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In today’s environment of heightened scrutiny by the government and the plaintiffs bar, companies must navigate amid constantly changing rules and make difficult choices. One of the more critical choices that a company could face effectively requires the company to pick its poison between criminal charges and potentially crippling class actions. Consider the following scenario: A company discovers that some of its employees have engaged in potentially illegal activities that resulted in inflated revenues. The company decides to come clean and report its discovery to the appropriate governmental enforcement agency. The government then initiates an investigation and, simultaneously, a dozen private class actions are filed. Proceeding in the spirit of cooperation, the company hires outside counsel to conduct a thorough internal investigation of the suspect activities, and the law firm prepares a written report for the company. In the end, and despite all of the ways in which the company has cooperated, the government proffers an ultimatum: Unless the company agrees to waive privilege and turn over its outside counsel’s report, the company will be deemed uncooperative and, most likely, face indictment. At the same time, turning over the report to the government could also lead to the report’s disclosure to class action plaintiffs, which in turn could result in a settlement jackpot. What should the company do? Companies increasingly find themselves in precisely this position — whether to waive attorney-client privilege and work product protection, risking disclosure of its internal investigation to civil litigants, or declining to waive the privilege and protection, and thereby risking criminal indictment for failing to fully cooperate. In June 1999, then-Deputy Attorney General Eric Holder Jr. issued a memorandum attaching a Justice Department document titled “Federal Prosecution of Corporations,” which directed federal prosecutors to consider “the corporation’s willingness � to waive the attorney-client and work product privileges” in gauging the extent of cooperation. As a result, requests for waivers became the order of the day, not only from U.S. attorney’s offices, but also from regulatory agencies such as the Securities and Exchange Commission. Members of the white-collar criminal defense bar were quick to respond. Citing the impact on internal investigations and the defense of parallel civil proceedings, the American Bar Association’s criminal justice section urged repeal of the waiver provisions of the Holder memo. No repeal was forthcoming. In January 2003, Deputy Attorney General Larry Thompson issued a memorandum attaching a revised version of the Holder memo titled “Federal Prosecution of Business Organizations.” Although many had expected the revised principles to soften the tenets of the earlier memo, particularly with respect to corporate waiver of privilege as an indicator of cooperation, they were proven wrong. The Thompson memo embraced in their entirety the aggressive policies articulated in the Holder memo. Indeed, the new memo formally established that companies seeking to avoid prosecution by cooperating with law enforcement are required to meet a high bar, particularly with respect to waiver. In the wake of the Holder and Thompson memos, the pressure for companies to waive privileges and protections has continued to mount. In fact, pursuant to a recently proposed amendment to the sentencing guidelines, the decision to waive would not only influence the charging decision, but could also have drastic consequences in the event of a conviction. An ad hoc advisory group on organizational sentencing guidelines impaneled by the U.S. Sentencing Commission proposed an amendment — ostensibly intended to guide organizations and courts on effective compliance programs — in which it acknowledged the relationship between obtaining “cooperation” credit at sentencing and waiving attorney-client privilege and work product protection. The proposed language provides that while waiver “is not a prerequisite to a reduction in culpability score,” the government may determine that waiver is necessary in order to satisfy the requirements of cooperation. Despite the purported purpose of providing guidance, the proposed amendment fails to offer any insight into what circumstances the government would deem waiver necessary. Instead, the proposed amendment merely serves to further entrench the notion that waiver of privilege is a prerequisite to cooperation with the government and mitigation of any penalties. Further confounding the waiver/non-waiver dilemma facing companies and their counsel, courts have recently found that a company waives the attorney-client privilege and attorney work product protection for documents the company shares with the government in connection with a government investigation. The California Court of Appeal’s Feb. 20 decision in McKesson HBOC Inc. v. Superior Court is the latest example of such a finding. In 1999, McKesson publicly disclosed findings of improper revenue recognition at its subsidiary, HBO & Co. McKesson’s disclosure immediately resulted in shareholder lawsuits and investigations by the Justice Department and the SEC. McKesson retained Skadden, Arps, Slate, Meagher & Flom to defend it in the shareholder lawsuits and conduct an internal investigation. Skadden’s internal investigation included conducting interviews of McKesson personnel, preparing a memorandum for each interview conducted and drafting and providing a written report of its investigation to McKesson’s audit committee. McKesson agreed to disclose the Skadden audit committee report and interview memoranda to the U.S. attorney’s office and the SEC subject to agreements between the company and the government designed to preserve the confidentiality of the materials provided. To date, the government has not brought any actions against McKesson. However, parties in various actions have sought to obtain disclosure of the audit committee report and interview memoranda. Among them are plaintiffs in consolidated civil actions in San Francisco Superior Court who brought a motion to compel against McKesson. The trial court granted plaintiffs’ motion to compel, finding that McKesson had waived the attorney-client privilege and work product protection because the company had provided the documents to the government. McKesson appealed the trial court’s decision. The court of appeal affirmed the trial court’s ruling. Among other things, McKesson argued that it did not waive the attorney-client privilege because providing the documents to the government was reasonably necessary for the accomplishment of the purpose for which Skadden was consulted and furthered a common interest or purpose McKesson had with the government — namely, to investigate and root out the publicly disclosed accounting improprieties. The court of appeal disagreed, holding that it was unnecessary to share the documents with the government to accomplish Skadden’s assignment and that there was no real “alignment of interests” between McKesson and the government. Indeed, the court found the situation “not qualitatively different than a defendant sharing privileged material with one plaintiff but not another.” McKesson further argued that it did not waive the protection of the attorney work product doctrine because the government had an interest in preserving the confidentiality of the documents pursuant to the agreement entered into by McKesson and the government. Again, the appellate court disagreed, finding that there was no true interest in maintaining confidentiality on the part of the government because the government and McKesson were not aligned on the same side in any litigation and did not share the same stake or goal in the outcome of any litigation. One of the main policy arguments proffered by McKesson and others who filed amicus curiae briefs was that compelled disclosure to litigants of privileged material provided to the government will make future targets of government investigations reluctant to cooperate. This argument has found some support in courts adopting a “selective waiver” theory under which a party could disclose privileged material to the government while continuing to assert the privilege against other parties. To date, various courts have split on the issue of the selective waiver theory. With its recent decision, California’s First District has joined the many courts rejecting the theory. However, as the court itself acknowledged: “We are not the first court to consider the matter; nor is it likely we will be the last.” In fact, the same issue currently is pending before the Ninth Circuit in an appeal of a district court decision that also found waiver by McKesson’s disclosure to the government. U.S. v. Bergonzi, 216 F.R.D. 487, 496-97 (N.D. Cal. 2003). Rejection by courts of the sound policy considerations in support of a non-waiver reflects the gap between theory and practice. The pressure placed by the government on a company to investigate itself and then turn the results of that investigation over to the government and the company’s decision to comply is often the difference between charges being filed or not. Companies thus are faced with the Hobson’s choice of criminal prosecution or potential class action disaster. Legislative action may be the only way out of this conundrum. Pamela R. Davis is a partner in the San Francisco office of Gray Cary Ware & Freidenrich, where she specializes in corporate governance and white-collar criminal defense matters. Roy K. McDonald is a litigation associate at the firm.

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