Blame Enron, Larry Thompson, Eliot Spitzer, overzealous prosecutors or a trigger-happy SEC. Regardless of who started this trend, there’s no question the attorney-client privilege is under attack on an alarming number of fronts. Today it’s part and parcel of the general counsel’s job to deal with broad requests from government officials for documents that a few short years ago unquestionably would have been protected by the privilege or work-product doctrines. When confronted with such a request, the company’s choice is grim: waive privilege and hand over everything, or face almost certain indictment or regulatory action.

“We’re still creatures of the environment that Enron bred,” says A. Ross Pearlson, a partner at Sills Cummis Epstein & Gross in New Jersey. “Since then, the attitude has been that it should be as easy as possible for the government to prosecute white-collar crimes.”

However, there are some inklings of a shift in the tenor of the debate over privilege. A growing chorus of protestors that includes the ABA, ACC and ACLU, claim the practices of the DOJ and regulatory agencies have gone too far. To the surprise of many observers, that concern was addressed, at least in part, on March 27 when the U.S. Sentencing Commission elected to remove language from its organizational guidelines that prosecutors used to justify their requests for waivers.

The decision is a beacon of hope for companies that have watched privilege get slowly worn away. But whether the change in the sentencing guidelines will be a watershed event or just a drop in the bucket remains to be seen.

Prosecutorial Muscle

The specific provision the Sentencing Commission removed from its guidelines was language contained in Section 8C2.5(g) that said that whether a company waived privilege could be a factor in determining whether a company was “cooperative,” and thereby potentially entitled to a lighter sentence.

“The DOJ and SEC have lost any basis they had to make these demands,” says Susan Hackett, general counsel of the ACC. “The change in the guidelines strengthens our ability to force the DOJ to reevaluate its policies.”

But while prosecutors have long seized on the sentencing guidelines to show they were justified in seeking waivers, that wasn’t the only document that enabled them to take a hard line. Such documents as the DOJ’s Thompson Memo have given local prosecutors relatively free rein to seek waivers where they see fit.

“If you think you can now be more aggressive in asserting the privilege, you’re being naive,” says Arthur Cambouris, assistant general counsel at the New York Power Authority. “As long as the Thompson Memo exists, prosecutors will ask for waivers in investigations.”

However, the hope among observers is that although the revision may not have a large practical impact, it will pave the way to dialogue with the DOJ about reining in its stance on waivers.

“The change in the sentencing guidelines is significant insofar as it indicates that some elements in the law enforcement community are recognizing that requiring waivers interferes with companies’ need to rely upon their counsel,” says Seth Levine, partner at Foley & Lardner in New York. “As a practical matter, companies’ primary concern isn’t sentencing–it’s avoiding being charged.”

Waiver Aftershocks

Certainly, avoiding indictment will remain companies’ chief worry–criminal charges can put a public company out of business. But the consequences of agreeing to waive privilege can be just as draconian.

Much of companies’ hesitancy to waive privilege stems from the fact that once you waive for a government investigation, those documents are discoverable in all future cases. Therefore, third-party plaintiffs often ride on the coattails of government investigations. The target is forced to hand over everything to a hostile party against whom it would have asserted privilege if not for the previous waiver demand.

A potential fix to this problem would be a limited waiver–an enforceable agreement between the government requestor and the company setting out that the company’s delivery of privileged documents does not constitute waiver with regard to future litigation.

“The idea of a limited waiver would be a useful step,” Cambouris says. “That would allow companies to cooperate with regulators but not waive with regard to third-party civil plaintiffs.”

Most courts reject the idea of limited waiver so legislation would be necessary to make it a reality. Congress considered creating a limited waiver in 2004 with HR 2179. That bill stated explicitly that producing privileged documents in response to a request from the SEC would not constitute a permanent waiver of privilege. However, HR 2179 stalled in the 108th Congress.

Many observers have doubts that a legislative solution will be forthcoming.

“There’s no political will for legislation to strengthen privilege,” says Roman Darmer, a partner at Howrey. “No one wants to be responsible for making it more difficult to get a conviction when the next Enron happens.”

Finding Solutions

Legislation might not be the only way companies could get relief. The ACC recommends the creation of an appeal process that would enable a company to seek review of a waiver request.

“It would be useful to have a neutral third party to consider whether a request is appropriate,” Hackett says.

Further, in light of some recent judicial activism on the issue of whether prosecutors are being too aggressive in forcing companies to cut off defense costs for their accused executives, some corporate counsel hope judges will take a similarly proactive role in the privilege debate.

“It would be helpful for judges to become more outspoken about why companies waive privilege,” says Bruce Ortwine, general counsel of The Sumitomo Trust & Banking Co. “Of course there’s only so much a judge can do.”

The reality is that there is still much work to be done to restore attorney-client privilege. However, the change in the sentencing guidelines will hopefully prove to be a significant first step.