By Stephen G. Huggard and Hilary B. Dudley, Edwards Wildman Palmer LLP
The recent health care fraud case United States v. Stryker Biotech et al.1 demonstrates the opportunities that exist for criminal defendants in cases where a company is indicted alongside its executives. At the same time, it provides leverage for company counsel during their pre-charge negotiations with the government. Simply put, if the government indicts the company and the executives together and counsel were consulted about the conduct at issue, then the government risks a severed case and multiple trials—usually a benefit to the defense and a problem for the prosecution. Much has been written about the Department of Justice's 2008 decision to formally disavow the controversial practice of coercing corporations under investigation to waive their attorney-client privilege to avoid indictment. But many prosecutors and defense counsel have yet to focus on the likelihood and implications of severance as a result of corporations no longer being forced to waive their privilege.
In every criminal investigation, the prosecutors have to decide whom to prosecute. Section 9-27 of the United States Attorneys' Manual sets out the formal “Principles of Federal Prosecution.”2 Prosecutors are to use their “reasoned exercise of prosecutorial authority” to “contribute to the fair, evenhanded administration of the Federal criminal laws” by charging the most culpable and maximizing the deterrent effect. Since DOJ continues to emphasize white collar prosecutions, the question of when it is appropriate to prosecute corporations in addition to individuals within the corporation remains a hot topic.
Officially, the current guidelines direct prosecutors to consider the following factors in determining the proper treatment of a corporate target: (1) the nature and seriousness of the offense; (2) the pervasiveness of wrongdoing within the corporation; (3) the corporation's history of similar misconduct; (4) the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents; (5) the existence and effectiveness of the corporation's pre-existing compliance program; (6) the corporation's remedial actions; (7) collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as an impact on the public arising from the prosecution; (8) the adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and (9) the adequacy of remedies such as civil or regulatory enforcement actions.3 Unofficially, there are at least two other considerations.
First, money motivates the government to charge corporations. The government wants to secure big corporate settlements or fines, particularly in the health care sector. Just last month, GlaxoSmithKline agreed to pay more than $3 billion in fines and penalties for various health care violations.4 This result was not anomalous. In 2009, pharmaceutical giant Pfizer agreed to pay $2.3 billion in a combination of civil and criminal settlements arising out Pfizer's allegedly illegal promotion of certain drugs.5 The government bragged about recovering more than $5.6 billion from fraud investigations in 2011 (almost $3.4 billion in civil settlements and more than $2.2 billion in criminal fines).6According to the same December 2011 White House press release, for every dollar spent on pursuing Medicare fraud, DOJ recovered $7. And earlier this year, medical device manufacturer Stryker Biotech agreed to plead guilty to a one-count misbranding misdemeanor and pay a $15 million criminal fine in exchange for dismissal of all felony counts inUnited States v. Stryker Biotech et al., No. 09-cr-10330 (D. Mass.).
Because the government cannot recover these staggering figures from individuals, corporations have to be targeted. If the company is unwilling to pay what the government demands pretrial, then the government might well indict the company in hopes of getting the money as part of a sentence or as the result of a plea bargain once the company tastes the unappetizing publicity that accompanies an indictment.
Second, indicting the company with its executives can give the prosecution a tactical evidentiary advantage at trial.7Generally—subject to the discussion below—the corporation will be tried together with the executives. If the corporation has the confidence to take the case to trial, the result can be an evidentiary advantage for the government because statements made by employees of the corporation in the course of their employment may be admissible against the corporation as nonhearsay pursuant to Fed. R. Evid. 801(d)(2)(A). While such “party opponent” statements technically are not admissible for the truth of their contents against the corporation's co-defendant executives, presumably the spillover will be useful in prosecuting the individuals.
In 1999, DOJ set forth the first iteration of its guidelines regarding prosecutions of corporations and other related business organizations in what became known as the Holder Memo. That memo directed prosecutors to “consider the corporation's willingness to identify the culprits within the corporation, including senior executives, to make witnesses available, to disclose the complete results of its internal investigation, and to waive the attorney-client and work product privileges” in gauging the extent of the corporation's cooperation.
The italicized clause sparked a decade-long debate over the government's power to force corporations under criminal investigation to waive their attorney-client privilege to earn cooperation credit and avoid prosecution. The debate culminated in 2008 with DOJ disavowing the practice of coercing corporations into waiving attorney-client privilege in a letter by then-Deputy Attorney General Mark Filip. This letter was subsequently codified as part of the Principles of Federal Prosecution of Business Organization in Section 9-28 of the United States Attorneys' Manual.
As with the prior iterations, DOJ's current policy promises that corporations that cooperate in investigations should earn credit for their effort and perhaps avoid prosecution altogether. Unlike prior DOJ policy statements, however, the current guidelines recognize “the value of promoting a corporation's ability to seek frank and comprehensive legal advice,” which is “particularly important in the contemporary global business environment, where corporations often face complex and dynamic legal and regulatory obligations imposed by the federal government and also by states and foreign governments.”
Accordingly, the guidelines now place emphasis on the corporation disclosing “relevant facts.” While a corporation remains free to voluntarily disclose nonfactual or “core” attorney-client communications or work product, Section 9-28.710 of the United States Attorneys' Manual specifically forbids prosecutors to ask for such waivers. What this means is that today corporations are free to cooperate as much as possible pre-indictment in an attempt to avoid prosecution without having to waive their attorney-client privilege.
The Shield: Preserving the Attorney-Client Privilege
The government was late to the game in recognizing that “corporations often face complex and dynamic legal and regulatory obligations imposed by the federal government and also by states and foreign governments” in the contemporary global business environment.8 As a result of those “complex and dynamic legal and regulatory obligations,” both in-house counsel and outside counsel are often consulted about the conduct being investigated by prosecutors in big white collar cases. Obviously if the government accuses a company of a crime and the company relied in good faith on contemporaneous legal advice by outside counsel that turned out to be incorrect, a corporation usually will waive its attorney-client privilege to present its solid defense of advice of counsel pre-indictment and avoid prosecution. This remains true even though corporations are no longer pressured into waiving their attorney-client privilege to earn cooperation credit.
On the flip side, there also may be cases where the legal advice and/or conduct in response to the advice is so inculpatory, solely as to either the attorney or the person who received the attorney's advice, that it makes sense to waive the attorney-client privilege in the spirit of identifying the singular individual culprit and sparing the corporation any further punishment. But real life is rarely that simple. Even in situations where attorneys are fully aware of the challenged conduct and there is a chance the corporation's pre-indictment cooperation might help it avoid prosecution altogether, corporations are now free to decide that it is in their best interest to preserve their attorney-client privilege.
Consider the following example. In-house counsel at Target Company consults outside counsel about the lawfulness of a particular financing transaction. Outside counsel advises in-house counsel that the government might challenge the lawfulness of the transaction, but it is a matter of first impression. In-house counsel conducts further research and decides that the transaction is lawful enough and so advises the company's management. Target Company's management then carries out the financing transaction. Lo and behold, the government later contends the transaction was unlawful and commences a criminal investigation. Faced with the prospect of a criminal indictment, defense counsel for Target Company digs into the facts and starts cooperating with the prosecutors.
As with all cases, to earn cooperation credit Target Company's defense counsel has to balance the need to help identify the culprits within the corporation and demonstrate remediation by firing those culprits, while attempting to minimize the appearance that there was pervasive wrongdoing within the corporation. But in this situation Target Company's defense counsel also has to decide whether it is in the company's best interest to waive the attorney-client privilege and expose in-house and outside counsel's role in the transaction. This requires assessing the risk that the prosecutor might challenge the good-faith nature of in-house counsel's advice and impute further criminal liability on Target Company based on in-house counsel's conduct.
The fear of additional criminal exposure for the company based on the conduct of in-house counsel is legitimate given DOJ's unrepentant indictment of attorneys such as a former GlaxoSmithKline associate general counsel in United States v. Stevens, No. 10-cr-694 (D. Md.). In that case, the government petitioned the district court to compel production of material otherwise covered by the attorney-client privilege in the grand jury on the basis of the crime-fraud exception. The resulting production led to the indictment of Lauren Stevens on false statements and obstruction of justice charges related to her role in responding to Food and Drug Administration subpoenas. While the trial judge later granted Stevens's Rule 29 motion to acquit—finding with the 20/20 vision of hindsight that the privileged material should never have been produced9—the disclosure of thousands of pages of privileged documents no doubt contributed to GlaxoSmithKline's agreement to plead guilty and pay $3 billion to settle allegations related to its sales practices.
Even in less stark contexts where attorneys but not necessarily the decision-makers are involved, it may be prudent to retain the attorney-client privilege. For starters, the corporation has to consider how such a waiver might impact the civil lawsuits and shareholder derivative actions that usually follow criminal white collar prosecutions.11 If the legal advice or the company's response to the legal advice at issue can be interpreted in ways that might be deemed harmful for the corporation, there may be a legitimate fear that waiving privilege in the criminal context provides crafty plaintiffs' counsel with extra unwanted leverage. In certain situations, additional civil liability may be just as serious a consideration as potential criminal prosecution.
But even in the criminal context, affirmatively referencing the role of attorneys in the challenged conduct might force the company to defend the legal advice or, in some cases, even the inaction or passiveness of the legal/compliance department. At trial, it might also create an impossible and unnecessary burden for the company if the court construes evidence as to the role of attorneys in the challenged conduct as raising the so-called “advice of counsel” defense. Generally the advice-of-counsel defense is viewed not as a separate defense but as evidence of good faith, which the trier of fact is entitled to consider for specific-intent crimes.12 Nonetheless, courts may be reluctant to instruct a jury on the advice-of-counsel defense unless the defendant puts forward evidence showing he or she made full disclosure of all material facts to his or her attorney before receiving the advice at issue and that he or she relied in good faith on the counsel's advice.13
In sum, it makes sense that many companies are now choosing to retain their attorney-client privilege as a shield even as they do everything else in an attempt to avoid prosecution.
The Sword: The Co-Defendant Executive's Rights
Up to this point, all of the discussion has been from the company's perspective. But it is very rare that a company is indicted alone. Usually the company is indicted along with a handful of the employees and executives deemed to be the most culpable, just as the United States Attorneys' Manual contemplates.
Whenever a party raises the advice-of-counsel defense, the attorney-client privilege is generally deemed waived. This makes sense. It would be unfair for a party to claim that he or she relied on counsel (sword), while protecting the actual advice from disclosure (shield).14 But in the world of corporations, it is the corporation that is the privilege holder. That means it is the corporation's management—typically its current officers and directors—who have the authority to assert and waive the corporation's privilege. Taken to the extreme, courts have found that even the founder, CEO, and controlling shareholder of a corporation does not have the authority to unilaterally waive the corporation's attorney-client privilege over the objection of the board of directors' decision to maintain the privilege.15
So what happens to the managers of Target Company who relied on in-house counsel's advice? Can they raise the advice-of-counsel defense even if Target Company chooses not to waive the attorney-client privilege? Pretrial or at trial? This dilemma is the new scenario prosecutors and defense counsel are increasingly going to face in white collar criminal prosecutions.
Severance: The Attorney-Client Privilege Versus an Individual's Sixth Amendment Right
The battle between the corporation's attorney-client privilege and the individual manager's advice-of-counsel defense played out in the W.R. Grace trial in the District of Montana and the Stryker Biotech trial in the District of Massachusetts. In both cases, the result was theoretical pretrial rulings that the individual defendants had a right to present evidence of attorney-client communications and advice over the corporation's privilege objection and severance of the individual defendants from the corporation based on this conflict. The ramifications of these pretrial rulings remain unknown because in both cases the government abandoned the prosecution of the severed defendants so the exculpatory privileged material was never disclosed in court.
On Feb. 7, 2005, W.R. Grace & Co. and seven of its executives were indicted on 10 criminal counts, ranging from conspiracy to wire fraud. The charges related to a mine in Libby, Mont., that exposed workers to asbestos poisoning. The government alleged that W.R. Grace and the individual defendants conspired to keep critical scientific information regarding the asbestos dangers from the government and knowingly endangered workers for decades. Prior to trial, five of the executives moved to sever their trials on the basis that they intended to rely upon an advice-of-counsel defense that could be established only through documents and testimony over which W.R. Grace claimed an attorney-client privilege. In response to the government's charge that the defendants were manufacturing a privilege issue to force severance, W.R. Grace filed a statement confirming its intention to invoke the attorney-client privilege in light of the lasting impact any waiver might have on pending and potential civil litigation.16 The court reviewed the documents submitted under seal by the individual defendants and determined that they “may, depending on the proof at trial, be of such probative and exculpatory value as to compel admission of the evidence over Defendant Grace's objection as the attorney-client privilege holder.”17 However, the court went on to conclude that only two of the individual defendants—the former in-house counsel, O. Mario Favorito, and the former general manager who became the community representative responsible for communicating with the Environmental Protection Agency, Alan R. Stringer—identified “documents of significant exculpatory value the admission of which is incompatible with Grace's right to a fair trial.”18As a result, the court severed Favorito and Stringer to be tried after W.R. Grace and the other individual defendants. In the end, Stringer died before the trial and Favorito was never tried because the corporation and the other individual defendants were acquitted after an almost three-month trial in the spring of 2009.
On Oct. 29, 2009, Stryker Biotech, its former president, and three former sales managers were indicted on multiple counts of conspiracy, wire fraud, and misbranding related to alleged off-label promotion of medical devices. Prior to trial, Stryker Biotech's former president moved to sever himself from the trial of Stryker Biotech and the other individual defendants to present good-faith evidence related to his frequent communications with both in-house and outside counsel.19 Stryker Biotech responded that it had no intention of using any privileged material at trial and that its introduction at a trial with the company would seriously prejudice the company's ability to defend itself.20 The government responded simply by stating that it could not meaningfully take a position on the motion without knowing the substance of the privileged communications.21 On the first day of trial, the court orally granted the former president's motion to sever. All charges against the former president were eventually dismissed after the government abandoned its felony case against the corporation and the other individual defendants halfway through the testimony of the first witness in the main trial.
The rationale for severance in the W.R. Grace and Stryker Biotech cases is based on the following three propositions:
(1) A criminal defendant has a Sixth Amendment right to present material and favorable evidence in his defense.
(2) In certain circumstances, evidentiary exclusionary rules and privileges, including a corporation's attorney-client privilege, must yield to a criminal defendant's Sixth Amendment right.
(3) Severance pursuant to Fed. R. Crim. P. 14 is required—with the trial of the corporation as the privilege-holder proceeding first—when the introduction of the privileged material in a joint trial would prejudice the privilege holder's trial rights.
In W.R. Grace, Chief Judge Donald W. Molloy was the first to apply these principles in these circumstances. He concluded that the question of whether the criminal defendant's Sixth Amendment right trumps a corporation's attorney-client privilege requires a balancing of the probative and exculpatory value of the otherwise privileged evidence.22 But even if it does, Molloy concluded that severance was not automatic. Rather, for the three defendants who were not severed, Molloy found that the privileged material they intended to use would not affect W.R. Grace's trial rights and thus the presumption in favor of joint trials and judicial economy outweighed the need for severance. With respect to Favorito and Stringer, however, the court determined that the introduction of the exculpatory privileged material with respect to these defendants would result in a heightened likelihood of antagonistic defenses and a near certainty that these two defendants would seek to introduce evidence that incriminated W.R. Grace or the other co-defendants. Because of this additional problem, severance was required.
In Stryker Biotech, Judge George O'Toole Jr. did not issue a written decision explaining his decision to sever the former president. However, the company relying on United States v. Walters—a Seventh Circuit case distinguished in W.R. Grace—urged the court that severance was necessary where “the attorney-client privilege is compromised by joint trials.”23 In Walters, the two principals of a sports and entertainment agent business were charged with various fraud, conspiracy, and RICO charges related to contracts entered into with college athletes. The two men sought legal advice by outside attorneys about the legality of their contracts. On appeal, the court determined that, unlike the W.R. Grace and Stryker Biotech situations, the attorney-client privilege belonged to each individual.24 One of the defendants, Norby Walters, elected to pursue an advice of counsel defense. The other defendant, Lloyd Bloom, requested severance because he did not want to pursue an advice-of-counsel defense. After both defendants were tried together and convicted, the Seventh Circuit held that once Walters decided to pursue an advice-of-counsel defense, as was his right, Bloom should have been provided the option of a separate trial. The court found the prejudice to Bloom outweighed the need for judicial economy because he was “forced to watch his own attorneys testify about the intimate discussions to which he had been a party” and he “could not pursue his own defense, but was forced to skittle along behind that of Walters …. Any other course of action forced Bloom to waive his attorney-client privilege. We cannot tolerate such devil's bargains.”25
It remains to be determined in future case how courts are to properly balance the presumption for joint trials and judicial economy with the privilege holder's trial rights. Specifically, courts will have to decide whether the privileged material in question must be truly antagonistic to the privilege holder, as required in Molloy's decision in W.R. Grace, or whether the privilege holder is sufficiently prejudiced by being forced to pursue an advice-of-counsel defense it would otherwise not have pursued as a tactical decision, as suggested by the Seventh Circuit in Walters.
How This Is Going to Work
Although the W.R. Grace and Stryker Biotech cases provide a framework for determining whether a company employee may rely on exculpatory material covered by his or her employer's attorney-client privilege over that employer's objection, it is not clear how the disclosures are to be managed by the trial judge and the ramifications of the disclosures in the press and in follow-on civil litigation.
In W.R. Grace, Molloy's pretrial ruling declared that for the three executives, Henry Eschenbach, Robert Bettacchi, and Jack Wolter, whose severance motions were denied, he would make “determinations of which documents might be of such probative and exculpatory value as to compel admission of the evidence over W.R. Grace's objection as the attorney-client privilege holder … on a document-by-document basis at trial as necessary.”26 He also noted, “If some of Grace's privileged communications are introduced at trial, the dissemination of the exhibits beyond their presentation to the jury can be discussed.”27 What he did not mention is how the trial judge would address issues of fairness to the government so that the individual defendants would not get to cherry pick exculpatory material and hide the rest of the story from the government. In the end, privilege issues were not formally brought back to the trial court's attention by Eschenbach, Bettacchi, and Wolter in their joint trial with W.R. Grace in the spring of 2009. And Favorito, Stringer, and the former president of Stryker Biotech were never tried. Had the second trials gone forward in the W.R. Grace and Stryker Biotech sagas, one can only speculate about the respective company's role and standing in the second trial with respect to exhibit lists and lines of questioning of witnesses regarding attorney-client communications, etc.
Stephen G. Huggard is chair of the White Collar & Government Enforcement Practice Group at Edwards Wildman in Boston. He represents businesses and individuals in criminal and complex civil litigation, with a focus on white collar criminal defense, and is experienced at conducting complex internal investigations, both in the United States and overseas. Huggard regularly represents clients before the Securities and Exchange Commission and the Department of Justice. He also advises several publicly traded companies on Foreign Corrupt Practices Act matters and has conducted training for those clients domestically and internationally. Prior to joining Edwards Wildman, Huggard spent 17 years as a prosecutor with the Department of Justice.
Hilary B. Dudley is an associate in the Litigation Department at Edwards Wildman in Boston. She represents clients in a wide range of litigation matters, including Securities and Exchange Commission administrative proceedings, white collar criminal defense cases, consumer class actions, and real estate disputes. Dudley also assists educational institutions on a variety of legal matters, including compliance issues, government subpoenas, and faculty disciplinary hearings.
So what does this mean for the government, defense attorneys, and in-house counsel managing criminal investigations and shareholder actions and other civil lawsuits?
We are cautiously entering new territory and new risks with big white collar criminal investigations. For individuals, it means that their employer cannot prevent them from disclosing exculpatory reliance on legal advice forever. For companies that elect to maintain the corporate attorney-client privilege, it means that they may be able to prevent compelled pretrial disclosure of privileged material, but they are not going to be able to prevent individual employees from presenting truly exculpatory attorney-client advice and communications at trial when the individuals are in jeopardy. Once that can of worms is opened, it will require diligent and creative containment efforts by the company to minimize the scope of the disclosure and the collateral consequences of the disclosure. For the government, it means an increased likelihood of multiple trials if the government chooses to prosecute companies for alleged pervasive fraud schemes that involved in-house or outside counsel in addition to individual employees who consulted with and relied on in-house or outside counsel's involvement in the allegedly fraudulent scheme.
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