An Important Reminder Regarding the Scope of the Attorney-Client Privilege in the Corporate Setting
Earlier this year, a federal judge in the Northern District of California ordered Elizabeth Holmes (“Holmes”), the founder and former CEO of now-defunct Theranos, Inc. (“Theranos”), to disclose communications between herself and attorneys at Boies Schiller Flexner LLP (“BSF”). Holmes objected to the court’s order, arguing that because BSF had represented her in her individual capacity, the communications were subject to her personal attorney-client privilege. Unpersuaded, the court held that the communications were subject only to Theranos’ corporate privilege, which had already been waived by the Theranos receiver.
The court placed the blame squarely on Holmes’ shoulders for failing to show she “made it clear that she was seeking legal advice in her personal capacity.”1 The issue is a bit more complex, however, as the scope of the relationship with BSF blurred over their years of representing Holmes and Theranos. Holmes’ dispute thus serves as a critical reminder to ensure corporate clients and their employees fully understand and appropriately document the scope of the attorney-client privilege.
Basics of Joint Company-Employee Representations
When a company and one or more of its employees are jointly represented by the same counsel, both the company and the employees are holders of the attorney-client privilege. The joint representation prevents the disclosure of privileged communications unless the company and its employees agree to waive the privilege. In contrast, when counsel is retained solely to represent a company, an employee’s statements to company counsel are protected by the attorney-client privilege, but the company, not the employee, owns the privilege and can waive it at any time.
Ideally, the scope of a joint company-employee representation will be clearly delineated in an engagement letter, and counsel will have obtained informed consent from the company and its employees. As evidenced by the Holmes case, however, absent a formalized joint representation, company employees may nevertheless attempt to assert their personal privilege over communications with company counsel. In these situations, courts generally apply one of two tests to determine whether an employee was jointly represented by company counsel: the Bevill test2 or the subjective belief test.3
Two Tests for Joint Representations
At present, there are two tests for determining whether a joint representation exists: the subjective belief test and the Bevill test. The subjective belief test, which has been applied by the Fourth and Seventh Circuits,4 requires individuals seeking to invoke the attorney-client privilege to prove that they subjectively believed they were represented by counsel, and that their subjective belief “was reasonable under the circumstances.”5 The Third Circuit’s Bevill test is more exacting and places the burden of satisfying all of the following elements on the individual seeking to establish the joint representation:
- First, they must show that they approached counsel for the purpose of seeking legal advice.
- Second, they must show that when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities.
- Third, they must demonstrate that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise.
- Fourth, they must prove that their conversations with counsel were confidential.
- And, fifth, they must show that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company.6
The First, Second, Ninth, and Tenth Circuits have adopted the Bevill test,7 and the Sixth Circuit has implied that it applies the Bevill test in the corporate context or, at the very least, that a corporate employee must make it clear to counsel that he seeks advice on personal matters.8 The remaining circuits have yet to adopt a particular standard by which to determine whether a corporate employee holds a joint privilege over communications with corporate counsel.
A Tale of (Possibly) Two Clients: Outside Counsel’s Relationships with Elizabeth Holmes and Theranos
From 2011 to 2016, Theranos retained BSF to provide legal work on a variety of matters, including a review of Theranos’ patent portfolio, guidance in connection with inquiries from government agencies, and advice regarding corporate governance issues. In addition to its work for Theranos, BSF also represented Holmes in her personal capacity in filing an intellectual property lawsuit in 2011. According to Holmes, following the intellectual property lawsuit, her relationship with BSF “grew organically and without reference to any engagement letter,” including responding to a class action lawsuit filed in 2016.9 Holmes claimed BSF’s personal representation of her continued until 2016, when Holmes retained separate counsel to represent her in the Securities Exchange Commission and Department of Justice investigations into Theranos.
In June 2018, Holmes was indicted on federal wire fraud and conspiracy charges. BSF’s personal representation of Holmes was called into question when she was served with the government’s trial exhibit list, including thirteen documents she asserted “on their face fall under the claimed privilege.”10
Applying the Bevill test, Magistrate Judge Nathanael M. Cousins found that Holmes was not jointly represented by BSF because she could not satisfy the test’s second, fourth, and fifth elements.11 The second element required a clear communication that Holmes sought legal advice as an individual, not as a representative of Theranos. On that, the court concluded, Holmes fell short because she never executed an engagement letter with BSF, nor could Holmes produce any financial records showing that she paid BSF’s fees from her own accounts. As to the fourth element of the Bevill test, Holmes could not show that her communications with BSF were confidential because none of the communications took place exclusively between Holmes and BSF. In fact, most of the communications involved other Theranos employees, which destroyed Holmes’ claim that she sought legal advice as an individual. As to the fifth element, which incidentally seems difficult to satisfy under a multitude of scenarios involving corporate executives, Holmes failed to show that her communications with BSF related to Holmes’ individual legal interests rather than the general affairs of Theranos.
Holmes filed objections to Judge Cousins’ ruling on the grounds the court overlooked key evidence of BSF’s “undisputed, public representations” of Holmes and erred in applying the Bevill test, but her objections were overruled by District Judge Edward J. Davila.12
Know the Benefits and Risks of Joint Representations
Joint representations are appealing, especially when, for example, a company and its executives are named as co-defendants in a lawsuit. It is often less expensive to retain a single law firm to represent both the company and its employees, and the joint representation also ensures that the testimony and document productions are well-coordinated. A joint representation has the added bonus of conveying a united front between the company and its employees. Finally, a joint representation can help the parties to the representation avoid a prisoner’s dilemma-type situation.
However, before retaining a law firm to simultaneously represent a company and its employees, in-house counsel must also consider the risks associated with joint representations. The foremost risk is that the parties’ interests will diverge, potentially giving rise to a conflict of interest between the company and its employees. In the event a conflict of interest arises, the law firm may be required to withdraw from representing either the company or its employees in the midst of litigation. Additionally, in a criminal investigation, a joint representation may cause the company to receive reduced cooperation credit if, for example, the employee prevents the company from providing information to the government about the employee’s misconduct. Ultimately, whether a joint representation is appropriate depends on the circumstances of the specific case. Knowing the benefits and risks and doing a fulsome analysis with the assistance of outside counsel will ensure that both the company and the individual are properly protected.
Best Practices When Considering a Joint Representation
1. When retaining outside counsel, define the scope of the representation in a written engagement letter. Due to the “lack of personal engagement letter or retainer agreement,” the scope and length of outside counsel’s representation of Theranos and Holmes “remain[ed] unclear.”13 Thus, at the outset of any representation involving an outside law firm, in-house counsel should request an engagement letter that defines the scope of the legal relationship between the law firm and the company. If the scope of the law firm’s representation changes, the engagement letter should be modified as such. Similarly, if the law firm’s representation extends to unrelated matters, in-house counsel should require distinct engagement letters for each additional representation.
As discussed previously, a fulsome analysis including in-house counsel, outside counsel, company representatives, and any employees who may be party to a joint representation should occur. If, following this discussion, the company does not want to enter into a joint representation, the engagement letter should make clear that the counsel’s client is the company, and that counsel is entitled to share anything company employees disclose during the course of the representation with the company.
If the company wants to enter into a joint representation with an employee, the engagement letter should make clear that the company and its employees are represented by the same counsel. The letter should also document that the company is the primary client, and that in the event the company’s interests diverge from one or more of its jointly represented employees, counsel is entitled withdraw from its representation of the conflicted employees and continue to represent the company. Finally, the employee should be advised, both orally and in the engagement letter, that he or she may wish to obtain independent advice about whether to enter into a joint representation.
2. Administer Upjohn warnings prior to conversations with company executives. In a situation in which a company has decided not to enter into a joint representation, an Upjohn warning14 is a critical tool. The Upjohn warning informs a company employee that although their conversation with company counsel is protected by the attorney-client privilege, the privilege belongs to and can be waived by the company. While Upjohn warnings are typically administered prior to an interview of a company employee, they may also be appropriate when speaking with company founders or other executives as the demarcation between the employee as an individual versus as a leader of the company is not always clear. In Holmes’ case, repeated Upjohn warnings would have helped provide clarity regarding the scope of the representation of Theranos vis-à-vis Holmes.
3. Know when it is time to retain separate counsel for employees. In any joint representation, there is always the possibility that the company’s interests will diverge from those of its employees. This often happens when the company wants to settle but the employees do not, or when the company learns that one or more employees are the target(s) of an investigation. In such circumstances, when counsel intends to continue its company representation, the employee should be advised to retain separate counsel. While not ideal, this process will be significantly easier if counsel has made clear to the parties that their interests may diverge during the course of the representation and has documented the arrangement accordingly, as discussed above.
As Holmes’ case demonstrates, attorney-client relationships and the scope of the attorney-client privilege can be difficult to determine in the corporate context. Counsel should make every effort to ensure company clients and their employees understand the limits of the attorney-client privilege, both at the outset and during the course of the representation. By proactively taking the above-mentioned steps, counsel will be well-positioned to weather potential challenges from corporate executives like Holmes down the line.
1 Order Granting Plaintiff’s Motion to Determine That Defendant Lacks Individual Privilege Interest in Disputed Documents at 5, United States v. Holmes, No. 18-cr-00258-EJD (N.D. Cal. filed June 3, 2021).
2 In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120, 123 (3d Cir. 1986).
3 In re Grand Jury Subpoena: Under Seal, 415 F.3d 333, 339 (4th Cir. 2005).
4 See id.; United States v. Keplinger, 776 F.2d 678, 701 (7th Cir. 1985) (“Moreover, at least in the absence of any relatively clear indication by the potential client to the attorney that he believed he was being individually represented, we think no individual attorney-client relationship can be inferred without some finding that the potential client’s subjective belief is minimally reasonable.”).
5 In re Grand Jury Subpoena, 415 F.3d at 339; see also United States v. Aramony, 88 F.3d 1369, 1390–92 (4th Cir. 1996) (holding that Aramony was not the client of internal investigation counsel because (1) Aramony did not seek legal advice; (2) Aramony could not have reasonably believed that the information he disclosed would be kept confidential; and (3) internal investigation counsel told Aramony they were retained to represent the company).
6 Bevill, 805 F.2d at 124.
7 In re Grand Jury Subpoena (Newparent), 274 F.3d 563, 571–72 (1st Cir. 2001); United States v. Int’l Brotherhood of Teamsters, 119 F.3d 210, 214–15 (2d Cir. 1997); In re Grand Jury Proceedings, 156 F.3d 1038, 1040–41 (10th Cir. 1998).
8 See Ross v. City of Memphis, 423 F.3d 596, 605 (6th Cir. 2005) (“Our court, like many others, requires that the individual officer seeking a personal privilege ‘clearly claim[ ]’ he is seeking legal advice in his individual capacity.” (citation omitted)).
9 Brief for Defendant in Opposition to Plaintiff’s Motion at 1, United States v. Holmes, No. 18-cr-00258-EJD (N.D. Cal. filed Dec. 4, 2020).
11 Order Granting Plaintiff’s Motion, supra note 1, at 5–6.
12 Order Overruling Objections to Magistrate Judge’s Order at 4, United States v. Holmes, No. 18-cr-00258-EJD-1 (N.D. Cal. filed July 1, 2021).
13 Id. at 3.
14 Upjohn Co. v. U.S., 449 U.S. 383, 390 (1981).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.