Tips for In-House Counsel

December 15, 2009

U.S. v. Ruehle And Attorney-Client Privilege: An Executive’s Statements to Outside Counsel During Internal Investigation Not Privileged

By Yuri Mikulka of Stradling Yocca Carlson & Rauth

The Ninth Circuit has held that a corporate executive’s statements made to outside counsel hired to conduct an internal investigation and to report its findings to corporate auditors, are not protected by attorney-client privilege, even if the executive may not have received a proper Upjohn-type warning. In U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009), the Court found that the officer’s “statements were not ‘made in confidence’ but rather for the purpose of outside disclosure.” As a result, the executive could not later suppress disclosure and use of those statements in a federal criminal proceeding against him based on attorney-client privilege.

BACKGROUND

In 2006, Broadcom Corp. retained the law firm of Irell & Manella to conduct an internal investigation of the company’s stock option practices. The government had begun investigating the company on claims of potential stock option backdating. Soon thereafter, civil suits were filed against the company based on the same claims. Some corporate executives, including Chief Financial Officer William Ruehle, were named individually in the civil suits. Irell & Manella represented the company and the individual officers, including Ruehle, in the civil suits when they were first filed.

During the internal investigation, attorneys from Irell & Manella interviewed Ruehle. Irell & Manella attorneys claim that at the beginning of the interview, they informed Ruehle that the investigation was being doing “on behalf of Broadcom.” Ruehle denied any recollection of that statement, he did not sign any document acknowledging that this warning was given, and no documentation of the interview indicates that it was made.

Nevertheless, Ruehle did know that information the outside attorneys gleaned from the interview would be reported to the company’s outside auditors, and in fact he was personally present when the information was disclosed to the auditors. The review prompted Broadcom to ultimately restate its earnings to include $2.2 billion in previously undisclosed stock-based compensation expenses.

Apparently without Ruehle’s consent, Broadcom agreed to disclose his interview statements to federal prosecutors. In 2008, Ruehle was indicted on charges of conspiracy and securities fraud for allegedly backdating options. Ruehle filed a motion to suppress the statements he made to the outside counsel, arguing that the statements were protected by attorney-client privilege, and that he believed the attorneys were representing him personally.

In April 2009, the U.S. District Court for the Central District of California agreed with Ruehle. Applying California state law, the district court found that Ruehle had a “reasonable belief” that those statements would be protected by the attorney-client privilege. As a result, the court determined that the lawyers of Irell & Manella had breached their ethical duties to Ruehle by failing to obtain his written consent before disclosing his interview statements to outside parties and it suppressed the statements. The district court went one step further and referred Irell & Manella to the California state bar for review and possible disciplinary action. The firm filed an expedited appeal. U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009).

The relevance of an Upjohn warning

The district court took Irell & Manella to task for failing to provide a proper Upjohn warning, especially in this case where the firm simultaneously represented Ruehle in a civil action. The district court found that California disciplinary rules mandate that any simultaneous representation presenting conflicting interests requires the written consent of both parties, which the law firm never obtained. Though the firm did advise Ruehle to obtain separate counsel (which he did), it did not do so until after the internal investigation interview.

The Upjohn warning, also known as “corporate Miranda” comes from the case Upjohn Co. v. United States, 449 U.S. 383 (1981), in which the U.S. Supreme Court held that communications between corporate counsel and company employees are privileged, but the privilege belongs to the company and not to the individual employee. In an internal investigation, the client who controls the privilege is the company, and only the company (not the individual employee) has the ability to waive the privilege, which might be done, for example, to demonstrate good faith cooperation with government investigators.

When giving an Upjohn warning, corporate counsel typically advise the employee that the lawyer represents the company, not the individual and therefore, anything stated during the interview is privileged between the lawyer and the company only, and the employee has no control over whether the statements made will be disclosed to third parties.

Upjohn warnings are a little tricky for corporate counsel, as counsel performing internal investigations hope to obtain complete and candid information from employees being interviewed, but the risk of disclosure may make employees less likely to reveal potentially incriminating information.

Ruehle’s statements were not protected by the attorney-client privilege

The Ninth Circuit unanimously reversed the district court, and was in fact quite critical of the district court opinion. First, the Circuit Court noted that the lower court’s opinion was based on a “fundamental flaw,” in that it applied state law, which presumes that the attorney-client communications are confidential. 583 F.3d at 608. The Ninth Circuit held that the question in this case was governed by federal common law, which places the burden of proof on Ruehle to establish the privileged nature of his communications and, if necessary, distinguish privileged information from non-privileged information. Id. at 608-609.

The Ninth Circuit then found that Ruehle was unable to meet this burden, finding “overwhelming evidence” that Ruehle’s statements to the attorneys were not protected by the attorney-client privilege. Id. at 612. Despite the fact that Ruehle had an individual attorney-client relationship with the firm relating to the civil actions, the Court found that his statements made during the internal investigation were not made within that relationship, based on the following facts:

• Ruehle “was no ordinary Broadcom employee” because he had primary responsibility for the company’s finances and primary contact with the outside auditors. Ruehle could not claim ignorance of the disclosure requirements and the need to report truthfully to the SEC.
• Ruehle participated in meetings where the audit committee directed the law firm to disclose its findings to outside auditors and regularly received updates from the lawyers about their investigation.
• Ruehle was present when the firm disclosed its findings to the auditors.
• At the evidentiary hearing, Ruehle confirmed his awareness that the substance of his interviews would not be held in confidence and would be disclosed to the company’s independent auditors.
• Even after Ruehle obtained separate counsel, he still did not object to his statements being shared with the auditors.

Ruehle apparently expressed “shock” that his statements could be disclosed to both the auditors and federal prosecutors, but the Court found Ruehle’s “shock” to be “frankly of no consequence here.” Id. at 611. He clearly knew that the interview statements would be disclosed to a third party and therefore they were not confidential and not subject to the attorney-client privilege. Based on his position and his knowledge, Ruehle could not “credibly claim ignorance” that his interview was not subject to disclosure. Id. at 610.

The Circuit Court accepted the district court’s finding that Ruehle did not receive a proper Upjohn warning, and called the firm’s failure to obtain written consent from Ruehle “troubling,” but concluded that it was no reason to suppress the evidence.  Id. at 613. The Court remanded the case for further proceedings, and did not reach the merits of the law firm’s alleged breaches of professional responsibility.

CONCLUSION

In this case, the Ninth Circuit clearly felt that Ruehle’s claim of privilege not only lacked merit, but that it was an after-the-fact attempt to prevent the introduction of incriminating evidence in the criminal proceedings against him.

Still, the case should act as a reminder for law firms hired to conduct internal investigations that employees interviewed need to clearly understand their rights and how their statements may be used. Some practical considerations include:

• Make it clear to all employees interviewed that counsel represents the company, not the employees, and therefore the attorney-client privilege resides only with the company. At minimum, document that this warning was given in the interview notes. To exercise the utmost prudence, have the employee sign a copy of the warning as proof that they received it.
• Early and often in the investigation, thoroughly and objectively assess where potential conflicts of interest may lie and be proactive in avoiding them.
• Advise any employee who is likely to become a material witness or cause a potential conflict of interest to retain separate counsel. This needs to be done before gleaning any substantive information from these individuals.
• If counsel does decide to represent both the company and an individual employee, obtain a written conflict waiver from both. In order to represent both a company and one of its employees simultaneously, a law firm must reasonably believe that it can represent both parties’ interests adequately. The moment it determines otherwise, it must withdrawal from one or both representations – even a thorough Upjohn warning does not obviate this requirement.

About the Author

Yuri Mikulka serves as Chair of the Intellectual Property Department of Stradling Yocca Carlson & Rauth, a law firm that represents high tech companies

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Yuri Mikulka

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