iCorporate officers may take less comfort in following the advice of counsel after a decision issued last week in the Southern District of New York. The decision in United States v. Wells Fargo Bank NA, No. 12-CV-7527 (S.D.N.Y. Sept. 22, 2015) (“Wells Fargo II”) is one of the very few addressing whether an individual civil defendant can present an advice of counsel defense using information his employer asserts to be protected by attorney-client privilege.
The Conflict Between an Individual’s Defense and a Corporation’s Privilege Interest
When individuals face civil fraud charges alongside their employer — something that may become increasingly common following the recent U.S. Department of Justice memorandum on charging individuals — interests can diverge at a number of levels. One issue that is becoming increasingly vexing is how to treat the legal advice that was provided to the company (and its employees) at the time of the alleged misconduct.
If a company’s lawyers analyzed an issue and advocated a course of action that is later alleged to be fraudulent, the company may not wish to voluntarily expose the details of that analysis, or risk a claim that such exposure amounted to a subject matter waiver of its attorney-client privilege. If the individual defendant acted based on the company lawyers’ legal analysis, however, he or she will want to raise that fact to rebut the allegation that he intentionally or recklessly violated the law. This scenario puts the company’s privilege interest directly at odds with the individual’s interest in presenting a defense. Which interest should prevail?
This is a thorny question that has remained uncertain due to scant, mixed case law on the subject. In criminal cases, where a defendant’s rights are squarely backed by constitutional principles, several courts have concluded that, under certain circumstances, it is appropriate for an individual’s right to present a defense to trump a company’s privilege interest. E.g., United States v. Rainone, 32 F.3d 1203, 1206 (7th Cir. 1994). Courts in criminal cases typically apply a balancing test that examines the privileged material in camera to assess how fundamentally it affects the defendant’s Sixth Amendment rights. Even in this context, many courts have concluded that an individual defendant should not be permitted to override a company’s privilege interest in order to present a full defense.
In the civil context, the picture is even more murky as very few courts have ever addressed the issue. The one circuit court decision confronting the matter concluded that an individual civil defendant should not be allowed to present privileged material to support his defense. See Ross v. City of Memphis, 423 F.3d 596 (6th Cir. 2005) (overturning district court finding that former police chief could present evidence of communications with the city’s attorney). Some earlier courts, however, had gone the other way, permitting civil defendants to present exculpatory evidence over a corporation’s assertion of privilege. See, e.g., In re National Smelting of New Jersey Inc. Bondholders’ Litigation, 1989 U.S. Dist. LEXIS 16962 (D.N.J. June 29, 1989); Moskowitz v. Lopp, 128 F.R.D. 624 (E.D. Pa. 1989).
The Court’s Decision in Wells Fargo
Last week’s Wells Fargo decision comes down decisively on the side of corporate privilege. In the opinion, Judge Jesse M. Furman concludes there should never be a balancing test in civil cases, and that the corporation’s privilege assertion should always prevail — even if it critically undermines an individual’s ability to present a defense. See Wells Fargo II. The decision’s sweeping, categorical conclusion is a departure from an earlier opinion in the same matter, in which Judge Furman deferred ruling on the privilege issue until further briefing because the individual defendant’s “right to present a defense could conceivably overcome [the corporation’s] right to maintain its privilege.” United States v. Wells Fargo Bank NA, 12-cv-7527 (S.D.N.Y. June 30, 2015) (“Wells Fargo I”).
The court’s Sept. 22 decision abandons the idea that an individual’s defense rights could conceivably prevail, and instead concludes that, under existing case law, courts should not even weigh the competing interests — they should simply defer to the company’s privilege interest. See Wells Fargo II at 8 (finding that applying any balancing test would render the company’s privilege unacceptably uncertain). Judge Furman acknowledges the result “may seem harsh,” but contends “it is the necessary consequence of commitment to the important policies and value underlying the attorney-client privilege. Id. at 13.
A troubling feature of the decision is Judge Furman’s conclusion that the result may not be as harsh as it seems, since the company would indemnify the employee against a judgment that resulted from his inability to assert reliance on counsel. This, of course, misses the point that in many jurisdictions, including Delaware, a company may not indemnify an officer if there is a basis to conclude he did not act in good faith. While it is possible that, even after an adverse result at trial, a company could nevertheless indemnify an individual (taking the position that because he followed the advice of counsel he acted in good faith and in the interests of the company), such protection is not assured. So the result of the decision is in fact harsh, not just that it may seem so.
Practical Implications of Wells Fargo
If other courts follow the Wells Fargo approach, it will significantly undermine corporate officers’ confidence that they are protected when they seek and follow the advice of in-house (or even outside) counsel. If a trial later determines that the officer’s actions constituted a civil fraud offense, the officer’s primary means of defending himself would be available only if the company is willing to waive attorney-client privilege (which it may not). Rather than receiving advice that may or may not be relied upon later as a defense, officers may have to consider obtaining advice from separate, personal counsel when they face complex legal compliance questions. Doing so would give the officer confidence he can present the advice later if necessary to show that he acted in good faith.
It would surely surprise many executives that they could be personally liable for their actions if their employer refuses to allow them to assert that they relied upon counsel.
