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Will New Guidelines on Waiving Attorney-Client Privilege Change Practice?

12/16/2009 --

Prosecutors may no longer ask firms under investigation to waive attorney-client privilege. The "culture of corporate waiver" may continue, however, as firms strive to appear cooperative in the eyes of the court, says Ross professor.

ANN ARBOR, Mich. — One of the most fundamental rights in the U.S. justice system is the attorney-client privilege, which guards the privacy of communications between lawyers and those whom they represent.

But for businesses under federal investigation, there's been a pervasive culture at the U.S. Department of Justice to lean on companies to waive that privilege. In response to some criticism, the justice department last year issued a new guideline that prohibits prosecutors from asking firms to do so. While it's a step in the right direction, professor Cindy Schipani thinks it won't necessarily change actual practice, at least for now. Schipani is the Merwin H. Waterman Collegiate Professor of Business Administration and a professor of business law at Ross.

In the past, waiving the privilege had been a factor when prosecutors gauged a firm's level of cooperation with an investigation. Appearing cooperative can be an effective financial strategy — it can knock a fine down by as much as 95 percent. If a company is seen as uncooperative, fines can go much higher.

That's partly why Schipani, in her paper "The Future of the Attorney-Client Privilege in Corporate Criminal Investigations," argues that companies still might volunteer to waive the privilege even if it isn't the best or most necessary option.

"I do want justice to prevail. And if we need to waive the privilege to get there, that's one thing," Schipani says. "But I'd rather see prosecutors get information through their investigation and encourage cooperation in ways other than waiving the privilege. Even though the new guidelines say prosecutors may not ask, the firms may still feel the pressure to waive it."

The "culture of corporate waiver" in the U.S. Department of Justice took hold in 1999, when now-Attorney General Eric Holder outlined factors that went into how prosecutors determined a company's level of cooperation. One of those factors was waiving the attorney-client privilege.

The complex nature and nuance of big business can make it difficult for prosecutors to muster the resources and expertise needed to dig out all of the facts. Prosecutors came to rely on a company's desire to appear cooperative (and expedite the investigation), which meant waiving the privilege. No firm wanted to suffer the fate of Arthur Andersen.

The justice department's guidelines have been tweaked from time to time. But the pressure to waive always has remained, and likely will remain, even with the new directive. In Schipani's opinion, that creates a problem.

Company executives should be comfortable speaking with corporate counsel about complicated legal issues without the fear that one day their words, memos, and emails could be turned over to the government. When management opts to waive the attorney-client privilege, it often throws executives under the bus.

Obviously corporate counsel and a board of directors have a duty to protect the company first. But Schipani is concerned that continuing the "culture of corporate waiver" can lead to executives not confiding in company lawyers when they should. As a result, a small problem related to an area where the law is muddy could turn into a big problem.

"There are plenty of areas where a good person might legitimately be making a mistake, and that can be stopped in the trenches if they tell the company lawyer what has happened so far," Schipani says. "The lawyer can say, 'Okay, back up because we need to fix that and not go any further.' So you need to keep that open line of communication with the company lawyers, and the more pressure you put on waiving that privilege, executives might be afraid to ask the questions to stay on the right side. They might end up on the wrong side because they didn't put it out there with the company's lawyers."

That's especially true with the Foreign Corrupt Practices Act and the growth of multinational companies, she says. The FCPA puts the onus on U.S. companies to know the law in countries where they operate. That means executives need to meet with company lawyers to get the legal lay of the land.

"The penalties are huge in those kinds of cases and that's where you need to really be careful," says Schipani. "You need your lawyer by your side and you must feel comfortable with that attorney."

She admits the new guideline is a welcome development, but suspects it will take some time for the reality to change.

"I think it will change the reality down the road, but I donít' know how quickly or how long that will take," she says. "There are deals in process and it's happening as we speak, so probably in a couple of years we'll have enough data to draw some conclusions."

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu