Vedder Thinking | Articles Yates Memo Creates a Privilege Paradox for GCs
As published on February 5, 2016 in Law360
Let’s say you’re the general counsel for a manufacturing company that builds armored transport vehicles for sale to the U.S. military. One of your vehicles recently exploded in use, injuring several military personnel. The U.S. Department of Justice is investigating the cause of the explosion and believes that your company skipped over certain required steps in product safety testing as part of an effort to meet contractual sales deadlines, and that members of the company’s senior management team may be criminally responsible because they knew about the corner-cutting and condoned it.
You must develop a plan to investigate the potential causes for the explosion, including a thorough review of the company’s product safety testing procedures. Should you task your internal risk management team with learning all the facts? Should you hire outside counsel to conduct the investigation? What information developed in the investigation will you recommend disclosing to the DOJ? What if critical information discovered in the investigation is protected by the attorney-client privilege? Will you recommend withholding the information or waiving the privilege as part of your cooperation with the government?
New DOJ Policies Impact Your Analysis
Before you answer any of these questions, you will need to consider DOJ’s latest update to its policies for investigating and prosecuting business organizations issued on Sept. 9, 2015 — the “Yates memo,” authored by Deputy Attorney General Sally Quillian Yates. The Yates memo boldly sets forth six new policies intended to strengthen the DOJ’s refocused effort to hold culpable individuals civilly and criminally liable for corporate wrongdoing. Perhaps most critically, the Yates memo states that a company must provide the government with “all relevant facts relating to the individuals responsible for the misconduct” in order for the company “to be eligible for any cooperation credit.”1 This is a serious policy shift that substantially alters the requirements for a company to earn cooperation credit — a potentially significant mitigating factor weighing against a decision by the DOJ to bring criminal charges against the company.2
Cooperation — It’s Now “All or Nothing”
Indeed, the days of partial cooperation credit for corporations appear to be over. As Deputy Attorney General Yates herself has explained: “In the past, cooperation credit was a sliding scale of sorts and companies could still receive at least some credit for cooperation, even if they failed to fully disclose all facts about individuals. That’s changed now. As the policy makes clear, providing complete information about individuals’ involvement in wrongdoing is a threshold hurdle that must be crossed before we’ll consider any cooperation credit.”3 Thus, after the Yates memo, if the DOJ believes that a company has declined to learn all the facts or failed to provide “complete factual information about individual wrongdoers, its cooperation will not be considered a mitigating factor” in the DOJ’s decision whether to charge the company.4
A Thorough Investigation Is More Important Than Ever
What do these seemingly unyielding new policies mean for you, our hypothetical corporate general counsel dealing with a serious product malfunction that injured military personnel? At the very least, it seems more critical than ever that you commission a thorough investigation to learn the who, what, where, when and why.
So let’s say you begin your internal investigation by instructing your company’s risk management team to investigate the facts in an effort to determine whether there was any wrongdoing at the company. Unfortunately, their investigation reveals that midlevel managers directed company engineers to sidestep certain product-safety testing requirements. Troubled by this information, you are considering whether to hire experienced outside counsel to investigate further.
Outside lawyers with experience conducting investigations will be better prepared to question witnesses and analyze documents in order to best understand the issues upon which government investigators will likely focus. In particular, retaining a firm with former prosecutors will provide critical guidance on how government lawyers look at cases and evidence, and how they make decisions about whether to bring criminal charges against a corporation, all of which will help put your company in the best possible negotiating position with the government. Of course, retaining outside counsel with this expertise will require the company to allocate considerable additional money and resources; should you move forward with the additional expense?
The answer, in light of the Yates memo, seems to be a resounding yes. Not only has the deputy attorney general herself made clear that companies must be proactive to learn all the facts and to identify the culpable individuals, but DOJ representatives have also noted that the government will simultaneously be conducting its own investigation and comparing its results to factual information submitted by the company.5 This last part is nothing new, as the government has always enjoyed investigative tools that a company does not, including wiretaps, compulsory process, granting immunity and cultivating access to cooperating insider witnesses who may provide information about the company to the government in real time, which the government uses to determine its own view of the facts and to test the accuracy and credibility of presentations made by a target before criminal charges are filed. But the not-so-gentle reminder should really get your attention in light of the new “all or nothing” approach to cooperation credit. Because the government will likely have a view as to what “all” the relevant facts are, the consequence of failing to investigate thoroughly and impartially has never been more stark. Perception that a company has failed to investigate or has not investigated enough could result in no cooperation credit, which could tip the scales in favor of the company’s indictment.
So you decide to bring in outside lawyers to investigate. Let’s say they conclude that the company’s president and chief operating officer are also potentially culpable based largely on what various company employees told the lawyers during interviews. What do you do with this privileged information? Although the DOJ has not specifically asked you to waive privilege, it is aggressively pressing the company, pursuant to the Yates memo mandate, for a full and complete disclosure of all relevant facts, including a description of all individuals with potential culpability. Do you advise the company to waive the privilege in order to hand over the names of all these individuals to the government, or do you tell the company to stand on its privilege and instead only disclose the information uncovered by your risk managers (which is not privileged but only identifies some of the potentially culpable individuals)?
Disclosure of “All Relevant Facts” Creates a Privilege Paradox
In answering this question, it is important to understand the backdrop of the DOJ’s evolving position on whether a corporation must waive attorney-client privilege in order to receive cooperation credit.6 Since the Yates memo was issued, Deputy Attorney General Yates and Assistant Attorney General Leslie Caldwell have publicly remarked that the new guidance does not roll back DOJ policy, memorialized in the Filip memo of 2008, that says companies are not required to waive privilege to receive cooperation credit, and prosecutors are not permitted to seek a waiver as a condition of cooperation.7 Although Deputy Attorney General Yates has explained that cooperation credit is conditioned on a company providing “all non-privileged evidence implicating [culpable] individuals,”8 the Yates memo is actually broader, conditioning cooperation credit on the provision of “all relevant facts.”
So what does the DOJ now expect a company to do if information relevant to culpable individuals is communicated by company employees during interviews with outside counsel subject to the attorney-client and work product privileges, as described in our hypothetical above? Deputy Attorney General Yates has spoken on this issue as well, in rather surprising terms:
[L]et’s be clear about what exactly the attorney-client privilege means. As we all know, legal advice is privileged. Facts are not. If a law firm interviews a corporate employee during an investigation, the notes and memos generated from that interview may be protected, at least in part, by attorney-client privilege or as attorney work product. The corporation need not produce the protected material in order to receive cooperation credit and prosecutors will not request it. But to earn cooperation credit, the corporation does need to produce all relevant facts—including the facts learned through those interviews—unless identical information has already been provided. We will respect the privilege, but we will also expect companies to respect its boundaries and not to wrongly exploit its legitimate purpose by using it to shield non-privileged information from investigators.9
Against the backdrop of the DOJ’s previous aggressive policies conditioning cooperation credit on waiver, Yates’ comments seem more like a creative approach to end-run the Filip memo and to obtain communications that are likely privileged, and less about “respecting the privilege.”
In any event, the DOJ’s overly simplistic “facts are not privileged” pronouncement sets forth a new expectation for corporate investigations that will not be so easily achieved. Perhaps the DOJ is anticipating that investigating attorneys, in an effort to preserve the privilege, will prepare facts-only summaries of information gleaned from employee interviews that could be provided to the government in the cooperation process. Thus, the “facts” would be independently memorialized and kept separate from privileged communications and memoranda containing legal analysis and other attorney work product necessary to providing legal advice to the company.
This procedure may have some superficial appeal, but it is not without risk. Separating out “the facts” from the interviews would not change the privileged nature of the underlying communication between the company’s employee and its attorneys as part of their work product. Thus, a court in a subsequent related civil proceeding, for example, could view this procedure as an attempt by the company to effect a partial or selective waiver, which is generally disfavored. The court may instead find a broader subject matter waiver, which could result in highly detrimental consequences in the related civil litigation.10 Thus, even where every effort is made to provide the government with “just the facts” and to preserve the privilege, there are substantial collateral risks that must be considered when deciding whether to cooperate with the government in the post-Yates memo regime.
Perils of Seeking Cooperation Credit After the Yates Memo
In light of these issues resulting from the Yates memo’s “all or nothing” approach to cooperation credit, a practical view may very well be that a company desiring to achieve such credit must be prepared to waive privilege or at least accept the risk that its cooperation efforts may later be deemed to have waived the privilege. Returning to our tank explosion hypothetical, you, as the corporate general counsel, are facing a potential bet-the-company case. Not only could the government’s investigation result in a felony conviction, but it could possibly lead to a suspension or debarment from government contracts, resulting in financial ruin. Thus, the importance of staving off an indictment at all costs may counsel in favor of waiving the privilege as part of your effort to be perceived as providing cooperation that goes above and beyond what is required or expected.
In contrast, for cases in which the worst-case outcome is not so severe, and the conduct may not be so black-and-white, the potential consequences of waiving privilege in an effort to obtain cooperation credit may weigh against a waiver for all of the reasons discussed above. In addition, consider the effect that seeking cooperation credit by providing “all relevant facts” may have on internal investigations: If employees believe the company’s lawyers are looking for culpable individuals to serve up to the government, they will naturally be less likely to cooperate in any investigation and may insist on their own representation before agreeing to an interview. This may only increase the expense of the investigation and potentially decrease the chances of uncovering the information the DOJ may be expecting in exchange for cooperation credit. Moreover, a chilling effect may be felt the next time the company’s attorneys seek to interview employees as part of an internal investigation.
In sum, the DOJ’s new policies set forth in the Yates memo are likely to require more diligence and deliberation among company leaders and advisers from the very outset of any investigation matter. The expectations on companies to investigate have never been more clear, and the consequences for being perceived as failing to investigate have never been more stark. At the same time, the DOJ’s “all or nothing” approach makes the questions of whether to seek and then try to obtain cooperation credit more complicated than ever. The additional care and consideration required in the post-Yates memo world will likely result in companies spending more time and resources on these issues, including the retention of outside counsel experienced in DOJ investigations. Unfortunately, these costs appear to be an unavoidable result of the DOJ’s stepped-up efforts to hold individuals accountable for corporate wrongdoing.
1 See Memorandum from Deputy Att’y Gen. Sally Quillian Yates, U.S. Dep’t of Justice, Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015) (“Yates Memo”) at 2-3, available at http://www.justice.gov/dag/file/769036/download. The six new policies applicable to DOJ attorneys are: “(l) in order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct; (2) criminal and civil corporate investigations should focus on individuals from the inception of the investigation; (3) criminal and civil attorneys handling corporate investigations should be in routine communication with one another; (4) absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation; (5) Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and (6) civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.” Id.
2 Cooperation credit is one of the factors DOJ may consider in determining whether to indict a corporation. When considering whether to award cooperation credit, DOJ looks at whether the corporation timely and voluntarily disclosed wrongdoing and cooperated with the government’s investigation to uncover all relevant facts. See U.S. Attorneys’ Manual, Principles of Federal Prosecution of Business Organizations, § 9-28.000, et seq. (rev. Nov. 2015), available at http://www.justice.gov/usam/usam-9-28000-principles-federal-prosecution-business-organizations.
3 Remarks of Deputy Att’y Gen. Sally Quillian Yates delivered at Amer. Banking Assoc. and Amer. Bar Assoc. Money Laundering Enforcement Conf. (Nov. 16, 2015) (“Yates Nov. 2015 Remarks”) at 2, available at http://www.justice.gov/opa/speech/deputy-attorney-general-sally-quillian-yates-delivers-remarks-american-banking-0. See also Remarks of Deputy Att’y Gen. Sally Quillian Yates delivered at N.Y.U. School of Law (Sept. 10, 2015) (“Yates Sept. 2015 Remarks”) at 3, available at http://www.justice.gov/opa/speech/deputy-attorney-general-sally-quillian-yates-delivers-remarks-new-york-university-school (“[I]f a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing . . . . It’s all or nothing. No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals. . . . If [companies] don’t know who is responsible, they will need to find out.”).
4 Yates Memo at 3.
5 Remarks of Asst. Att’y Gen. Leslie R. Caldwell delivered at the Second Global Investigations Review Conf. (Sept. 22, 2015) (“Caldwell Remarks”) at 4, available at http://www.justice.gov/opa/speech/assistant-attorney-general-leslie-r-caldwell-delivers-remarks-second-annual-global-0 (“We often can obtain from third parties evidence that is not available to the company. Also, we know that a company may not be able to interview former employees who refuse to cooperate in a company investigation. Those same employees may provide information to us, whether voluntarily or through compulsory process.”).
6 The changing contours of DOJ’s policy regarding privilege waiver and cooperation credit may be gleaned from a series of memos issued by several Deputy Attorneys General over the years. In June 1999, the Holder Memo stated that a prosecutor may consider a company’s willingness to waive the attorney-client and work product privileges in gauging the extent of the company’s cooperation with the government (available at http://www.justice.gov/sites/default/files/criminal-fraud/legacy/2010/04/11/charging-corps.PDF). In January 2003, the Thompson Memo took a harder line, stating that the prosecutor should consider a company’s willingness to waive privilege and expressly authorizing prosecutors to request a privilege waiver as appropriate in the cooperation process (available at http://www.americanbar.org/content/dam/aba/migrated/poladv/priorities/privilegewaiver/2003jan20_privwaiv_dojthomp.authcheckdam.pdf). After the Thompson Memo, common perception based on DOJ (and SEC) practice was that a company was required to waive privilege in order to receive any cooperation credit. According to critics, this practice led to an unwarranted erosion of the privilege and practical difficulties in maintaining full and open communications between corporate employees and their legal counsel, among other presumably unintended consequences. In December 2006, the McNulty Memo specifically stated that waiver was not a prerequisite for cooperation credit, but prosecutors were still permitted to request a privilege waiver in certain circumstances during the cooperation process (available at www.justice.gov/sites/default/files/dag/legacy/2007/07/05/mcnulty_memo.pdf). In August 2008, the Filip Memo stated that a company could earn “due credit” for cooperation if it timely disclosed relevant facts about alleged misconduct, regardless of whether the company chose to waive privilege, and it expressly directed prosecutors not to ask for privilege waivers as part of the dialogue (available at www.justice.gov/sites/default/files/dag/legacy/2008/11/03/dag-memo-08282008.pdf). Thus, the Filip Memo appeared to introduce a regime in which a company could earn at least some cooperation credit for disclosing relevant facts while standing on its privilege, presumably to withhold what could be relevant, but privileged, information.
7 See Caldwell Remarks at 4 (The Yates Memo “does not change existing department policy regarding the attorney-client privilege or work product protection. Prosecutors will not request a corporate waiver of these privileges in connection with a corporation’s cooperation.”); Yates Nov. 2015 Remarks at 3 (“[T]here is nothing in the new policy that requires companies to waive attorney-client privilege or in any way rolls back the protections that were built into the prior factors.”).
8 Yates Sept. 2015 Remarks at 3.
9 Yates Nov. 2015 Remarks at 3.
10 Indeed, according to one former high-ranking DOJ attorney, plaintiffs’ lawyers may argue that such information was never privileged in the first place because it was gathered by outside lawyers at the direction of the government and with the intention of providing it to the government pursuant to policies outlined in the Yates Memo. See Chris Bruce, “U.S. Will Retreat on Yates Memo, Former DOJ Official Predicts,” Bloomberg Law (Nov. 20, 2015), available at http://www.bna.com/us-retreat-yates-n57982063844 (quoting former Deputy Att’y Gen. James M. Cole).