, and it may do so

without notice to or consent from the employee; and

the employee should be aware that the company may decide to waive

the privilege and disclose the contents of the interview to third parties,

including law enforcement or regulatory authorities.

See Michael M. Farhang and Daniel L. Weiss, Corporate Miranda Warnings:

Defining Your Role and Avoiding Pitfalls In Internal Company Investigations,

Litigation, Spring 2010, at 21–22; Pollack & Seymore, supra, at 23–24.

Providing all of these warnings maximizes counsel’s chance of avoiding the

creation of an attorney-client privilege with the interviewee. Of course, counsel

must weigh the additional protection afforded by more thorough warnings against

the potential chilling effect of a long legal soliloquy on an employee.

The failure to give adequate Upjohn warnings can have serious consequences.

Most importantly, the failure can result in the employee retaining control over the

privilege in regard to the interview, effectively stripping the company’s right to

unilaterally waive the privilege and share information with, for example,

government investigators. Furthermore, the failure to give adequate Upjohn

warnings can be cause for ethical sanction. See, e.g., United States v. Nicholas, 606

F. Supp. 2d 1109, 1121 (C.D. Cal.) (referring outside counsel to the state bar for

discipline), rev’d on other grounds sub nom. United States v. Ruehle, 583 F.3d 600

(9th Cir. 2009) (declining to reverse the referral to the state bar).

Memorializing the provision of Upjohn warnings

Upjohn warnings should be memorialized.

The warnings should be noted in two places. First, the employee should be

given a written form of the Upjohn warnings to sign, with a signature indicating

that the warnings were given and that the employee understood them. Second,

counsel’s own notes from the interview should indicate precisely what warnings

were given to dispel any attorney-client relationship between the interviewer and

the employee.

The importance of documenting Upjohn warnings cannot be overstated. In

United States v. Ruehle, the parties disputed whether the warnings had been given.

583 F.3d 600 (9th Cir. 2009). Counsel was unable to demonstrate any written

evidence of the warnings, and the notes from the interview did not indicate that any

warnings were given. The district court found that no warning was given, crediting

the employee’s testimony over the interviewers’ testimony. Id. at 604 n.3.

III. The Ethical Mine Field Surrounding Upjohn Warnings

One purpose of Upjohn warnings is to avoid the creation of an attorney-client

relationship between the interviewer and the interviewee. However, sometimes

other circumstances, beyond the simple provision of the Upjohn warnings, can lead

courts to find the creation of an attorney-client relationship where the company did

not expect one. As the following cases show, counsel must be vigilant about the

extent of the warnings given and how they are communicated. Counsel should also

be mindful of several other factors that can create a separate legal relationship with

the interviewed employee.

The consequences of a separate attorney-client relationship

with the individual

Upjohn warnings help ensure that the corporation has an attorney-client

relationship with its investigating counsel, but that no such relationship forms

between counsel and the corporation’s interviewed employees. But, where the

warnings are given improperly—or not at all—the corporation can lose control of its

ability to create and control the attorney-client privilege and work-product

protection. The Fourth Circuit has referred to this area as “a potential legal and

ethical mine field.” In re Grand Jury Subpoena, 415 F.3d 333, 340 (4th Cir. 2005)

[hereinafter AOL Subpoena]. Courts are divided on the test applied to determine

whether a separate attorney-client relationship has been formed.

1. The Bevill Test

Commonly referred to as the “Bevill test,” the Third Circuit has adopted a set

of factors for evaluating whether corporate officers may assert a claim of privilege in

regard to communications with their company counsel:

First, [the employees] must show they approached counsel

for the purpose of seeking legal advice. Second, they must

demonstrate that when they approached counsel they

made it clear that they were seeking legal advice in their

individual rather than in their representative capacities.

Third, they must demonstrate that the counsel saw fit to

communicate with them in their individual capacities,

knowing that a possible conflict could arise. Fourth, they

must prove that their conversations with counsel were

confidential. And, fifth, they must show that the

substance of their conversations with counsel did not

concern matters within the company or the general affairs

of the company.

In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F. 2d 120, 123 (3d Cir.

1986) (internal brackets removed) (quoting In re Grand Jury Investigation, 575 F.

Supp. 777, 780 (N.D. Ga. 1983)).

In Bevill, two corporate officers, principals in two related companies,

unsuccessfully sought to keep their communications with outside counsel privileged.

The officers had initially consulted with outside counsel regarding counsel’s

representation of the two corporate entities, as well as representation of the officers

in their personal capacities. After that consultation, the law firm was officially

retained by the corporate entities. Shortly thereafter, the firm advised the officers

that they would need to retain separate counsel.

Immediately afterwards, the companies filed for bankruptcy and a trustee

was appointed. The SEC also filed a civil complaint against the companies and

officers, and separately began a criminal investigation. Counsel for the trustee

waived the companies’ privilege and sought to depose the officers regarding the

conversations they had had with corporate counsel before the SEC complaint was

filed. The officers objected, claiming that the communications were protected by the

attorney-client privilege.

The district court found that, for discussions prior to the point at which

outside counsel advised the officers to seek separate counsel, the privilege applied.

However, for the communications after that point, the district court ordered

disclosure.

On appeal, the Third Circuit affirmed. The officers argued that “because

their personal legal problems were inextricably intertwined with those of the

corporation, disclosure of discussions of corporate matters would eviscerate their

personal privileges.” Bevill, 895 F. 2d at 124. The court of appeals explained that

the officers did “not have an attorney-client privilege with regard to

communications made in their role as corporate officials.” Id. at 125. To the extent

that some communications dealt with the officers personally and not in relation “to

their role as officers of the corporation,” the district court’s disclosure order was

tailored to protecting those possibly privileged communications. Id.

Because of the facts of the case, Upjohn warnings were not at issue.

Nevertheless, the lesson to be learned is that, without proper preparation,

individual employees can retain control over at least some of communications with

counsel.

The Bevill test has been adopted by the First, Second, Ninth, and Tenth

Circuits. See United States v. Int’l Bhd. of Teamsters, 119 F. 3d 210, 214–15 (2d Cir.

1997); In re Grand Jury Subpoena, 274 F. 3d 563, 571–72 (1st Cir. 2001); United

States v. Graf, 610 F.3d 1148, 1157 (9th Cir. 2010); In re Grand Jury Subpoenas,

144 F. 3d 653, 659 (10th Cir. 1998).

2. The Law in the Fourth Circuit

The Fourth Circuit has declined either to adopt or reject the Bevill test. AOL

Subpoena, 415 F.3d at 340. Instead, the Fourth Circuit has relied on the larger

body of law governing the creation of an attorney-client relationship to analyze

whether the company’s attorneys have created one with the interviewed employees.

Under these general principles, the Fourth Circuit placed the burden on

employees asserting privilege to show that they had a subjective belief that an

attorney-client relationship existed, and that this subjective belief was reasonable

under the circumstances. Id. at 339.

In the AOL Subpoena case, the Fourth Circuit found that the employees

asserting privilege could not have reasonably believed that an attorney-client

relationship existed between them and the company’s in-house and outside counsel.

Id. The corporation’s counsel in this case gave a variation of Upjohn warnings that

included the following:

The attorneys represented the company.

The conversations were privileged, but that privilege belongs to the

company, which can choose to waive it.

The employees were free to consult with their own attorneys, which

could be retained at the company’s expense.

When asked by an employee if the employee should retain counsel,

corporate counsel said that he did not recommend it, but that he was

free to do so.

The attorneys “could” also represent the employees, if there was no

conflict of interest.

Id. at 336.

Based on these warnings, the court concluded that no attorney-client

relationship was created. Specifically, the court found that

Counsel did not tell the employees that they represented them, nor did

the employees ask counsel to represent them.

The employees never sought “personal legal advice” from the

investigating attorneys, nor was any personal legal advice rendered.

The employees were fully informed that the information disclosed to

the interviewers could be disclosed at the company’s discretion.

Although the attorneys gave a “watered down” Upjohn warning by

saying that they “could” represent the employees, the context of the

entire warning demonstrated “that the attorneys’ loyalty was to the

company.”

Id. at 339–40.

The Fourth Circuit concluded this analysis with a warning. It explained the

consequences for both the company and the attorneys had the attorneys been found

to have entered into an attorney-client relationship with the employees. In such a

case, the company could not have waived the employees’ privilege when a conflict of

interest arose. Id. at 340. Instead, counsel would have had to withdraw from

representing all clients and maintain all confidences. Id. This, the court noted, “is

a potential legal and ethical mine field.” Id.

3. The Lessons of United States v. Ruehle

The dueling analyses of the Ninth Circuit and the district court in United

States v. Nicholas provide another cautionary tale about the hazards of Upjohn.

United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009), rev’g sub nom. United States

v. Nicholas, 606 F. Supp. 2d 1109 (C.D. Cal. 2009).

In May 2006, a prominent, California-based AmLaw 200 firm (“the Firm”)

undertook representation of Broadcom to conduct an internal investigation

regarding allegedly improper stock option back-dating. At the same time, the Firm

began representing Broadcom’s chief financial officer William Ruehle individually

in connection with two shareholder suits based on the same facts, in which Mr.

Ruehle and Broadcom were named defendants. The Firm had a long-standing

relationship with Broadcom. It had previously represented both the company and

Mr. Ruehle and had acquired 225,000 shares of Broadcom stock prior to the

company’s initial public offering.

In June 2006, attorneys from the Firm met with Mr. Ruehle and discussed

the back-dating of the stock options. There was later a debate about whether Mr.

Ruehle was given Upjohn warnings: the Firm’s attorneys argued that the warnings

were provided, while Mr. Ruehle claimed he had no recollection of any warnings.

The district court found, as a fact, that the warnings were not given; that finding

was upheld on appeal.

Broadcom subsequently directed the Firm to disclose the substance of those

communications to federal investigators and Ernst & Young, the company’s outside

auditors. The government then sought to use the substance of those

communications as part of a criminal case against Mr. Ruehle. However, once he

learned of the disclosure (over two years later and as part of the criminal case

against him), Mr. Ruehle claimed that the communications were privileged, that he

had neither waived the privilege nor consented to disclosure, and therefore, that the

government was barred from using them in its prosecution.

In a strongly worded opinion, the district court agreed with Mr. Ruehle. The

crux of the court’s opinion was that the Firm owed a duty to both the company and

Mr. Ruehle. Therefore, even though Broadcom had ordered it, the Firm had no

authority to disclose the communications to Ernst & Young or to the government

without Mr. Ruehle’s consent. The district court hinged its decision not on the

substance of any Upjohn warnings but instead on the Firm’s ethical obligations

pursuant to California law to obtain written consent from Mr. Ruehle for the dual

representation in the first place. Indeed, because it found that “[i]n effect, [the

Firm] was unethically interrogating one client [Mr. Ruehle] to benefit another client

[Broadcom],” the court referred the Firm to the California state bar. Nicholas, 606

F. Supp. 2d at 1120–21.

On appeal from the district court’s decision, the Ninth Circuit took a very

different approach. In reversing, the Ninth Circuit pointed out what it termed “a

fundamental flaw” in the district court’s opinion. Namely, the district court had

applied California law to the privilege analysis when, properly, “[i]ssues concerning

application of the attorney-client privilege in the adjudication of federal law are

governed by federal common law.” Ruehle, 583 F. 3d at 608.

The Firm’s conflict of interest, which had drawn the ire of the district judge,

was not central to the Ninth Circuit’s disposition. Instead, the basis for the Ninth

Circuit’s reversal was that Mr. Ruehle could not have reasonably expected that any

statements made to the Firm—even in regard to his own representation—would be

held in confidence. Because the Firm’s representation of Broadband and of Mr.

Ruehle involved the same matter, and because Mr. Ruehle was aware that his

communications regarding Broadband would be disclosed to third parties (namely,

the company’s independent auditor, Ernst & Young), Mr. Ruehle could not attempt

to retain control over the privilege of only those communications that might have

pertained to him personally. Id. at 611.

The markedly different results reached by each court should serve as an

important reminder that there is a lack of consensus within the federal courts.

Counsel must remain vigilant and make every effort to proceed reasonably. They

must be advertent not only to privilege issues, but also to broader ethical concerns,

such as the obligations that accrue based on dual representation.

The effect of the ethics rules

The provision of Upjohn warnings helps protect the corporation’s control over

the attorney-client privilege. However, as Ruehle demonstrates, Upjohn warnings

can also protect the interviewing attorney from possible ethics violations.

Ethical implications arise from a number of rules of professional conduct. In

North Carolina, the most relevant ethical principles come from Rule 1.13 of the

North Carolina Rules of Professional Conduct, which makes clear that a lawyer

employed or retained by a corporation represents the corporation itself. Subsection

(f) acknowledges that the company’s employees and officers might not always

understand this principle. Therefore, it requires the attorney to “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.” N.C. Rules of Prof’l Conduct r. 1.13(f).

A comment to the rule further acknowledges that the corporation’s interests

might become adverse to one of its constituents. In dealing with that constituent, it

is the attorney’s job to ensure that individual understands that the attorney

represents only the company, and any communications will not be kept privileged

from the company. Id. cmt. 10; see also id. r. 4.3 (requiring attorneys to ensure that

unrepresented person does not misunderstand who the attorney represents).

Moreover, if an interviewing attorney is found to have created an attorney-

client relationship with the interviewee, and the interests of the interviewee become

directly adverse to the corporation, then this conflict of interest might require the

attorney to withdraw from representing both the corporation and the interviewee.

See id. r. 1.7.

Risks that the company’s privilege may not attach in the first

place

In Ruehle, the Ninth Circuit concluded that, because he had no expectation of

confidentiality in regard to his own personal matters, no privilege attached to Mr.

Ruehle’s communications with counsel as to those personal matters. A corollary

question is this: Can a decision to disclose documents to the government prior to a

meeting with an employee call into question the company’s ability to claim privilege

at all?

The question may seem suited to a law school exam but its consequences are

both real and severe, as shown by a California federal court in precisely this

situation. In United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003), the

question before the district court was “whether the attorney-client privilege

attaches to the documents where [the corporation] agrees, prior to the creation of

the documents, to disclose them to the Government on condition that the

Government acknowledge and make efforts to maintain the confidential nature of

the documents unless it determines, in its discretion, that it must disclose them.”

Id. at 463. The court determined that, because the documents were not intended to

be kept confidential from third parties, including the government, that attorney-

client privilege never attached in the first place. Id. at 494. The court noted that

the privilege is intended to encourage frank attorney-client communication, but that

purpose is not served where the client agrees to disclose the communications to the

government in advance. Id. at 494 n.7. Therefore, the court ordered the corporation

to disclose its investigatory report and witness interview memoranda.

This circumstance raises a potential ethical issue. Normal Upjohn warnings

explain that the communications are to be kept confidential. However, “it would

seem affirmatively misleading, and therefore unethical, to advise employees that an

interview session is privileged under Upjohn when counsel already knows that the

privilege effectively has been waived.” Mark L. Rotert, New Ethical Challenges in

Internal Investigations 10 (Practising Law Inst. June 15, 2010).

Cooperation and the Impact of the Yates Memo

The federal government has recently issued new policies that increase the

importance of Upjohn warnings and heighten the risk of conflict between

corporations and their employees.

In the past, the U.S. Department of Justice had been criticized in some

quarters for failing to prosecute individuals (as opposed to their corporations) for

white-collar crimes. In response, Deputy Attorney General Sally Yates issued a

September 2015 memo that is generally referred to as the “Yates Memo.”

Memorandum from Sally Q. Yates, Deputy Attorney Gen., U.S. Dep’t of Justice

(Sept. 9, 2015) [hereinafter Yates Memo], available at

https://www.justice.gov/dag/file/769036/download.

The Yates Memo lays out six general rules that the Department hopes will

lead to more individual prosecutions, both civil and criminal. The biggest change is

in how the Department will give “cooperation credit” to corporations under

government investigation. Previously, corporations could earn partial cooperation

credit. Under the Yates Memo, however, “to be eligible for any credit for

cooperation, the company must identify all individuals involved in or responsible for

the misconduct at issue, regardless of their position, status or seniority, and provide

to the Department all facts relating to that misconduct.” Yates Memo at 3

(emphasis added). As Ms. Yates has further explained, this means that cooperation

credit is now “all or nothing.” Amelia T. Rudolph, The Yates Memo and the Ethical

and Strategic Challenges It Presents for White Collar Defense Attorneys, 2015 WL

9183828, at *3, in Managing White Collar Legal Issues (2016).

Other aspects of the memo prevent the DOJ from entering into settlements

with the corporation whereby corporate officers are immunized from further

prosecution “absent extraordinary circumstances.” Yates Memo at 5. Similarly, the

DOJ will not settle cases with corporations “without a clear plan to resolved related

individual cases.” Id. at 6.

The Yates Memo accentuates the risks of adversity between corporations and

the employees they are investigating. The “all or nothing” availability of

cooperation credit will put corporations under greater pressure to cooperate. Given

the complexity of the intersection of government and corporate investigations, the

corporation should immediately weigh the benefits and detriments of declaring an

intent to cooperate. Rudolph, supra, at *12. When the corporation decides to

cooperate, its interests are highly likely to become directly adverse to the employees

under investigation.

Undoubtedly, the Yates Memo will affect how Upjohn warnings are given in

several ways.

First, employees may refuse to speak to corporate counsel in the first place,

especially if represented by separate counsel or if the employee is aware of the

Yates Memo.

Second, even if the employee is not aware of the Yates Memo, the substance

of the warnings themselves may need to be modified. Ordinarily, an Upjohn

warning simply states that the corporation may disclose that information to

communications to the government. Now, under the Yates Memo, if counsel knows

that the corporation has already decided to cooperate, or is highly likely to do so,

counsel may need to tell the interviewee that disclosure is highly likely and not just

possible. Id. at *7. Of course, such a warning may well pressure the employee into

being less than forthcoming.

Even before the Yates Memo was issued, some commentators recommended

providing a so-called “Zar warning” in cases where the corporation knows that it

will be cooperating with the government. Pollack & Seymore, supra, at 24–25. A

Zar warning puts the interviewee on notice that if he gives false or inaccurate

information with the intent for that information to be passed along to the

government, then the interviewee could be charged with obstruction of justice. See,

e.g., United States v. Singleton, No. H-06-080, 2006 WL 1984467 (S.D. Tex. July 14,

2006); Press Release, U.S. Dep’t of Justice, Former Computer Associates Executives

Indicted on Securities Fraud, Obstruction Charges (Sept. 22, 2004), available at

http//www.justice.gov/opa/pr/2004/September/04_crm_642.htm. Zar warnings are

not required, but they are sometimes given out of a sense of fairness to the

interviewee.

In sum, the Yates Memo heightens the chance of conflicting interests

between corporations and the employees they investigate. Because of Upjohn,

counsel must tread deliberately. Given the adversity of these interests, if a

separate attorney-client relationship is formed with the employee, a corporation’s

ability to disclose privileged communications—and thus get cooperation credit—

could be extinguished.

IV. Further Practical Considerations

In considering Upjohn implications, a host of ancillary issues must be

considered. The following are some practical considerations.

Risks of broader waiver in disclosure to the government

Once counsel has made efforts to maintain the attorney-client privilege over

communications and documents made during an internal investigation, the

voluntary disclosure of documents to the government—even when subject to

confidentiality restrictions on the part of the government—can waive the privilege.

As such, previously privileged communications and documents may become

available to subsequent opposing parties in civil litigation. See, e.g., In re

Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F. 3d 289, 293 (6th

Cir. 2002) (affirming ruling that “voluntary disclosure of privileged materials to the

government constitutes a waiver of the attorney-client privilege to all other

adversaries” even where Department of Justice had agreed that “certain stringent

confidentiality provisions would govern its obtaining of the documents”); In re Mut.

Funds Inv. Litig., 251 F.R.D. 185, 187–88 (D. Md. 2008) (“The defendants’ voluntary

disclosure of otherwise protected material to the SEC and NYAG, despite the entry

of a confidentiality agreement, results in waiver.”); cf. In re Martin Marietta Corp.,

856 F. 2d 619, 623 (4th Cir. 1988) (“The Fourth Circuit has not embraced the

concept of limited waiver of the attorney-client privilege.”). This risk can also apply

to work product protection. See, e.g., In re Steinhardt Partners, L.P., 9 F.3d 230,

236 (2d Cir. 1993) (“Steinhardt’s voluntary submission of the memorandum to the

[SEC’s] Enforcement Division waived the protections of the work product doctrine

as to subsequent civil litigants seeking the memorandum from Steinhardt.”).

Risks of broader waiver in disclosure to the board of directors

Similarly, even disclosure to the company’s own board of directors can create

a broader waiver of the attorney-client privilege. Ryan v. Gifford, involved a

company that formed a special committee of its board to investigate allegations of

stock option back-dating. No. 2213-CC, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007).

The special committee, in turn, hired outside counsel. The special committee and

outside counsel eventually presented their findings—orally—to the full board.

Present at the meeting were members of the board who were suspected of wrong-

doing and those directors’ separate counsel.

Plaintiffs in a subsequent derivative suit sought to compel the company and

outside counsel to disclose all communications between the special committee and

outside counsel during the course of the investigation, as well as the substance of

the final report that the special committee and outside counsel had presented to the

full board. The court granted most aspects of the motion to compel. In doing so, the

court refused to decide whether the company itself shared in the privilege that

attached to communications between the special committee and outside counsel

hired by the special committee to perform the investigation.

Further, one of the bases for the court’s conclusion in Ryan was that the

directors under suspicion did not have a common interest with the company (as

demonstrated in part by their retention of separate counsel). The Ryan court

considered their presence and the presence of their counsel at the presentation of

the special committee’s final report to be a waiver of any privilege. Moreover, the

court found that this waiver applied not only to the presentation, but also to all

communications between the special committee and outside counsel over the course

of the investigation.

Considerations in regard to internal investigations that

involve overseas entities

Additional considerations apply when an investigation will involve corporate

entities located outside the United States. In short, local law should always be

consulted. However, some frequently encountered areas for concern include the

following:

In the European Union, the attorney-client privilege often does not

attach to communications with in-house counsel or to communications

with non-EU-licensed outside counsel;

Local laws may restrict the ability of investigators in the United States

to review the emails of employees located overseas or to convey

information about targeted employees across national borders;

Employees in some countries may be afforded additional protections in

regard to the investigation, such as the right to withhold certain

information or to have union representatives present during an

interview.

See Donald C. Dowling, Jr., International HR Best Practice Tips: Conducting

Internal Employee Investigation Outside the U.S., Int’l HR J., Winter 2010.

Additional practical considerations

Lastly, counsel should remain aware of narrower areas where privilege issues

can arise during an internal investigation.

As in other contexts, for example, it can be wise to ask employee-interviewees

not to take notes during the interview.

Documents that reflect privileged communications collected or created during

an investigation should be marked clearly as attorney-client privileged, and, where

appropriate, subject to work-product protection. Counsel should also consider

storing them separately. In the event government investigators obtain a subpoena

that allows a physical collection, this separate storage can facilitate efforts to keep

such documents from becoming part of the government’s collection. Of course,

privileged documents would be subject to return by the government, but it is better

that they never leave the premises at all.

Finally, once an investigation is complete, to the company must decide what

aspects of the investigation should be committed to writing. In some instances, an

oral report may be sufficient. In any disclosure, the objectives of the investigation

as well as the substance of the findings—whether positive or incriminating—need to

be weighed against the possible risks of future disclosure inherent in the creation of

a writing.

V. Conclusion

In performing an internal investigation, the communication of Upjohn

warnings to individual employees can be essential. Even though there are few

bright-line rules in any jurisdiction, it is important to be aware of potential pitfalls

and to proceed as reasonably as possible. In the final analysis,

counsel conducting investigations need to consider the

specifics of each matter, as well as the different

backgrounds of the employees interviewed during each

investigation, and adopt a flexible approach that

effectively balances the competing considerations of

obtaining accurate information, having the ability to

cooperate effectively with the government if that is in the

company’s best interest, and protecting the rights and

morale of employees who did not engage in wrongdoing,

all the while avoiding ethical miscues.

Robert J. Jossen & Neil A. Steiner, The ‘Upjohn’ Pitfalls of Internal Investigations,

N.Y.L.J., July 13, 2009. Quite a challenge, indeed.

Notes: