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The quality of an internal investigation is crucial to manage a company’s serious legal crises and to protect its reputation. Few issues are more important to the success of an investigation than preserving the attorney-client privilege.

General counsel must carefully consider important questions at the start of an investigation to avoid problems down the road. How broad is the privilege in the context of an internal investigation? What potential pitfalls loom? And, with increasingly aggressive federal prosecutors looking to make their reputations, when could a company find that it had unintentionally waived that hard-won privilege?

These issues are no doubt weighing on the mind of the general counsel of General Motors Co., Michael Milliken, who became one of the latest in-house counsel to order an internal investigation—in this case, to analyze how much GM knew about an ignition switch that may have caused at least 13 deaths and led GM to recall more than 1.6 million cars. With his company facing multiple federal investigations and a possible criminal inquiry, Milliken belatedly brought in outside counsel to lead the GM probe. While that investigation was underway this past May, GM entered into a $35 million settlement with the federal government, agreeing to pay the maximum fine and make “significant and wide-ranging internal changes” to its safety reviews and practices ["The Lawyers Were Here," page 48].

Tip No. 1: Think About Privilege Now, Not Later

Internal investigations often start quickly and must immediately produce results. To protect the privilege, the most important decisions are usually made at the very beginning of the investigation. It pays to take the time to carefully lay out privilege rules.

Before any work gets started, prepare a memo setting out the purpose of the investigation; the specifics of the information-gathering process; and the names of each lawyer and other third-party expert or consultant taking part. Remind all team members to use “Privileged & Confidential” headers in all of their communications concerning “legal advice.”

Educate all business people and the nonlawyers on the investigation about when the privilege applies, how it can be waived and why they should not forward any legal advice to anyone not part of the investigation. In emails and documents, nonlawyers should also be instructed to insert language that explicitly requests legal advice, and in-house counsel should explicitly state that they are rendering legal advice or seeking information in order to provide it.

For jurisdictions outside the United States, attorney-client privilege rules may be different. The majority of countries in the European Union, for example, do not extend the privilege to in-house counsel on the ground that they are not independent from their employers. In such jurisdictions, keeping communications privileged falls to the outside counsel.

Next, before taking any action, it is critical to map out the company’s ultimate legal strategy, which could include attempting to use the internal inquiry as a defense—which, in turn, could affect the privilege. A recent federal case highlights the importance of tackling these issues early.

In Koss v. Palmer Water Dept., a U.S. magistrate judge held that an employer had waived its privilege—both as to communications involving in-house counsel and its outside law firm—when it used the thoroughness of its internal investigation as a defense in a sexual harassment suit. While the company had anticipated the waiver of privilege on its in-house documents, it sought to protect the privileged communications with its outside law firm. The court found that outside counsel participated in the investigation beyond simple “advice to the client about the investigative process and decisions made by the employer,” which would have remained privileged. Instead, outside counsel became “intimately connected to, if not controlling of, the investigation,” guiding, advising and directing the main investigator. As a result, the Koss court required all outside counsel communications about the internal investigation to be produced.

The Koss case reminds us that inside counsel should carefully prepare the company’s ultimate investigation strategy at the beginning. Outside counsel should be segregated from the actual investigation, or its communications should be tailored to the reality of an eventual privilege waiver. Koss is a lesson to all in-house counsel as they lay the groundwork for their own investigations.

Tip No. 2: Beware the Limits of Privilege

Once the appropriate policies are in place and the investigation reaches the fact-gathering stage, inside counsel must take great care to protect the limits of the company’s privilege.

First, when interviewing or emailing a company employee, make sure that the employee is covered by the privilege under rules in your jurisdiction. Under the “subject matter” test, which is the dominant one, a lawyer’s communications with an employee are normally privileged if: 1) the communication is made for legal advice; 2) the employee speaks at the employer’s direction; 3) the communication is within the scope of the employee’s duties; and 4) the information is not disseminated beyond those in the company who need to know. A handful of jurisdictions, however, such as Illinois, still follow the older “control group” test, where a communication is privileged only when it involves an employee who is in a position “to control or take a substantial part in the determination of corporate action” in response to the legal advice. Make sure to know the appropriate test before sending or receiving communications.

Second, during any interview, make clear to the employee that the attorney represents the corporate entity, not any individual employees or third parties. At the beginning of each interview with an employee witness, administer an “Upjohn warning” in which the attorney explains that he or she represents the company, not the employee; that the interview is protected by the attorney-client privilege (which is controlled by the company, not the employee); and that the company can decide to waive its privilege and provide information it gets to the government or other third parties. Without such an explicit warning, the employee might reasonably believe that the lawyer represents the employee’s interests, not just those of the company. In such cases, that employee could attempt to veto the company’s subsequent attempts to waive the privilege, or the employee could create a conflict, preventing the lawyer from continuing to represent the corporate client. The goal here is to adequately warn the employee about privilege without preventing that employee from providing truthful and complete information.

Tip No. 3: Carefully Evaluate the Risks Before Waiving

For most high-stakes internal investigations like the one at GM, in-house counsel ultimately must weigh the pros and cons of waiving the company’s privileged communications as part of cooperating with a federal investigation. Federal prosecutors often take into consideration a company’s voluntary and timely disclosure of information in their decisions, and cooperation can sometimes work to avert prosecution altogether—or drastically reduce a company’s eventual sentence.

Prior to 2008, the U.S. Department of Justice actively demanded that many corporate targets waive their privilege in order to get “cooperation credit.” This policy has changed, and prosecutors are less likely to request such waivers, but there may still be situations in which a waiver makes sense.

The judgment call is highly case-specific. In some instances, waiving may be the only way to adequately apprise the government of a problem the company faces, and the steps it has taken to remedy the situation. The benefits of voluntarily waiving privilege, however, simply may not be worth the danger of letting privileged information detrimental to the company fall into the hands of plaintiffs lawyers and other adverse third parties. Additionally, disclosure of previously privileged information may not have its desired effect on the government, or may lead to a lawsuit against the company by the corporate employees involved in those communications. Finally, if a company does decide to waive privilege and provide information to the authorities, it should strive to limit disclosures as narrowly as possible.

As if the pressure cooker of an internal investigation were not enough, inside counsel must always step back at the beginning of an investigation to consider the safeguards to privileged communications. Work done at the beginning of an investigation is likely to save a lot of headaches later.

Elizabeth Herrington is a partner in the Chicago office of McDermott Will & Emery. She focuses her practice on national, complex corporate and commercial litigation. Thomas A. McCann is a Chicago-based associate in the firm’s trial practice group.