Gregory P. Joseph*

A few weeks ago, the President signed legislation establishing the doctrine of selective waiver in the banking field. Disclosure of attorney-client privileged materials to banking authorities — U.S. or foreign — no longer effects a waiver as to third parties. Over the summer, the Third Circuit ruled that a lawyer’s discussions with his client about electronic discovery, although privileged, must be disclosed if a prima facie showing is made that the client failed to prevent the deletion of data. These and other developments are discussed in this article.

Statutory Selective Waiver: Banking. On October 13, 2006, the President signed the Regulatory Relief Act of 2006. Section 607 of the Act adopts the doctrine of selective waiver for disclosures to authorities regulating banks and credit unions.

The submission by any person of any information to any Federal..., State..., or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such agency ... shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such agency, supervisor, or authority.

Id. at § 607(a) (12 U.S.C. § 1828). See also § 607(b) (12 U.S.C. § 1785) (credit unions).

This provision parallels the effort of the Advisory Committee on the Federal Rules of Evidence, acting at the behest of Congress, in drafting Proposed Federal Rule of Evidence 502(c), which would establish selective waiver across the board. The controversy concerning selective waiver in the current environment — in which aggressive prosecutors and regulators routinely demand waiver as a prerequisite to leniency or bargaining — has been discussed in a prior column (NLJ, 7/10/06 at 12). Without rearguing the issue, suffice it to say that, if demanding waiver has become customary in certain regulatory circles, it would appear protective of the privilege to confine the scope of that waiver.

Electronic Discovery Shock. Most of us operate on the assumption that, when we talk to our clients about electronic discovery issues, those discussions are privileged. This protection is most important when the client’s conduct as to preservation is put at issue. The Third Circuit’s decision in In re Grand Jury Investigation, 445 F.3d 266 (3d Cir. 2006), suggests that the privilege may no longer provide protection in these circumstances — precisely when the client needs it most.

The government, in In re Grand Jury Investigation, subpoenaed email from a company. Company counsel explained the scope and requirements of the subpoena to the executive director of the company. The government contended that the executive director ‛failed to use her position as an executive of the organization to direct that all email deletion stop immediately.“ Id. at 279. The government then subpoenaed counsel’s emails to the executive director and notes of counsel’s conversations with her explaining the subpoena.

There was no suggestion of wrongdoing by counsel. Nonetheless, the Court ordered disclosure of the privileged communications under the crime-fraud exception to the attorney-client privilege.

The Third Circuit applied the two-part test of crime-fraud exception:

The government must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.

Id. at 278.

The government made a prima facie showing as to prong (1) — that the client was committing or intending to commit a fraud or crime (namely, obstruction). The nature of that factual showing is not reported, but it is very common that an adversary can identify discrepancies in production that could give rise to an inference of data deletion or inadequate preservation.

The harder question concerned prong (2) — whether counsel’s communications were made ‛in furtherance“ of the alleged crime or fraud. The Third Circuit reasoned that the lawyer’s communications concerning the contents of the subpoena furthered the crime of obstruction because they provided the client with knowledge of the type of material the government sought.

[I]f Jane Doe learned of the Government’s interest in certain documents from her [communications with company counsel] and subsequently acquiesced in the deletion or destruction of those documents, the second prong of the crime-fraud exception would be satisfied.

Id. at 279.

The duties imposed by the subpoena in In re Grand Jury are analytically no different than those imposed by subpoenae or document requests served in civil actions every day. Additionally, the doctrine of obstruction that was applied in In re Grand Jury is equally applicable in civil cases — as a former President learned to his chagrin. Jones v. Clinton, 36 F.Supp.2d 1118, 1127 (E.D. Ark. 1999).

If counsel’s communications in In re Grand Jury ‛furthered“ the client’s misconduct, they did so in only a weak sense — that the client needed to know the requirement in order to break it. What if the client decided only after the communication to engage in document destruction and had no such intent at the time? Could counsel’s earlier communications in any meaningful sense be deemed to have ‛furthered“ uncontemplated misconduct? Did it do so retroactively?

Tellingly, the executive director in In re Grand Jury had not claimed ignorance of the subpoena and put counsel’s advice at issue. The alleged crime, alone, made counsel’s communications relevant.

Therefore, this is potentially a very broad ruling. Under the Third Circuit’s analysis, any crime or fraud by a client that consists of a violation of a stricture communicated by counsel may waive the privilege as to the communication stating the stricture. This analysis potentially extends beyond electronic discovery to advice concerning disclosure obligations of all sorts — including disclosures to governmental authorities, to counter-parties in transactions, and to business partners.

Tort ≠ Crime. The female plaintiff in Constand v. Cosby, 232 F.R.D. 494 (E.D. Pa. 2006), sued Bill Cosby for sexual assault and battery arising out of an incident that allegedly occurred in the entertainer’s home in 2004, and for defamation based on an interview he subsequently gave to the National Enquirer. Mr. Cosby’s lawyer arranged the interview, and the plaintiff sought to pierce the privilege as to all related discussions between lawyer and client under the crime-fraud exception, on the theory that counsel’s communications with his client furthered the alleged defamation. The Court held that a mere tort not comprising a crime or fraud is insufficient to trigger the crime-fraud exception. Id. at 500 (applying Pennsylvania law).

Death of a Privilege. The Supreme Court ruled in 1998 that the attorney-client privilege survives the death of an individual. Swidler & Berlin v. United States, 524 U.S. 399 (1998). A recent federal district court suggests that the opposite presumption should apply when a corporation expires.

The defendant in Gilliland v. Geramita, 2006 U.S. Dist. LEXIS 65546 (W.D. Pa. Sept. 14, 2006), was a law firm being sued for fraud in the sale of securities that had been issued by a now-defunct corporation (the former client). The law firm asserted the former client’s privilege when the plaintiff sought confidential communications in discovery.

The Gilliland Court could find no one associated with the defunct client in a position to assert the privilege and, therefore, could simply have disposed of the privilege issue on burden of proof grounds.

Defendant cannot meet its burden to prove that the privilege has been validly asserted because there is no person with authority to properly invoke the privilege. Thus, the burden never shifts to plaintiffs to demonstrate that the privilege either does not exist or has been effectively waived.

Id. at *11.

The Gilliland Court, however, went further:

The better rule, in the Court's view, is that there should be a presumption that the attorney-client privilege is no longer viable after a corporate entity ceases to function, unless a party seeking to establish the privilege demonstrates authority and good cause.

Id. at *12.

This presumption, if the Court’s suggestion is adopted, raises interesting questions as to the privilege of corporate entities that are liquidated or merged out of existence. It also raises questions about the duties that arise when a lawyer is subpoenaed for confidential communications with a former corporate client. Is there a duty not merely to determine if someone stands in a position to assert the privilege but also to advise that such a person must be appointed (or found) if the privilege is to be preserved?

Sale of Corporate Assets & Privilege. It is well-settled that a transfer of corporate assets, without more, does not transfer the right to assert or waive the attorney-client privilege. See, e.g., In re In-Store Advertising Sec. Litig., 163 F.R.D. 452, 458 (S.D.N.Y. 1995). ‛Without more,“ however, is a loaded phrase. What ‛more“ is required?

The asset purchase agreement in Coffin v. Bowater Inc., 2005 U.S. Dist. LEXIS 9395 (D. Me. 2005), conveyed to the buyer ‛all of Seller's right, title and interest in all properties, assets, and rights of any kind, whether tangible or intangible, real or personal“ — and did so at great length. Although other courts have found similar, general language inadequate to transfer the privilege, the Coffin Court ruled that ‛the practical consequences rather than the formalities of the particular transaction“ control, and that, ‛if the practical consequences ... result in the transfer of control of the business and the continuation of the business under new management, the authority to assert or waive the attorney-client privilege will follow as well.“ Id. at *7 (quoting Soverain Software LLC v. Gap, Inc.).

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* Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers; Chair, American Bar Association Section of Litigation (1997-98), and member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Editorial Board, Moore’s Federal Practice (3d ed.). Author, Sanctions: The Federal Law of Litigation Abuse (3d ed. Supp. 2007); Civil RICO: A Definitive Guide (2d ed. 2000); Modern Visual Evidence (Supp. 2007).
© 2006 Gregory P. Joseph