In the privilege world, in-house lawyers often encounter court presumptions that their internal communications automatically pertain to business, rather than legal, advice. And when so, courts apply a heightened standard when assessing an in-house counsel’s privilege claim. A federal court, applying Oklahoma privilege law, addressed this issue but ultimately decided that an oil company’s legal department failed to prove that a spreadsheet—created at an in-house lawyer’s request—was for legal-advice purpose. So, presumption or no, the privilege claim failed. Kunneman Props., LLC v. Marathon Oil Co., 2021 WL 141234 (N.D. Okla. Jan. 14, 2021), available here. Let’s discuss how that happened.

In-House Lawyer Request

Way back in 2012, an in-house lawyer at Marathon Oil Company asked a Marathon business manager to compile certain information related to Marathon’s gas-producing wells in Oklahoma. The information related to post-production costs that may be apportioned to land lessors under the Oklahoma Supreme Court’s decision in Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998). The in-house lawyer created a form to house this information, and the business manager filled it with factual information, labeled it “Mittelstaedt Reviews,” and stored it on the company’s server as the in-house lawyer directed.

In a class-action lawsuit filed in 2017 by those with royalty interests in Marathon-operated gas wells, the plaintiffs sought production of the Mittelstaedt Reviews. Marathon claimed the corporate attorney–client privilege protected them, and the issue first went to the Magistrate Judge for a hearing and decision.

Heightened Scrutiny for In-House Counsel?

Following a telephonic hearing, the Magistrate Judge announced this heightened-scrutiny standard that courts apply to in-house counsel’s putatively privileged communications:

When in-house counsel is communicating with the corporate client, the presumption is that the attorney’s input is more likely business than legal in nature, and such communications to and from in-house counsel can be sheltered only upon a clear showing that the in-house counsel gave advice in a professional capacity.

Many states and courts apply this heightened standard, as I first discussed years ago in an article in the ABA’s Business Law Today. But is this the standard under Oklahoma law?

The District Judge, upon review, respectfully disagreed, noting that Oklahoma has not adopted a heightened-scrutiny standard or applied a rebuttable presumption that in-house lawyers’ internal communications are more business than legal. Instead, courts must make a “fact-driven determination as to whether the primary or predominant purpose of the communication is a legal or a business purpose.”

That said, “the status of counsel (in-house or outside) is a relevant factor for the court to consider.”

However, ….

So, even if there is no per se heightened-scrutiny standard, the in-house lawyer’s status remains “a factor” and a company must prove—through a privilege log and affidavits—that the communication primarily related to legal advice. Here, Marathon submitted the affidavit, available here, of the business manager who supplied the information rather than the in-house lawyer who created the form and requested the information. Perhaps it was because the in-house lawyer was no longer with Marathon, but, for whatever reason, it proved fatal.

The business manager said this—

It is my understanding Marathon’s in-house legal department would then access those spreadsheets to use for legal analyses.

To the best of my knowledge, the sole purpose of the Mittelstaedt Review spreadsheets was to compile information for legal analysis by Marathon’s in-house legal department.

See anything wrong with these statements? The District Judge did. He found this evidence wholly insufficient. The manager’s statements that it was his “understanding” the lawyer requested the information for legal-advice purposes and to “his knowledge” she used it for legal-advice purposes were too conclusory. Importantly, according to the judge, “Marathon offers no affidavits or evidence of what legal analysis took place or what the purpose of the analysis would be.”

And with that, the court rejected Marathon’s privilege claim and ordered it to produce the Mittelstaedt Reviews.

POP Analysis

Whether courts apply a heightened standard a regular standard, the lawyer’s status as in-house counsel remains “a factor” that requires clear proof that the putatively privileged communication’s purpose was primarily for legal analysis. Here, the court wanted evidence from a lawyer about why she needed the obviously factual information to advise Marathon on legal issues. And with no such evidence, there is no privilege for the in-house attorney’s internal communications.

On January 13, 1981—40 years ago today—the U.S. Supreme Court issued its landmark decision in Upjohn Co. v. United States and forever redefined the corporate attorney–client privilege. This case, which has now been cited in close to 5,000 federal and state opinions, had it all.  An American-made story of corporate success. A novel question about the oldest evidentiary privilege known at common law. Lions of the Supreme Court Bar. Three Chief Justices. And a result that permeates lawyers’ everyday existence.

So, here’s to you, Upjohn, on your 40th anniversary. Cheers!

Who was Upjohn?

The Upjohn Company was—and is—an American success story. Dr. William E. Upjohn of Kalamazoo, Michigan started The Upjohn Pill and Granule Company in 1886 after he invented and received a patent for the “friable pill,” a pill that one could easily crush—even with your thumb—into a powder for easier intake. With a much-needed product and an ingenious marketing campaign, with the classic thumb-crushing pictorial, Dr. Upjohn’s company took off.

Dr. Upjohn and his successors grew the company into a national and international pharmaceutical powerhouse. In 1995, Upjohn merged with Sweden’s Pharmacia AB to form Pharmacia Upjohn. Pfizer bought the company only to spin it off in 2020 by merging it with Mylan to form Viatris.

But in the late 1970s, the Upjohn Company was a U.S.-based pharmaceutical giant that found itself in the middle of an international bribery scandal facing IRS scrutiny.

Kickbacks and an Internal Investigation

In January 1976, outside accountants auditing an Upjohn foreign subsidiary discovered that some subsidiary employees paid foreign government officials to secure their business. The accountants informed Upjohn’s General Counsel, and he initiated an internal investigation into these “questionable payments.”

The investigation included a detailed questionnaire sent to all foreign general managers and area managers regarding their individual knowledge of the alleged improper payments. The questionnaire instructed the various managers to treat the inquiry as “highly confidential” and to return the completed forms to the General Counsel.

Upjohn, showing cooperation, sent a preliminary report on the “questionable payments” to the Securities and Exchange Commission with a copy to the Internal Revenue Service. The IRS began an investigation and issued a summons seeking the production of the employees’ responses to those questionnaires.

Upjohn objected, arguing that the corporate attorney–client privilege protected them from compelled disclosure. The IRS brought an enforcement action, and the District Judge, adopting the Magistrate Judge’s “excellent opinion,” held that the privilege did not shelter the questionnaires from IRS review. United States v. Upjohn Co., 1978 WL 1221 (W.D. Mich. Apr. 29, 1978).

The Privilege Question

The question at issue was the scope of the corporate attorney–client privilege. Based on a 1915 Supreme Court decision, U.S. v. Louisville & Nashville R.R., 236 U.S. 318 (1915), courts knew that the attorney–client privilege applied to corporations. But courts diverged in how the privileged applied in practice given the many layers of employee hierarchy that existed.

Two tests had emerged.  Some federal circuit courts followed the narrow control-group test. Arising from the court’s decision in Philadelphia v. Westinghouse Electr. Corp., 210 F. Supp. 483 (E.D. Pa. 1962), this test held that the privilege applies only to communications between the company’s lawyer and those employees in a position “to control or even to take a substantial part” in a decision informed by the lawyer’s advice.

Other federal courts followed the subject-matter test. The 7th Circuit, in Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487 (CA7 1970), rejected the control-group test and held that the privilege covers communications between a company’s lawyer and any employee so long as the employee’s superiors direct him to communicate with the lawyer and the discussion pertains the employee’s duties. The Supreme Court—10 years and a day before its Upjohn decision—affirmed the decision “by an equally divided Court,” with Justice Douglas not participating and with no written opinion. 400 U.S. 348 (1971).

Having lost at the District Court level, Upjohn appealed to the Sixth Circuit.  The appellate court, fearing that the subject-matter test would create a corporate “zone of silence,” favored the control-group test, affirmed the lower court’s decision, and rejected the privilege over the GC’s questionnaires.

With three new justices—including Justice Rehnquist—since its Harper & Row silent affirmance, the Supreme Court awaited.

The Lawyers

On November 5, 1980—the day after Governor Ronald Reagan won the presidency over President Jimmy Carter—two lions of the Supreme Court Bar entered the Supreme Court chamber for a momentous oral argument.  For the IRS was legendary Deputy Solicitor General Larry Wallace. Wallace, who retired in 2003, served under each president between Johnson (“Lyndon rather than Andrew” as he put it) and George W. Bush. He argued 157 cases before the U.S. Supreme Court.

Upjohn retained another lion of the Supreme Court Bar, Covington & Burling’s Dan Gribbon, who asked future 9th Circuit Judge Alex Kozinski to join him on the brief.  Mr. Gribbon argued several cases before the Court, but the Upjohn case, which he found “very interesting and very gratifying,” and which “created a lot more furor at the Bar,” was among his top two.

For a terrific of account of Mr. Gribbon’s legal career, read his interview conducted as part of the District of Columbia Historical Society’s Oral History Project. And if interested in reading the transcript of the oral argument, you may do so here.

The Amici

High-profile organizations, led by high-profile lawyers, lined up to file amicus briefs in support of Upjohn and Mr. Gribbon. Leon Jaworski filed an amicus brief on behalf of the American Bar Association. The American College of Trial Lawyers filed an amicus brief with Erwin Griswold, a long-time Solicitor General who had hundreds of Supreme Court arguments on his resume, taking lead on the brief.

No amici appeared on behalf of the IRS.

The Opinion—A “Philosophical Twist”

The “important question” before the Court was “the scope of the attorney–client privilege in the corporate context.”  But the decision did not simply devolve into the Court choosing between the control-group and the subject-matter tests that created a circuit conflict.  Rather, the opinion—written by future Chief Justice Rehnquist—began with the privilege’s purpose and a need for certainty. You may read it here, and its cite is 449 U.S. 383 (1981).

The attorney–client privilege’s purpose is two-fold. First, it ensures that a client’s communications with its attorney remain forever confidential and therefore encourages the client to provide full and frank information to the lawyer. This promotes the public interest in having corporate entities observe the law. Second, the privilege allows the corporation’s lawyer to provide sound legal advice, “which depends on the lawyer being fully informed by the client.”

With these purposes in mind, the Court rejected the control-group test as failing to recognize that lawyers need as much information as possible to render optimal legal advice. The Court recognized that employees outside the so-called control group can “embroil the corporation in serious legal difficulties,” and the entity’s lawyers need to know this information “to advise the client with respect to these actual or potential difficulties.”

Mr. Gribbon advocated hard on this point, saying:

“[Employees are] participants. It isn’t the control group back in Kalamazoo that’s going to know anything about this matter if it’s ever litigated.”

In short, the control-group test discourages the conveyance of relevant information to a company’s lawyers, and “threatens to limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.”

The Court, though, refused to articulate a bright-line rule to “govern all conceivable future questions” about the corporate attorney–client privilege. But the privilege applied in this case, the Court ruled, for the following reasons:

  • Upjohn’s employees made the putatively privileged statements to its counsel—acting as a lawyer—at the direction of corporate superiors;
  • The questionnaire concerned matters within the scope of the employees’ corporate duties;
  • The communications were made so that Upjohn could obtain legal advice;
  • Upjohn considered the questionnaire “highly confidential” when made; and
  • Upjohn kept the communications confidential thereafter.

As Upjohn’s lawyer, Mr. Gribbon, later observed, the opinion did not adopt one test over the other, but “gave a ringing endorsement to the privilege itself and that was a shot in the arm I believe to everybody.” Although the Court consistently takes a narrow view of the privilege, “Rehnquist’s opinion just gave a philosophical twist on it which was quite important for the entire privilege,” Gribbon concluded.

Chief Justice Burger’s Concurrence

The decision was a 9–0 victory for Upjohn, but the then-current Chief Justice, Warren Burger, wrote a separate concurring opinion. The Chief advocated for a standard “that will govern similar cases and afford guidance to corporations, counsel advising them, and federal courts.”

What should that standard be? The Chief said that, as a general rule, the privilege applies where “an employee or former employee speaks at the direction of the management with an attorney regarding conduct within the scope of employment.”

While a concurring opinion, Chief Justice Burger’s standard has served as the basis for many courts applying that standard and, importantly, applying it to former employees, a subject the other eight justices preferred to leave for another day.

Upjohn Warnings

The Upjohn case is, not surprisingly, the origin of the so-called Upjohn warnings that corporate lawyers provide to employees before interviewing them. The decision, however, does not outline these warnings. Rather, the warnings arise from the court’s discussion of the privilege factor that the communications must be for the purpose of the lawyer providing the corporation with legal advice.

The opinion did not discuss in detail that the client was the corporation, but the justices certainly emphasized it in oral argument. Some of the first questions posed to Mr. Gribbon concerned whether the corporation was the client and privilege beneficiary.

The Third Chief Justice

We have discussed Chief Justice Rehnquist and Chief Justice Burger.  So, who is the third Chief Justice in this privilege story, you ask?  It is current Chief Justice John Roberts. Roberts clerked for Justice Rehnquist during the 1980–1981 term—exactly when Rehnquist heard oral arguments and wrote the opinion.

Legacy

On this morning 40 years ago, Larry Wallace was the first of the oral advocates to learn of the Court’s Upjohn decision, and he gave Dan Gribbon a call.  What did he say?

“Dan, I guess you got about nine more votes than I did.”

As Mr. Gribbon would later recall, that was “a very graceful way to deal with the matter.” And so it was.

A legendary case with legendary participants had a legendary ending.  Happy Anniversary, Upjohn.

What’s the PCAOB, you ask? It is the Public Company Accounting Oversight Board, and it has some power.  A non-profit organization established by Congress in 2002, the PCAOB oversees the audits of public companies and SEC-registered brokers and dealers. It has the authority to investigate companies—such as Ernst & Young—that audit public companies. 15 USC § 7215(b). The information it receives, however, is subject to a statutory evidentiary privilege. Or at least it appears so.

The Fifth Circuit condemned the PCAOB’s conveyance to the FDIC of privileged information pertaining to EY, and quashed the deposition of an EY auditor. But was the issue moot, and did it prevent the FDIC’s malpractice action against the auditing firm?  FDIC v. Belcher, 978 F.3d 959 (CA5 2020).  You may read the decision here. (Petition for rehearing and en banc review denied Jan. 6, 2021).

The Privilege

The PCAOB Act provides an evidentiary privilege that precludes the organization from disclosing materials received and prepared during an investigation. The Act mandates that these materials “shall be confidential and privileged as an evidentiary matter” and are not discoverable in any federal or state court or administrative proceeding. 15 USC § 7215(b)(5)(A).

Despite the evidentiary privilege, the Act permits the PCAOB to disclose privileged material to other governmental agencies, including the Attorney General of the Unite States, states attorneys general, and—importantly for our purposes—the “appropriate Federal functional regulator … for an institution subject to the jurisdiction of such regulator.” 15 USC 7215(b)(5)(B)(ii)(III). But this disclosure does not eviscerate the privilege.

The EY Issue

The First NBC Bank of New Orleans—owned by First NBC Bank Holding Company—began to struggle financially. The Holding Company had previously retained EY to audit its financial statements. With the Bank heading towards collapse, the PCAOB started an investigation into EY’s audits of the Holding Company. The Federal Reserve—not the FDIC—regulates the Holding Company.

As part of the investigation, EY produced thousands of documents to the PCAOB, including sacred workpapers, emails, proprietary firm methodology, and personnel files.  Several of its auditors gave 28 days of depositions resulting in 62,000 transcript pages and 390 exhibits. One of the deponents was EY auditor Daniel Belcher.

The Bank failed, and the Louisiana Office of Financial Institutions appointed the FDIC to serve as the Bank’s receiver.  You may read the FDIC’s press release here and read about the Bank’s “decline and fall” here.  In its role as a receiver, the FDIC investigated EY and asked PCAOB to provide it with the documents EY produced and the deposition transcripts of EY auditors.

PCAOB did so.  But why? The evidentiary privilege is quite clear, but I suppose this was not—at the time—a court or administrative proceeding. So, did PCAOB see the FDIC, even though a receiver, as one of the regulatory/oversight agencies that could receive the information despite the privilege?

But I Asked You Nicely…

Each time EY produced information to the PCAOB, it made this request—

In the event that the PCAOB receives any request for the Confidential Materials from any third-party or plans to provide the Confidential Materials to any third-party, EY requests that [its counsel] be notified of such request or plan.

The PCAOB had no legal obligation to notify EY when it produced materials to the FDIC and did not honor the firm’s request to do so.

Subpoena Enforcement Action

After reading the materials, the FDIC wanted EY’s Belcher to sit for a second deposition. EY’s lawyers stepped in and declined, saying that the FDIC lawyers “committed a legal violation and ethical breach” by obtaining the privileged material from PCAOB.

The FDIC filed suit to enforce the subpoena. The District Judge enforced the subpoena and the Fifth Circuit denied a stay. So, the FDIC deposed Belcher while his appeal proceeded but did not ask him about the privileged PCAOB material.

Is there a mootness issue?  Privilege or no privilege, the PCAOB did not produce the EY documents as part of a court proceeding—the District Judge had not ordered their production. The only issue the District Judge decided was whether to enforce the FDIC’s subpoena. But the court based its ruling that the FDIC could depose Belcher on its finding that FDIC, in its capacity as a receiver, was “the appropriate Federal functional regulator” that could receive the PCAOB documents. You may read the District Court’s opinion here.

Matter of First Impression

On appeal, the question before the Fifth Circuit was whether the FDIC—in its capacity as the Bank’s receiver, not as the regulator—was “the appropriate Federal functional regulator” that could receive the privileged PCAOB investigatory materials. Employing statutory-interpretation principles, the court, in a 2–1 decision, held that the FDIC was not the “appropriate” functional regulator “because the FDIC was acting in its capacity as the Bank’s receiver when it acquired the confidential documents from the PCAOB.”

In fact, the FDIC—acting as a receiver—filed a separate lawsuit against EY alleging that it committed professional negligence when auditing the Bank.  And the DOJ obtained a guilty plea on a conspiracy charge to defraud the Bank.

With this finding, the court ruled that the PCAOB improperly disclosed its privileged investigatory information—including EY deposition transcripts. And for this reason, the court vacated the district court’s order enforcing Belcher’s deposition.

The Dissent: “A Strange Appeal”

The dissenting judge could not overcome the mootness of the issue.  The district court and the appellate majority analyzed the PCAOB’s production of privileged material to the FDIC.  But the district court did not order that production, and the only issue before the court was whether the FDIC could depose an EY auditor.   The deposition occurred, and the FDIC did not even ask about the privileged documents.

The dissent saw “no reason to override what common sense suggests: the appeal of an order requiring a deposition is moot once the deposition is over.” In short, as the dissent said, “This is a strange appeal.”

POP Analysis

What are the takeaways here? EY produced information to the PCAOB, as required, but with the statutory assurance that the documents were privileged from compelled disclosure in any subsequent court proceeding. Yet, the PCAOB—for an unknown reason—hurdled the privilege and gave EY’s information to the FDIC which used it to further investigate the firm, seek investigatory depositions, and sue it for malpractice. Would a written agreement between EY and PCAOB have prevented the PCAOB’s unilateral dissemination of the privileged information?

Quashing the already-taken auditor’s deposition seems like a moot topic and, in any event, pales in comparison to the PCAOB’s conveyance of privileged material. Perhaps we see this issue again in the malpractice action. Strange, indeed.