The White Collar Appeal: First Circuit Examines Waiver of Corporate Attorney-Client Privilege in Prosecution of Executives

• A corporate executive seeking to introduce evidence of the involvement of the company’s attorneys does not necessarily effect waiver, the First Circuit recently held in United States v. SpineFrontier, Inc.

• The decision followed a three-factor framework for determining whether an executive’s disclosure works a waiver of company privilege, while cautioning that courts should be reluctant to find a waiver unless it is clear that principles of logic and fairness require such a finding.

• Yet SpineFrontier is far from a panacea for executives seeking to defend themselves based on advice they received from corporate counsel.  While the decision provides a potential path for such a defense, there are still a number of ways in which a company can preserve its privilege and an executive’s invocation of the information might backfire.

Background

SpineFrontier, Inc. was a medical device company that paid a consulting fee to physicians who used the company’s products.  The government charged the company and its two executives with violations of the Anti-Kickback Statute.  One defendant—the founder, principal shareholder, President, and CEO—pleaded guilty before trial, and the government dismissed the charges against SpineFrontier. The third defendant, Humad, was the CFO, Vice President of Business Development, Secretary, and Treasurer—but not a shareholder.  Together, the CEO and Humad were the only officers of the company.

Prior to implementing the consulting program, SpineFrontier had engaged outside counsel to provide opinion letters about the legality of the proposed agreements.  SpineFrontier distributed these opinion letters to surgeons.  Humad disclosed pretrial that he intended to invoke an “involvement-of-counsel” defense—specifically, that he would “elicit evidence concerning the presence or involvement of SpineFrontier’s counsel in the company’s consulting program” and argue that “the presence or involvement of such attorneys . . . tends to show that [he] acted in good faith.”  Critically, however, Humad clarified he was not pursuing an advice-of counsel defense and did “not intend to disclose any specific advice from counsel for SpineFrontier or to make arguments about such legal advice.” 

The district court concluded that Humad’s planned defense would effect an implied waiver of SpineFrontier’s attorney-client privilege.  SpineFrontier, though no longer a party to the criminal case, filed an interlocutory appeal to preserve its privilege.

Holding

The First Circuit held that the record did not support a finding of waiver. The court adopted a three-factor framework for analyzing the “logic and fairness” of whether to find a corporate executive’s defense should be deemed to waive a company’s attorney-client privilege: (1) the nature of the relationship between the executive and the company, including whether they were “alter-egos” or otherwise share interests; (2) the nature of the disclosure; and (3) potential prejudice to the opposing party.

Here, the court held that it needed more information to evaluate the relationship between Humad and SpineFrontier, and it remanded to the district court for further factual development.  But the court  noted that a “tight alignment of interests,” even if not technically an alter-ego relationship,  could be sufficient to find that an executive had the power to waive the company’s privilege, but only so long as “the executive’s interest in defending against pending criminal charges” does not “override” the executive’s “fidelity to the corporation, including its interest in preserving the privilege.”  In that case, it “may not be fair” to impute waiver to the company.

Second, the court held that not every involvement-of-counsel defense necessarily causes a waiver.  The court emphasized that “courts should be cautious about finding implied waivers” and do so only when “principles of logic and fairness” demand it.  Where no actual privileged communication is disclosed, “a waiver conclusion is difficult to justify.”  But if Humad sought to argue that he was not guilty because SpineFrontier’s counsel had blessed the consulting program as executed, such a defense would waive the privilege because it would rely on the implied attorney-client communication that the program was legal.

The government, for its part, argued that regardless of Humad’s authority to waive SpineFrontier’s privilege, the Sixth Amendment right to present a defense supersedes a company’s attorney-client privilege.  The First Circuit declined to reach that issue—which the Supreme Court left open in Swidler & Berlin v. United States, 524 U.S. 399 (1998)—and noted simply that the Sixth Amendment “does not grant an unfettered right to offer testimony that is incompetent, privileged, or otherwise inadmissible.”

Key Takeaways

“Involvement of Counsel”—or advice of counsel lite—does not necessarily waive privilege.  SpineFrontier clears a path for criminal defendants to point to the presence of counsel as exculpatory evidence without having to make a full-blown privilege waiver.  But the path is still narrow and beset with obstacles.  For one, SpineFrontier says that if “Humad seeks to suggest that outside counsel were ‘watching’ or ‘in the room’ while the consulting program was ongoing,” that would result in a waiver.  But that’s nearly indistinguishable from what many involvement-of-counsel defenses consist of—some variant of “Who brings a lawyer to a criminal conspiracy?”  Moreover, as the First Circuit points out, district courts can change their mind midtrial and decide that a defendant’s argument went too far and thereby opened the door to a broader waiver.  So although a waiver may not be automatic, an involvement-of-counsel defense can still be treacherous terrain.

When would an executive’s interest in avoiding conviction NOT supersede her “fidelity to the corporation”?  In discussing the first factor—the alignment of interests between the executive and the company with respect to preserving privilege—SpineFrontier says that it “may not be fair” to impute an executive’s desire to waive privilege to the company if “the executive’s interest in defending against pending criminal charges plausibly overrides his fidelity to the corporation, including its interest in preserving privilege.”  At the risk of underestimating how seriously corporate officers take their fiduciary responsibilities, it would seem that nearly every executive would favor his own liberty over his duty to the company. It may often be the case that the executive’s personal interests align with the company’s privilege, but when they diverge, one must expect that executives nearly always will favor their personal interests over the company’s.  As a result, it would appear that this factor may not carry much weight in the analysis.

SpineFrontier punts on the Sixth Amendment question left open in Swidler.  The First Circuit did not bite on the government’s invitation to decide whether a defendant’s right to put on a defense trumps a third party company’s attorney-client privilege.  And it even hinted that district courts should avoid that issue too by relying on Rule 403: “Humad’s Sixth Amendment rights may not win out if, for example, evidence of [the law firm]’s involvement risks substantial confusion or unfair prejudice relative to its probative value.” Corporate counsel and executives will have to wait for another day before there is clarity on this issue.

Companies should make clear factual records and take every precaution to preserve privilege.  Companies facing criminal investigation where attorney-client communications may be implicated should be painstaking in developing a record to support their privilege assertions, in particular with respect to individual executives’ authority to waive privilege.  And where there appears to be a risk that an executive’s defense might implicate the company’s attorneys, the company should act quickly and decisively to preserve the privilege, just as SpineFrontier did by seeking an interlocutory appeal.

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