Pitfalls of Attorney-Client Privilege and Tips for Corporate Officers and Employees

Rothwell, Figg, Ernst & Manbeck, P.C.
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Elizabeth Holmes, former CEO of the now-defunct blood-testing technology company Theranos, recently learned a harsh lesson on the complexities and pitfalls of attorney-client privilege.  As a result of a June 3, 2021 ruling in the U.S. District Court for the Northern District of California, critical communications between Holmes and Boies Schiller—Theranos’ counsel from 2011 to 2016—may be admissible at her federal criminal trial in late August on fraud and conspiracy charges. The ruling serves as another cautionary tale for corporate officers and employees about the importance of understanding when attorney-client privilege applies to communications between an employee and a company lawyer.

A lawyer retained by a company represents the company and not its members of management or employees. However, a corporate entity can only communicate and transact through its management or employees. Therefore, the client-lawyer relationship in the corporate setting is actually established through these intermediaries, which adds complexity to distinguishing communications that are privileged under the attorney-client privilege versus communications that are personal in nature and not protected by privilege.

Within most corporations, close relationships commonly form between employees and in-house or outside counsel resulting in both personal and professional exchanges. Given this dynamic, employees may be legitimately confused about the privileged status of their communications with counsel. Often, employees are under the mistaken impression that they are “the client” of the company’s lawyer and have expectations about an attorney-client privilege. As a result, an employee may share sensitive and confidential information, believing that all communications with counsel are privileged.

Last week, U.S. Magistrate Judge Nathanael M. Cousins found that Elizabeth Holmes made this exact error. Holmes mistakenly believed her communications with David Boies and the Boies Schiller law firm to be protected under individual attorney-client privilege.  In rejecting those claims of privilege, Judge Cousins ruled that the communications between the former Theranos CEO and Boies Schiller attorneys are subject only to corporate privilege. Because the company waived its privilege, the communications are not subject to Holmes’ individual privilege and may be admissible in her trial this August.

Judge Cousins relied on the test enumerated in United States v. Graf, 610 F.3d 1148 (9th Cir. 2010) to evaluate Holmes’ privilege request. Under the test, the individual corporate officer or employee seeking to assert a personal claim of attorney-client privilege must affirmatively show:

  • they approached counsel for the purpose of seeking legal advice;
  • they made it clear that they are seeking legal advice in their individual rather than in a representative capacity;
  • the counsel saw fit to communicate with the individual in their individual capacity;
  • their conversations with counsel were confidential; and
  • the substance of the conversations with counsel did not concern matters within the company or the general affairs of the company.

Notably, all factors must be met, and the fifth factor itself presents a significant hurdle because it requires the entirety of the legal communications to be completely unrelated to the company. To further complicate matters, the Graf test is not a universal standard. Holmes unfortunately relied on the “subjective-belief” test—which is instead evaluated upon the client’s belief of an attorney-client relationship—but Judge Cousins declined to adopt that standard, particularly given that Holmes initially took the position that law firm was jointly representing her as an individual and the company but later asserted that the communications at issue related to her individual legal matters rather than the affairs of the company.

This cautionary tale highlights the significance of understanding the boundaries of attorney-client privilege within a company. Thus, it can be helpful for company management and employees to keep the following tips in mind:

  • corporate counsel represents the company and not individuals that work for the company;
  • corporate counsel is not ethically permitted to provide advice inconsistent with the corporation’s interests;
  • the company can elect to disclose communications between an employee and the company’s attorney;
  • attorney-client privilege may not protect communications between an employee and the company’s attorney; and
  • individuals that work for the company should seek independent counsel for any topic that is not legal advice regarding corporate interests or corporate actions or, should they decide to approach corporate counsel for legal advice, they should ensure that they can affirmatively satisfy all five factors of the Graf test.

Corporate counsel should clearly communicate the boundaries of attorney-client privilege at the outset of the relationship and over time during the engagement because they should not expect employees to be familiar with this complex area of the law.  Nevertheless, Judge Cousins did not consider the failure of Boies Schiller to inform Holmes as consequential when he made the ruling to deny her privilege claims. Therefore, company management and employees should keep the aforementioned tips in mind when speaking to a company lawyer so as to avoid making the same mistake as Holmes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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