When conducting internal investigations and interviewing witnesses, company counsel must ensure that they protect the company's attorney-client privilege against witnesses' claims that they too have an attorney-client relationship with interviewing counsel. In Upjohn Co. v. United States, 449 U.S. 383 (1981), the U.S. Supreme Court found that, in the context of an internal investigation, an attorney-client relationship could exist between counsel retained by the company and witnesses -- including company employees -- whom counsel interviews. Since Upjohn was decided, to avoid the possibility that a witness may claim an attorney-client privilege exists between him or her and interviewing counsel, standard practice in conducting interviews in internal investigations has required counsel to provide "Upjohn warnings" or "corporate Miranda warnings." These warnings ensure that witnesses are not under the misimpression that an attorney-client privilege between the witnesses and the attorney will arise out of the interview, while protecting the privilege for the company at whose request the internal investigation is being performed.

A recent decision highlights the consequences of failing to provide adequate Upjohn warnings to a witness. In United States v. Nicholas, No. Cr. 08-00139 (C.D. Cal.), a corporation retained outside counsel to conduct an internal investigation relating to the corporation's practices in granting stock options. Outside counsel interviewed a number of witnesses, including the company's chief financial officer. The only warning outside counsel provided to the CFO was that the interview was on behalf of the company in connection with an internal investigation. As outside counsel later admitted, they never told the CFO that they were not his lawyers, that he could consult with another lawyer, or that statements made to them could be shared with third parties, including the government.

The company decided to cooperate with the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) and instructed its outside counsel to disclose what it learned during the internal investigation, including statements made by the company's CFO. Outside counsel did not obtain the CFO's consent prior to making disclosure to the government.

DOJ later prosecuted the CFO and sought to use statements outside counsel attributed to him against him. The witness, in turn, objected to the use of those statements on the ground that they were privileged attorney-client communications that he had not authorized counsel to disclose to the government.

In assessing whether the attorney-client privilege applied to the statements, the trial court examined whether the CFO reasonably believed that an attorney-client relationship existed. In concluding that the CFO reasonably believed that an attorney-client relationship existed, the Nicholas Court found that counsel failed to give proper Upjohn warnings to him. Instead, the Court stated that it had "serious doubts whether any Upjohn warning was given" and found that, even if an Upjohn warning had been provided, the substance of the warning given was "woefully inadequate under the circumstances."

The decision in Nicholas reinforces the importance of providing proper Upjohn warnings in order to protect the interests of the company. Although DOJ no longer requires waiver of the attorney-client privilege to demonstrate cooperation (see DOJ's Principles of Federal Prosecution of Business Organizations [Revised August 28, 2008]), a company's voluntary disclosure of facts learned during an internal investigation remain a relevant factor in determining the extent of a company's cooperation. Similarly, under the SEC's decision in the Seaboard Report, Sec. Rel. No. 44969 (Oct. 23, 2001), companies may demonstrate cooperation, and thus avoid litigation and mitigate penalties, by disclosing the results of internal investigations conducted on their behalf, including information counsel learns from company employees. To preserve the option of cooperation by waiving the attorney-client privilege, it is critical that the company alone -- and not the witnesses -- hold the attorney-client relationship. If, however, both the witness and company jointly control privileged information, the witness may prevent the company from disclosing privileged information to the government, thereby jeopardizing the company's ability to cooperate with the government and receive favorable treatment as a result of that cooperation. To avoid this result, interviewing counsel must clearly inform the witness that counsel represents the company and not the witness; the company and not the witness holds the attorney-client privilege; the witness's statements will be communicated to the client company; and the client company may decide to waive privilege and disclose information it receives to third parties, including the government. See, e.g., In re Grand Jury Subpoena, 415 F.3d 334 (4th Cir. 2005).

For more information on the Nicholas decision or internal investigations, please contact John C. Grugan at gruganj@ballardspahr.com or 215.864.8226; Henry E. Hockeimer, Jr. at hockeimerh@ballardspahr.com or 215.864.8204; or Justin P. Klein at kleinj@ballardspahr.com or 215.864.8606.


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