December 11, 2014 Articles

Ethical Issues for Corporate Counsel in an Internal Investigation

Clear identification of corporate clients will assist lawyers in carrying out the duty of loyalty while maintaining client confidentiality.

By Michael T. Dawkins

When a lawyer is hired by a corporation to conduct an internal investigation or to shadow a criminal investigation, the lawyer often steps into a whirlwind. The lawyer must, in the flurry of activity, pause and identify the client. For the lawyer and those with whom the lawyer interacts, clarity as to who the client is and who the client is not is critical to the lawyer’s carrying out the duty of loyalty as well as protecting the privilege cloaking the lawyer’s communications during the investigation.

In an Internal Investigation, Who Is the Lawyer’s Client?
ABA Model Rule of Professional Conduct 1.13(a) specifies that “[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents [officers, directors, employees, and shareholders].” The lawyer must take the initiative to ensure that these corporate representatives who are involved in the investigation understand whom the lawyer is representing in the investigation.

The best practice is for the lawyer to have one client, the company. In an internal investigation, the lawyer is trying to determine whether the company, through the acts or omissions of its representatives, violated the law and, if so, who is responsible. The lawyer’s goal is to obtain facts so that the lawyer can provide the company with informed legal advice as to these questions: (1) What happened? (2) Who is responsible? (3) Should the company report the noncompliance or illegality to officials? (4) What should the company do in the future to avoid repeated noncompliance? Corporate counsel’s objectivity and loyalty to the entity may be clouded by an attempt to serve multiple parties while carrying out these functions.

What Is the Scope of the Corporation’s Attorney-Client Privilege?
An employee need not be within the corporation’s “control group” for the privilege to protect the confidentiality of corporate counsel’s interview of the employee.

[A]n employee of a corporation, though not a member of its control group is sufficiently identified with the corporation so that his communication to the corporation’s lawyer is privileged where the employee made the communication at the direction of his superiors and where the subject matter upon which the lawyer’s advice was sought by the corporation and dealt with in the communication was within the performance by the employee of the duties of his employment.

Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 602 (8th Cir. 1978).

Internal-investigation interviews are also shielded from disclosure by Model Rule 1.6: “[I]f an organizational client requests its lawyer to investigate allegations of wrongdoing, interviews made in the course of that investigation between the lawyer and the client’s employees or [officers, directors, or shareholders] are covered by Rule 1.6.” Model Rules of Prof’l Conduct R. 1.13 cmt. 2.

Do Interviewees Understand Whom the Lawyer Represents?
Interviewees may not understand whom the lawyer represents. An employee-interviewee might assume that because the lawyer represents the employer, the lawyer must be representing the employee individually.

The lawyer must, at the beginning of the interview, ensure that the employee understands that the lawyer represents the company and does not represent the employee individually. Otherwise, the corporation’s privilege could be jeopardized. Long after the interview is completed, the individual may claim that he or she was communicating with his or her own attorney during the interview and assert the privilege as to the contents of the interview. At this point, the corporation’s ability to determine whether or when the privilege will be waived is at risk.

The temptation is great for the lawyer to be vague with the interviewee as to whether the interviewee is represented by the interviewing lawyer. The lawyer knows that if an Upjohn warning is provided to the interviewee, it could freeze the witness and cut off the flow of open communication. However, the rules of ethics do not allow counsel to use ambiguity as a tool to keep the witness talking.

In dealing with an organization’s directors, officers, employees, members, shareholders, or other constituents, a lawyer is required to explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing. Model Rules of Prof’l Conduct R. 1.13(f) (emphasis added). While the rule requires corporate counsel to specifically identify the client only where the adversity of position with the interviewee is known or reasonably should be known to the lawyer, the better practice is to always identify the client for the employee. Often the adversity of the interviewee’s interests are not known at the beginning of the interview because the lawyer must gather the facts to know where conflicts of interest exist. And in any event, the lawyer is already obligated to ensure that the interviewee is clear as to the identity of the interviewer-lawyer’s client. Corporate counsel are not allowed to take advantage of the individual’s status as an unrepresented party.

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.

Model Rules of Prof’l Conduct R. 4.3.

Aside from the ethical obligation held by corporate counsel, the lawyer’s failure to specify whom he or she does and does not represent exposes the lawyer to disqualification from representing the company and the consequences will be borne by the corporate client.

Does the Interviewee Understand Who Determines Whether the Interview Is Maintained as Confidential?
The lawyer’s role includes advising the entity whether to preserve the privilege or waive the privilege by making voluntary disclosures to authorities of information gathered during the internal investigation. Therefore, practically speaking, corporate counsel must not only clarify for the employee the identity of the client; counsel must explain the attorney-client privilege and the fact that confidentiality is controlled by the entity, not the individual.

At the initiation of the interview, the lawyer should explain to the employee that the interview is being conducted so that the lawyer can provide legal advice to the company. The lawyer must explain to the employee that the interview itself, the questions asked and the answers given, must be kept confidential.

The employee may misunderstand the lawyer’s description of the interview as being “confidential.” The employee may think that the interview’s confidentiality means that the employee’s answers to the lawyer’s questions will not be disclosed outside the company. The lawyer must ensure that the employee understands that (1) the content of the interview is covered by the attorney-client privilege; (2) the privilege is held by the company, not by the employee; and (3) the company has the right to decide whether to disclose the content of the interview to third parties.

Whether in writing or orally, counsel must be guarded in what is communicated to the interviewee about the investigation: “The lawyer may not disclose to [the organization’s officers, directors, employees, or shareholders] information relating to the representation except for disclosures explicitly or impliedly authorized by the organizational client in order to carry out the representation or as otherwise permitted by Rule 1.6.” Model Rules of Prof’l Conduct R. 1.13 cmt. 2.

What Are the Employee’s Rights?
Internal investigations place the interviewee at a disadvantage. The corporation expects its officers and employees to cooperate with the company’s investigation. Most often, the individual is unrepresented.

Former U.S. district court judge Frederick B. Lacey (District of New Jersey) took a broad view of employee rights during an internal investigation. Judge Lacey recommended that corporate counsel give employees an “Adnarim” warning (Miranda spelled backwards). According to Judge Lacey, corporate counsel should inform the employee that the employee has the right to have counsel present at the interview and that the employee may opt not to be interviewed.

The employee is entitled to retain counsel to attend the interview. But whether the employee is entitled to have separate, company-provided counsel is another matter. Judge Lacey’s opinion, that the employee has the option of not cooperating with the company’s investigation is probably overly pro-employee. The employee’s duty of loyalty to the employer most likely obligates the employee to cooperate in the company’s investigation.

The Case of Carol Warley
These perils were illustrated when KPMG’s marketing of tax shelters was investigated by the Internal Revenue Service and the Department of Justice (DOJ). KPMG conducted an internal investigation under the direction of the Kronish Lieb and King & Spalding law firms. Carol Warley, a partner at KPMG, was interviewed by these law firms. When the DOJ threatened KPMG with indictment, the accounting firm, in an effort to avoid the fate of Arthur Andersen, waived the privilege and gave prosecutors the substance of its internal-investigation interviews of Warley and other current and former KPMG partners.

After the case was indicted, Warley moved to suppress the government’s use of memoranda of her interviews, claiming that she was represented by Kronish Lieb and King & Spalding. Judge Kaplan framed the issue: “[Warley] thus raises a troublesome question that arises whenever an employee of a business organization consults with counsel retained by the entity about matters involving both the employee and the entity—when does the lawyer represent the employee as well as the entity?” United States v. Stein, 463 F. Supp. 2d 459, 460 (S.D.N.Y. 2006).

Judge Kaplan offered advice to corporate counsel in these situations: “This problem could be avoided if counsel in these situations routinely made clear to employees that they represent the employer alone and that the employee has no attorney-client privilege with respect to his or her communications with employer-retained counsel.” According to Warley, she did not remember outside counsel informing her that they only represented KPMG or that the privilege belonged to KPMG and that the content of the interview could be disclosed at the option of the firm.

Judge Kaplan observed that if employees could control the privilege, an entity’s ability to conduct an effective investigation could be thwarted: “Allowing individual employees to assert personal attorney-client privilege over communications with the employer’s counsel could frustrate an employer’s ability to act in its own self-interest, perhaps to the detriment of other employees, stockholders or partners.”

The court noted the disadvantage at which employees find themselves when asked to cooperate with an internal investigation. Specifically, Judge Kaplan observed that the employee may provide full and candid responses to counsel’s questioning, unaware that what has been told to counsel may be disclosed to prosecutors who are making charging decisions.

In the district court’s analysis as to whether Carol Warley could claim that she held an attorney-client privilege over the content of her interview by outside counsel, the court first noted that there was no evidence that the Kronish Lieb or King & Spalding lawyers or KPMG itself deceived her regarding the nature of the relationship. “Although she claims to have ‘understood that . . . [counsel] were representing [her] personally as a partner in the firm,’ her subjective belief alone does not support a conclusion that KPMG’s acts were responsible for that belief.”

Judge Kaplan then examined whether Warley’s communications with counsel related to “personal matters.” The court discussed the obvious overlap between KPMG’s internal investigation and Warley’s personal interest in receiving legal advice on the same subject matter. Nevertheless, because the interviews were not focused on Warley’s personal interests alone, the court found that no personal privilege attached to the content of the interviews. Warley’s motion to suppress was therefore denied; her subjective belief that she had a personal attorney-client relationship was insufficient for the court to recognize that she held the privilege.

Eventually, Judge Kaplan dismissed the indictment against Carol Warley and several of her former KPMG partners because the DOJ had pressured KPMG to withhold the payment of legal fees for these individuals. Warley’s experience with internal investigations raised the visibility of the problem faced by corporate officers and employees during internal investigations.

Keywords: criminal litigation, internal investigations, attorney-client privilege, confidentiality, employee

Michael T. Dawkins is a shareholder with Baker Donelson Bearman Caldwell & Berkowitz in Jackson, Mississippi.


Copyright © 2015, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).