Selective Waiver Doctrine Rejected in FCA Case: K–Mart Must Disclose Work Product Data to Relator

In a case that should teach us all a lesson, the USDC for the S.D. of Illinois ruled that K–Mart waived its work product protections over attorney-created data when it disclosed the data to HHS investigators. The Court rejected K–Mart’s selective waiver argument and compelled it to produce the data in a False Claim Act civil action. United States v. Kmart Corp., 2014 WL 2218758 (S.D. Ill. May 29, 2014).Cooperation and privilege You may read the opinion here.

Risky Decision?

In 2009, the OIG for the Dep’t of Health and Human Services conducted an investigation into K–Mart’s alleged improper Medicare claims. In response to an OIG subpoena, K–Mart produced a substantial amount of documents culled from 25 custodians, and its legal team also created and produced a subset of transaction data in a simpler format.  K-Mart and HHS entered into a confidentiality agreement prior to the production, but the agreement did not specifically address attorney–client privilege or work-product concerns.

In the False Claim Act action, K–Mart produced the custodial documents, but refused to produce the subset of data on grounds that the work-product doctrine protected this attorney-created subset from production.

Selective Waiver?                                                 

K–Mart urged the Court to apply the selective waiver doctrine, arguing that it encourages corporations to cooperate with government investigators. While finding cooperation laudable, the Court “most pointedly” reminded K–Mart that “the attorney client privilege and work product doctrines do not exist to foster full and frank conversation with the government.”

The Court noted that the majority of federal circuits reject the selective waiver doctrine, and found that K–Mart should have known that producing the attorney-created data to the government waived any work-product protections. In fairly strong language, the Court said that “it is incumbent upon attorneys anticipating or involved in litigation to take appropriate steps to closely guard confidential information” and that “K–Mart should not be permitted to ‘pick and choose’ to which adversary it waives work product protection and which adversary does not.”

The Court commented that “disclosure of protected attorney work product is a strategic litigation decision” and found that K–Mart made a strategic calculation that the benefit of appearing cooperative with a government investigation outweighed the risk of waiver.

Would a Confidentiality Agreement Work?

The Court noted one federal-court decision, Lawrence E. Jaffee Pension Plan v. Household Int’l, Inc., 244 FRD 412 (N.D. Ill. 2006), held that the defendant did not waive work-product protections upon disclosure to the SEC because it had a confidentiality agreement with the SEC stating that disclosure did not waive the privilege and work-product protections.

But the K–mart case is different. While K–Mart secured a confidentiality agreement with HHS, it did not mention privilege or work-product protections. And the Court indicated that, even if the agreement mentioned those protections, the agreement would not affect its decision.

PoP Analysis

This case illustrates the peril companies under investigation face when responding to government subpoenas or document requests. While some federal statutes provide selective waiver protections in financial services investigations, the majority view under federal common law is that there is no selective waiver doctrine—disclosure of documents to an investigative body waives the privilege in existing or subsequent civil actions. And while it is certainly better to have a confidentiality agreement with the government agency, those agreements may not withstand the waiver tide.

Court Refuses to Recognize “Compliance Officer Privilege” in Qui Tam Action

The growing number of corporate compliance officers, most with law degrees and housed in the corporate legal department, will increasingly raise the issue whether some evidentiary privilege protects from compelled disclosure corporate communications with the CCO.  A Texas federal court, interpreting a Texas state statute, refused to find a statutory “compliance officer privilege” that protectscomplianceofficer a CCO’s communications.  U.S. v. Austin Radiological Associates, Inc., 2013 WL 113668 (W.D. Tex. Mar. 18, 2013).

In Austin Radiological, a former employee of Austin Radiological Associates (ARA) brought a qui tam action under the False Claims Act alleging ARA retained Medicare overpayments, wrongfully billed Medicare, and wrongful discharge.  She sought discovery from ARA’s compliance officer, but ARA objected asserting a “compliance officer privilege” under Texas Health & Safety Code § 161.032(e).  This statute provides, in part, that

The records, information, and reports received or maintained by a compliance officer retain the protection provided by this section only if the records, information, or reports are received, created, or maintained in the exercise of a proper function of the compliance officer . . .

The question whether this statutory section created an evidentiary privilege depended upon the court’s statutory interpretation.  Upon review, the court determined that this section incorporated another section (Texas Gov’t Code § 552.005) stating that the “protection provided by this section” did not “create new privileges from discovery.”  The court therefore rejected a statutory “compliance officer privilege” and ordered the CCO’s documents produced.

PoP Analysis.  This decision raises several issues for in-house lawyers and corporate compliance officers.  First, the court and parties applied Texas state law even though the presence of a federal claim could have provided an opportunity to argue for a common law compliance privilege.  Second, the case is silent regarding whether the compliance officer was a lawyer working in ARA’s legal department.  If so, then perhaps an argument that the corporate attorney-client privilege protected the compliance officer’s communications would have proved more successful.  While a few cases address a compliance officer’s privilege in the attorney-client privilege context, the cases are fact-specific and rely on a traditional analysis whether the compliance officer was acting in a legal versus a business capacity.  See, e.g., Leazure v. Apria Healthcare, Inc., 2010 WL 3397685 (E.D. Tenn. Aug. 26, 2010); U.S. ex rel. Parikh v. Premera Blue Cross, 2006 WL 3733783 (W.D. Wash. Dec. 15, 2006).

And finally, this case reminds us that statutory confidentiality rules are not the equivalent of evidentiary privileges.  As courts note, “[c]onfidential does not necessarily mean privileged,” In re Grand Jury Subpoena Dated Dec. 17, 1996, 148 F.3d 487, 492 (5th Cir. 1998), and “confidentiality and privilege are two separate, albeit overlapping, legal concepts.”  Gaumond v. Trinity Repertory Co., 909 A.2d 512, 518-19 (R.I. 2006).