This privilege loss is interesting, and likely avoidable. A federal court ruled that neither the attorney–client privilege nor the work-product doctrine protects from discovery emails between outside counsel and a corporate client exchanged before and during the lawyer’s internal investigation of an employee’s hostile-work-environment complaint

Why? Because the investigation emails apparently pertained to business—not legal—advice. Guy v. Yusen Logistics (Americas), Inc., 2019 WL 2465173 (W.D. Tenn. Apr. 11, 2019), available here.

How could this happen?

Investigation Request

A female AR Manager at Yusen Logistics, located just above the Mississippi line in Memphis, complained to Yusen’s HR department that her supervisor subjected her and other female employees to a hostile work environment. Yusen did what employers do—it retained outside counsel to investigate the claims.

Lawyer’s Investigation-Related Emails

Before starting the investigation, outside counsel debated—internally and with the client—whether this endeavor should be a “discoverable investigation” with the HR Dep’t as the titular head, or a “privileged investigation” led by a specific outside lawyer.

They ultimately decided to conduct a “privileged investigation.” The lawyers labeled these emails as “Confidential” and “Attorney-Client Privileged.” Unfortunately, these emails also revealed that this complaint represented Yusen’s third from the same department. You may read these emails here.

Business—or Legal—Investigation?

Yusen later fired the employee, allegedly because she recorded and distributed a conversation with her supervisor. The employee sued, and sought production of outside counsel’s investigation file and notes. For reasons that are unclear from the public record, Yusen produced some—but not all—of its counsel’s investigation file. It argued, however, that the privilege and work-product doctrine protected certain emails created before and during the investigation.

Ruling

The Magistrate Judge, in an opinion available here, rejected the privilege and work-product claims.

Noting the discussion between conducting a “discoverable investigation” or a “privileged investigation,” the Magistrate Judge found that Yusen HR Dep’t often conducts the internal investigations. For this reason, and citing CA6’s Alomari decision (see my post here), the privilege did not apply—to the pre-investigation emails or those sent during it—because the emails’ “predominant purpose” was not to solicit legal advice.

The work-product doctrine objection failed because Yusen did not prove that it anticipated litigation, with the Magistrate Judge finding that, when the investigation started, “it was improbable that Yusen anticipated [the plaintiff’s] termination or this litigation.”

Maybe, but did Yusen anticipate that the plaintiff would sue for hostile work environment claims? The District Judge’s affirming opinion did not discuss this point, ruling only that the lawyers created the emails because of “an internal investigation regarding an employee’s complaint, not necessarily in anticipation of litigation.”

“Not necessarily”?

POP Analysis

The email exchanges appear to show that the client and its lawyers intended a “privileged investigation,” apparently meaning that the lawyers would conduct the investigation for the purpose of providing the client with legal advice. But this “appearance” and the “confidential and privileged” labels ultimately proved insufficient privilege-protecting evidence.

The employer did not submit a sworn declaration—through an employee or its lawyers—attesting to the “privileged investigation” and explaining why they communicated for legal-advice purposes. This lack of evidence proved fatal. For examples of lawyers proving the legal-advice element in internal investigations, see this post and this one.

To be fair, it does not appear that the employer was that concerned about a privilege loss. Its lawyers told the Magistrate Judge that it would withdraw the privilege claims, only to later reassert them. And it produced other investigation-related emails, prompting the court to consider that waiver. But the core ruling—the lack of privilege or work-product protections—was avoidable. If the employer really wanted it.

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The Delaware Chancery Court called it a “quite common scenario,” and I suppose it is. At the closing of an acquisition, the Seller transfers all of its assets to the Buyer, including email servers that contain the Seller’s pre-merger privileged communications with its deal counsel.

A post-closing dispute between Seller and Buyer erupts, and the Buyer wants to use the Seller’s pre-merger privileged communications as evidence in the litigation. Did the Seller convey its privilege to the Buyer for its unfettered use? Did the transfer of the email servers waive the privilege?

The Chancery Court held, in this instance—no. Why? Because the Seller negotiated a privilege-preservation clause in the acquisition agreement that was sufficient to avoid waiver and prevent use of its pre-merger privileged emails. Shareholder Representative Services, LLC v. RSI Holdco, LLC, 2019 WL 2290916 (De. Ch. May 29, 2019).  You may read the opinion here.

There is a clear lesson to heed here, folks, so let’s discuss it.

Use Your “Contractual Freedom”

First, some law. In 2013, the Delaware Chancery Court, in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (De. Ch. 2013), available here, ruled that all assets of the Seller—including privileged communications—transfer to the Buyer. It based this decision on Delaware Code § 259, which states that the surviving company–essentially the Buyer–acquires the Seller’s “property, rights, privileges, and powers.”

But the Great Hill Court provided a way out—the transfer does not occur if the Seller takes affirmative action to prevent the transfer of privileges. The Court said that sellers should “use their contractual freedom” to prevent transfer and waiver.

1200 Privileged Emails

Turning to 2019, RSI Holdco acquired Radixx Solutions pursuant to an Agreement and Plan of Merger. Through the merger, Holdco obtained possession of Radixx’s computers and email servers, which contained 1200 emails between Radixx and its deal lawyers—all presumptively privileged.

Radixx did not excise or segregate the privileged emails prior to the merger, and Holdco got them. And in post-closing litigation between Holdco and Radixx’s Shareholder Representative, Holdco sought to use Radixx’s pre-merger privileged communications.

The Privilege-Preservation Clause

The Agreement in Shareholder Representative, however, contained a comprehensive privilege-preservation clause. The Agreement is, at this time, sealed, but the Court quoted much of the clause (Section 13.12), which you may read in full here. The clause met four objectives:

  1. Preserves the privilege over pre-merger communications;
  2. Assigns the privilege to Radixx’s shareholder representatives;
  3. Requires the Seller and Buyer to take steps to preserve the privileges; and
  4. Prevents the Buyer from using or relying on privileged communications in post-closing litigation.

Waiver?

Apparently recognizing the quite strong privilege-preservation clause, Holdco argued that Radixx and its shareholder representative waived the privilege due to post-closing conduct. Specifically, it argued that Radixx should have extracted and segregated the privileged communications from the soon-to-be-transferred email servers, rather than turning them over to Holdco.

The Court did not buy this argument. It said that the privilege-preservation clause precluded the waiver argument because Holdco agreed that it, too, would “take steps to preserve the privilege” and would not use privileged communications in a post-closing lawsuit.

POP Analysis

The first question deal lawyers should ask is whether the governing state law—chosen or by default—provides that a transfer of “all assets” includes privileged communications. Delaware courts interpret a statute to include privileged communications, but does your state?

If so, then the Great Hill and Shareholder Representative decisions make clear that a privilege-preservation clause is required to prevent the Buyer from using the Seller’s pre-merger privileged communications in post-closing litigation between the two. The failure to include the clause could be catastrophic.

But even if a state’s law reads differently than Delaware’s, it remains a good idea to include a privilege-preservation clause in the acquisition agreement. If you don’t need it, fine; but if you do, it is there.

Stated differently, when trial lawyers are drafting a protective-order motion and frantically looking through the acquisition agreement for the privilege-preservation clause, please, please, please let it be there.

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A recently unsealed USDC—DC opinion reveals that Greg Craig, former White House Counsel under President Obama, failed to prevent—on privilege grounds—two craig-photo-1.jpgof his former Skadden law partners from testifying before a grand jury. Craig’s privilege loss paved the way for his indictment on charges of providing misleading and false information to the DOJ, but also provides lessons for in-house lawyers, particularly law firm in-house counsel. In re Grand Jury Investigation, 2019 WL 2179116 (D.D.C. Mar. 4, 2019) (opinion available here).

This privilege tale involves many of today’s inside-the-beltway subjects: Manafort, Mueller, Russia, a foreign leader, and DOJ investigations. So, let’s explore.

2011—Ukraine Trial of Yulia Tymoshenko

In October 2011, a Ukrainian court convicted Orange Revolution leader and former Ukrainian Prime Minister Yulia Tymoshenko for abusing her official powers in negotiating a natural-gas deal with Russia while serving as prime minister.

After issuance of the seven-year jail sentence, $190M fine, and a ten-year ban from political office, many claimed that the trial and conviction were politically motivated by then-President Viktor Yanukovych, her political rival. One publication labeled Tymoshenko a “victim of a kangaroo trial.”

2012—Skadden Report

Paul Manafort, who represented Mr. Yanukovych, arranged for the Skadden Arps firm to investigate the Tymoshenko trial and prepare a report evaluating whether the trial complied with Western standards of due process. The Skadden team, led by Greg Craig, produced a 300+ page report concluding, among other things, that the court based its verdict on factual determinations that had evidentiary support. You may read the Skadden report here.

Just before the Report’s release, Craig contacted a New York Times reporter and provided him with a copy. The reporter published an article on the report, noting that Skadden “seemed to side heavily with the government of President Viktor F. Yanukovich.” Craig later provided interviews with other publications.

December 2012–January 2014—FARA Unit (Relevant Period)

The Foreign Agents Registration Act (FARA) requires any person acting as “an agent of a foreign principal” to register with the Attorney General for certain activities, such as public-relations efforts. Immediately after the Report’s release and Craig’s interactions with the press, a DOJ FARA Unit began investigating whether Skadden and/or Craig should have registered as a foreign agent.

Importantly, during this Relevant Period Craig provided statements to FARA investigators and discussed these issues internally with Skadden lawyers—including Skadden’s General Counsel. Did Craig believe the privilege covered these conversations? Did the Skadden GC give him an Upjohn warning?Keep Reading this POP Post

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The House Judiciary Committee served former White House Counsel Don McGahn with a subpoena, available here, to produce several documents on May 7, 2019 and appear for sworn testimony on May 21, 2019. The topics primarily relate to McGahn’s knowledge and comments detailed in the Meuller Report’s obstruction-of-justice section. The HJC no doubt wants to explore McGahn’s presidential conversations in more detail.

The Washington Post reported that the White House would assert executive privilege to prevent McGahn’s testimony. According to the New York Times, HJC Chairman Jerrold Nadler said that this assertion would “represent one more act of obstruction by an administration desperate to prevent the public from talking about the president’s behavior.” The White House did not back down—yesterday, April 28, 2019, Counselor to the President Kellyanne Conway told CNN that asserting privilege over McGahn’s testimony was “always an option.”

But has the President already waived executive privilege such that the HJC has no boundaries when it questions McGahn (if it ever does)? Some law professors, as quoted in this Associated Press report, think so, but precedent from the Nixon, Clinton, and Bush43 administrations cautions against immediate conclusions.

McGahn Testified—Waiver?

McGahn provided 30 hours of testimony to investigators during the Mueller investigation, and the Mueller Report contains portions of that testimony. The President, as confirmed in this tweet, allowed McGahn to voluntarily appear for the interviews with no restrictions on his testimony.

Barr Confirms Non-Assertion of Executive Privilege—Waiver?

After General Barr sent Congress his Mueller Report summary, available here, but before releasing the Mueller Report, he gave a short press conference. Barr confirmed thatKeep Reading this POP Post

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Here is a privilege question you don’t see every day—can one bequeath her attorney–client privilege? We know that the privilege survives one’s death, see the Vince Foster case, so may a lawyer give his deceased client’s files—which contain privileged communications—to the estate’s personal representative?

A Colorado court said yes—a post-death property-transfer statute requires the transfer of a decedent’s property to the personal representative, including files—and, consequently, privileged information—held by the decedent’s lawyer. The court, however, refused to answer a significant follow-up question. In re Estate of Louis Rabin, 2018 WL 6801821 (Colo. Ct. App. Dec. 27, 2018). You may read the opinion here.

Marriage—Divorce—Marriage—Death

Lawyer Mark Freirich represented Lou Rabin in over 40 matters throughout the years. Lou, once married to Suyue, was married to Claudine when he died in 2017. Lou’s Last Will and Testament named Claudine as his personal representative in the estate’s administration.

As it turns out, lawyer Freirich had prepared a couple of promissory notes from Lou to Suyue that became due upon Lou’s death. Claudine, as the estate’s personal representative, subpoenaed Lou’s files from lawyer Freirich. Freirich refused, claiming that Lou was the privilege holder, the privilege survived Lou’s death, and he was duty-bound to prevent disclosure.

Privilege vs. Property Transfer

Colorado’s decedent’s estates law provides that, unless the Last Will & Testament provides otherwise (remember this phrase), the personal representative has a right to take possession of “the decedent’s property.” The Rabin court held that “property” includes files maintained by the decedent’s attorney, and that “a personal representative ‘has a right to’ client files held by an attorney for a decedent, except where a will provides otherwise.”

Colorado’s attorney–client privilege law and ethics rule 1.6 prevent Freirich from disclosing Lou’s privileged and confidential information, so how do you reconcile those obligations with the property-transfer law?

Reconciliation Ruling

No conflict, the court ruled, because the personal representative “effectively steps into the shoes of the decedent.” The representative becomes the client, and “the right to claim the attorney–client privilege passes to the personal representative, who becomes the holder of the privilege.”

Unanswered Question

Freirich’s concern—and all lawyers’ concern—is that if privileged communications transfer, thenKeep Reading this POP Post

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