Recent Developments Making Privilege Waivers Less Likely

The past few weeks have seen some extraordinary developments in the area of waiver of attorney-client privilege and attorney work product protection.

First came the news that the Department of Justice has reversed course after pursuing a policy for many years in which it has pressured corporations to waive privilege if they want to be credited with being cooperative in a DOJ investigation. That policy had been embodied in a memorandum by Deputy Attorney General Larry D. Thompson entitled "Principles of Federal Prosecution of Business Organizations," dated January 20, 2003. A short memorandum, entitled "Waiver of Corporate Attorney-Client and Work Product Protections," by Acting Deputy Attorney General Robert D. McCallum, Jr., was published on October 21, 2005, which recognized the need to develop some procedural controls that were absent from the Thompson Memorandum. The policies embodied in those memoranda were highly controversial because they represented a systematic assault on the confidentiality of the lawyer-client relationship that forms a central backbone of our adversarial judicial system. The DOJ in effect was saying that it could pressure corporations to waive confidentiality during an investigation, even though such a waiver could have disasterous consequences for individual corporate employees who also were targets of the same investigation and for the company and its employees in companion civil litigation brought by private parties.

The controversy led to a revised memorandum by Deputy Attorney General Paul J. McNulty entitled "Principles of Federal Prosecution of Business Organizations," dated December 13, 2006, but that memorandum brought little real change in policy. Although it imposed new internal approval procedures that prosecutors had to follow when requesting that a corporate target waive privilege, the fundamental issue remained: Prosecutors were empowered to make requesting waiver of privilege a part of their arsenal whenever they felt justified in doing so.

However, all of that changed on August 28, 2009 when newly-appointed Deputy Attorney General Mark R. Filip announced the promulgation of a new policy. Bowing to pressure from a wide range of sources, the DOJ adopted a formal policy generally directing prosecutors not to seek privilege waivers from companies as part of their cooperation efforts. Rather than continue the string of less formal internal memoranda, the new policy formally was incorporated into Chapter 9-28 of the U.S. Attorneys' Manual. This change likely will moot efforts in Congress to legislatively direct a change in DOJ policy regarding a waiver-based quid pro quo.

Second, and coincidentally on the same day, the Second Circuit published United States v. Stein, 541 F.3d 130 (2d Cir. Aug. 28, 2008). In addition to pressuring companies to waive privilege to the detriment of individual employees (often ex-employees), the DOJ also had a policy of pressuring corporations not to pay the legal fees of accused employees. Among other things, this represented a different kind of erosion of attorney-client privilege and work product protection, i.e. by preventing company employees from hiring lawyers so that attorney-based privileges never arose in the first place. In Stein, the Second Circuit held that it was improper for the DOJ to have pressured KPMG into refusal to pay defense costs for numerous individuals at KPMG who were accused of wrongdoing in connection with counseling clients regarding various tax shelters. The court found that the DOJ's actions deprived those individual defendants of their right to counsel under the Sixth Amendment, and affirmed the district court's dismissal of the indictment.

Finally, last week the U.S. Congress sent legislation to the President that would create a new Federal Rule of Evidence 502, which the Judicial Conference proposed to Congress on September 26, 2007. As stated in the original proposal, and in the Senate committee report on the legislation, the purpose of new Rule 502 is to provide protections against waiver of the attorney-client privilege and work product immunity, and to reduce the costs associated with discovery (and, it was noted, particularly electronic discovery). The rule accomplishes the following:
  1. Avoidance of broad subject-matter waiver implications. If a waiver is found, it only applies to the information disclosed, unless a broader waiver is made necesary by the holder's intentional and misleading use of protected information.
  2. Waiver does not occur through inadvertent disclosure. Inadvertent disclosure in federal proceedings does not cause a waiver if the holder took reasonable steps to avoid inadvertent disclosure and took reasonable steps to claw it back, e.g. following Fed. R. Civ. P. 26(b)(5)(B).
  3. Non-waiver provisions in protective orders enforceable. If a federal court orders that disclosure of protected information is not a waiver, that order is also binding against non-parties and in both state and federal proceedings. If the parties enter into a non-waiver agreement, they can make it binding on non-parties by having it entered as a court order.
  4. State courts covered. When a disclosure is made in a state proceeding and is not the subject of a state-court order concerning waiver, the disclosure does not operate as a waiver in a federal proceeding if the disclosure: (1) would not be a waiver under Rule 502 if it had been made in a federal proceeding; or (2) is not a waiver under the law of that state.

If signed by the President as expected, Rule 502 will not change the substantive law of privilege at all, only the law of waiver. As one member of the House of Representatives remarked, "The
legislation improves the efficiency and the discovery process, while it still promotes accountability. It alters neither Federal nor State law on whether the attorney-client privilege or the work product doctrine protects specific information. The bill only modifies the consequences of an inadvertent disclosure once a privilege exists." (Cong. Rec. Sept. 8, 2008 at p. H7819.)

Hopefully this new rule will give parties confidence in the non-waiver agreement as a cost-reducing technique in appropriate cases, lessen the consequences of inadvertent production, and reduce litigation over waiver issues.