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Corporations faced with a government investigation often must make a Hobson’s choice: whether or not to disclose the results of an internal probe. As the Sixth Circuit U.S. Court of Appeals has stated in this context, “[a]ll litigation-related tactical decisions have an upside and a downside.” In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (2002). When confronted with notice that a government agency is commencing an investigation, typically the company and its counsel will have only limited knowledge of the facts underlying the subject matter of the probe. As a result, counsel will often advise the company to conduct an internal investigation. This will usually result in a written report and other documentation of the facts discovered for the use of the company’s board of directors in formulating its response to the government investigation. Invariably, the facts giving rise to the government’s investigation will also give rise to — and likely already have spawned — a number of private lawsuits against the company and its representatives by its shareholders and others. The same facts might also give rise to civil and criminal actions by the government against the company and some of its officers, directors and representatives. To protect the company’s internal investigation from disclosure to those plaintiffs and other parties, outside counsel will usually be retained to conduct the internal investigation and draft the investigation report to the board. In so doing, the company can assert that the report and other documents created during the investigation are protected from disclosure by the attorney-client privilege and attorney work-product doctrine. At the same time, the corporation’s exposure to liability, in contrast to the liability of its agents, may turn on the company’s cooperation with the government’s investigation. The company may enhance its chances either for avoiding liability or for leniency by sharing the results of its internal investigation with the government. Disclosing the company’s internal investigation report and backup materials to the government, however, raises the possibility of waiver of the attorney-client and the work-product protections. Faced with this choice, what should counsel do under these circumstances? The McKesson Corp. and its outside counsel, Skadden, Arps, Slate, Meagher & Flom, found itself in just this situation. In April 1999, McKesson publicly disclosed that its auditors had discovered massive accounting irregularities in the financial statements of McKesson’s newly acquired subsidiary, HBO & Co. (HBOC). As a result of those irregularities, McKesson wrote off several hundred thousand dollars of revenue and its stock price plummeted. Following its public announcement, McKesson was quickly besieged by numerous lawsuits from private litigants. It was also confronted with investigations by the Securities and Exchange Commission and the U.S. attorney’s office. Over the next several months, the SEC commenced civil enforcement actions against several former HBOC and McKesson officers and employees and employees of HBOC’s outside auditors. Some of those same individuals were indicted by the USAO for federal securities fraud. McKesson retained Skadden to represent it in the shareholder lawsuits, conduct an internal investigation and represent it in connection with the SEC and U.S. attorney’s investigations. Skadden’s internal investigation resulted in the firm’s preparation of numerous memoranda of interviews with various McKesson employees and a written report to McKesson’s audit committee. Prior to the completion of its report to the audit committee, and faced with the various federal investigations into McKesson’s conduct, Skadden negotiated confidentiality agreements with both entities and then later produced the privileged audit committee report and interview memoranda to them. The confidentiality agreement with the SEC called for the agency to maintain confidentiality of the information provided to it by McKesson, except to the extent required for the SEC to carry out its duties and responsibilities or to the extent that the SEC determined that disclosure was required by federal law. While the U.S. attorney’s office also agreed to keep the information confidential, it could, in its discretion, disclose the documents to a federal grand jury and use the documents in any resulting criminal proceeding, including prosecution of McKesson. Although McKesson has argued in subsequent litigation that its decision was motivated by a common desire with the government to pursue the persons responsible for the accounting irregularities, there can be little doubt that it was also hoping to curry favor with various federal officials by producing its privileged documents to them. Leniency is always at least one goal of those who agree to cooperate in the face of a government investigation. Indeed, the SEC has praised McKesson’s cooperation and stated that the privileged documents produced to it by McKesson served as a “roadmap” in its investigation. In addition, by negotiating confidentiality agreements with both agencies, McKesson no doubt hoped to reap the advantage of its cooperation while, at the same time, maintaining its privilege in the private litigation. While the issue of whether disclosure of otherwise privileged documents to government agencies would waive the attorney-client privilege and the work-product protection had been litigated before, the reported decisions at the time were anything but consistent. McKesson and its lawyers thus ran the risk of waiving the privilege by disclosing the protected documents to the SEC and U.S. attorney’s office even under the terms of the confidentiality agreements. At the time of McKesson’s disclosure, although many courts had ruled that disclosure of an internal investigation report to the government waived work-product and attorney-client privileges, some courts had suggested that a confidentiality agreement with the government might protect such documents from discovery by private litigants after disclosure to the government. For example, in In re Steinhardt Partners, L.P., 9 F.3d 230 (1993), the Second Circuit U.S. Court of Appeals found that work-product protection had been waived by disclosure, while stating that result might be different if the disclosing party and the government either shared a common interest or entered into a confidentiality agreement). On the other hand, in Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (1991), the Third Circuit found there was a waiver by disclosure, stating that the result might be different if the disclosing party and the government had not been adversaries and the disclosing party had a reasonable expectation that government would keep disclosed material confidential. Following Steinhardt, some courts found that internal investigation audit reports were protected where the disclosure to the government agency had been made subject to a confidentiality agreement. Two recent decisions in cases arising out of the McKesson accounting irregularities in the federal and state courts of California suggest that the chances of successfully blocking disclosure of a corporation’s privileged documents to its adversaries and other parties in private party litigation, following disclosure of those documents to the government, are not good — despite the existence of a confidentiality agreement with the government agency. In both cases, the courts rejected the selective waiver doctrine and ruled that production by McKesson of its attorney-client privileged and work-product protected materials to the SEC and U.S. attorney’s office waived those protections as to other parties seeking production of those documents. In United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003), the court addressed the issue of Skadden’s report to McKesson’s audit committee and other related documents produced to criminal defendants fighting charges brought by the U.S. attorney’s office, which grew out of the transactions that formed the subject of McKesson’s internal investigation. The court held that the attorney-client privilege never attached to the requested documents because McKesson had agreed to produce the documents to the government before they had ever been created and because McKesson had given to federal officials full discretion to disclose the documents under the terms of the confidentiality agreements. The court also held that, although the documents were originally protected by the work product doctrine, McKesson had waived that protection by producing the documents to an adversary. In reaching this conclusion, the court found that McKesson and the investigating federal agencies did not share a common interest because the government entities had not agreed to unconditional confidentiality of the documents. The court also rejected the selective waiver doctrine, finding it inherently unfair that a party could disclose documents to one outsider but not another. Finally, the federal district court concluded that the government entities in this case were adversaries of McKesson and that waiver of the work-product protection as to one adversary constituted waiver as to all adversaries. The ruling is on appeal to the Ninth Circuit, and the criminal prosecution has been stayed pending that decision. In a separate case arising out of the same facts, a Superior Court judge similarly ordered the same documents produced to private party plaintiffs suing McKesson and others in California state court under the California securities laws. Relying heavily on the policies supporting the attorney-client privilege and work-product doctrines in California, the state Court of Appeal affirmed the decision that McKesson had waived both the attorney-client privilege and the work product protection by producing the documents to the government. McKesson has recently petitioned the California Supreme Court to review this affirmance. In both opinions, the courts rejected McKesson’s request to recognize a selective waiver doctrine that would have allowed disclosure of the documents to one adverse party without waiving the privilege as to other adverse parties. In so ruling, the courts rejected the two principal arguments advanced by McKesson. First, both courts found that McKesson and the government were adversaries at the time of the disclosure — contrary to McKesson’s argument that it and the government were cooperating to get to the root of the fraud, and despite that both the SEC and the U.S. attorney’s office eventually decided not to pursue claims against McKesson. For this reason, the courts held that McKesson was not entitled to the protection from waiver of the privileges similar to that afforded to participants in a joint defense agreement. Because McKesson’s production was to an adversary, despite the existence of the confidentiality agreement, the courts held that the privilege was waived. Second, both courts rejected the argument advanced by McKesson — and also by the SEC and the Securities Industry Association as amicus curiae in both cases — that recognizing a selective waiver exception under these circumstances would further an important public policy by encouraging companies to cooperate with government investigations. The courts reasoned that the policies underlying the attorney-client privilege and work-product doctrine were not fostered by permitting disclosure of otherwise protected material to the government. Since it appears that McKesson’s and Skadden’s attempt to cooperate fully with the government while protecting its privilege has failed, unless both decisions are reversed on appeal, what do these recent decisions mean to counsel faced with this Hobson’s choice? They certainly mean that counsel must face the possibility that, if a company decides to produce the results of its internal investigation to the government — even according to the terms of a confidentiality agreement — it is quite possible, maybe even likely, that the audit report and the underlying documentation will later be subject to discovery in suits filed against the corporation by private individuals. Despite the best efforts of in-house and outside counsel to pursue a strategy of cooperating with the government, while at the same time attempting to protect the company’s attorney-client privilege and work-product protection, they should be aware that such efforts might well prove to be futile. Counsel may have to recognize that it can either produce its privileged documents to the government or maintain its privilege. But not both. In the final analysis, a decision to provide any information to a government agency, whether written or oral, will expose a company to the possibility that a court will later rule that it has waived its attorney-client privilege and work product protection as to the information disclosed. Nonetheless, by thinking carefully about the benefits and risks involved in cooperating with the government’s investigation, counsel can help the company make decisions to maximize benefits while minimizing risk. J. Philip Kirchner is a partner and Vincent J. Nolan III is an associate in the litigation practice group at Flaster/Greenberg in Cherry Hill, N.J.

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