30 (b)(6) Corporate Designee Depositions – What You Need to Know

By Hayes Hunt and Joshua Ruby

30.jpgIn a world where the overwhelming majority of cases never make it to trial, depositions take on outsized importance. They will almost certainly be the only in-person testimony either party has the opportunity to elicit and the only opportunity for live cross-examination. That means every deposition requires careful preparation.

Corporations and other entities have unique obligations regarding the depositions of corporate designees pursuant to Federal Rule of Civil Procedure 30(b)(6) and its state cognate, Pennsylvania Rule of Civil Procedure 4007.1(e). An entity must prepare a designated witness to answer its adversary’s questions, and the designee’s answers bind the entity in the litigation. Avoiding costly mistakes and discovery sanctions requires that both in-house and outside counsel for such entities take care to prepare for such depositions and understand the rules that govern them.

Adversary’s Responsibilities In Noticing Deposition

The entity’s adversary has few obligations in noticing the deposition of a corporate designee. AlllowercaseB (2).jpg Rule 30(b)(6) requires is a notice directed to the entity that “describe[s] with reasonable particularity the matters for examination.”

Notwithstanding this minimal obligation, some limits do exist on the adversary’s description of the matters for examination. The qualifier “including, but not limited to,” or other language indicating that the topics listed in the notice are not exclusive renders the notice overbroad and subject to a motion to quash. (See, e.g., Reed v. Bennett, 193 F.R.D. 689, 692 (D. Kan. 2000).) 

Instead, the adversary has an obligation to define the “outer limits” of the subject matter of the deposition of the corporate designee. This limit exists to ensure that the entity is capable of designating a witness (or witnesses) who can testify about each of the topics listed, rather than facing the “impossible task” of designating a witness who can testify about all possible questions the adversary might ask.

Responsibilities Upon Receiving Rule 30(b)(6) Notice

#6.jpgUpon receiving a Rule 30(b)(6) notice, a corporation must produce a witness (or witnesses) for deposition questioning by the adversary. The witness(es) must be capable of giving “complete, knowledgeable and binding answers on behalf of the corporation” about each of the topics listed in the deposition notice, according to Marker v. Union Fidelity Life Insurance, 125 F.R.D. 121, 126 (M.D.N.C. 1989).

Accordingly, the corporation also incurs a duty to educate and prepare its designees to testify about any matter outside the designee’s personal knowledge, which the Rule 30(b)(6) notice specifies. Failure to do so “is tantamount to a failure to appear, and warrants the imposition of sanctions,” as in United Technologies Motor Systems v. Borg-Warner Automotive, Civil Action No. 97-71706, 1998 U.S. Dist. LEXIS 21837, at *4 (E.D. Mich. Sept. 4, 1998).

Who Can The Corporation Designate?

An entity is not limited to its own present employees as its corporate designees. Instead, Rule 30(b)(6) permits an entity to designate “officers, directors, or managing agents, or … other persons who consent to testify on its behalf.”

In particular, where the relevant events have long since passed, a former employee may be the most appropriate corporate designee. In Beauperthuy v. 24 Hour Fitness USA, Case No. 06-715 SC, 2009 U.S. Dist. LEXIS 104906, at *17 n.5 (N.D. Cal. Nov. 9, 2009), for example, the court held that “the text of Rule 30(b)(6) leaves no doubt that a former employee can and should be designated as a Rule 30(b)(6) deponent, if the former employee is the most knowledgeable individual and as long as the former employee consents.”

Nor does Rule 30(b)(6) limit proper designees to people employed by or otherwise affiliatedKnowledge.jpg with the entity. Any “other person who consent[s]” to testify on behalf of the entity and has the requisite knowledge and preparation may do so.

What Questions Must The Corporate Designee Answer?

As with any other deposition witness, the corporate designee must testify about facts within his or her (or, in this case, the entity’s) knowledge. But a corporate designee’s responsibilities go further; he or she must also answer questions about the entity’s “subjective beliefs,” “interpretation of documents and events,” and “position” on any of the topics in the deposition notice, as in United States v. Taylor, 166 F.R.D. at 361.

Some courts also permit the adversary to ask questions beyond the scope of the topics in the deposition notice. Even where the court so permits, the answers of the designee are treated like those of any other fact witness and do not bind the entity, according to Detoy v. City & County of San Francisco, 196 F.R.D. 362, 367 (N.D. Cal. 2000).

Other courts, such as in Paparelli v. Prudential Insurance Co. of America, 108 F.R.D. 727, 728-31 (D. Mass. 1985), have held that the adversary may not ask questions beyond the topics listed in the Rule 30(b)(6) notice. But counsel for the entity cannot enforce that limitation by instructing the designee not to answer the questions. Instead, the designee must answer the questions to the extent possible, and the adversary has no recourse if the witness disclaims knowledge of matters outside the scope of the deposition notice.

What Is Effect Of Corporate Designee’s Testimony?

buildings2.jpgWithin the scope of the deposition notice, the designee’s answers are the corporation’s answers. That is not to say that the corporation may not later alter its answers or positions, but doing so will subject its representatives to cross-examination at trial. And the deposition testimony itself of the designee may be admissible at trial as a prior inconsistent statement, a statement against interest, or on another basis.

The same rule applies “if a party states it has no knowledge or position as to a set of alleged facts or area of inquiry at a Rule 30(b)(6) deposition.” In that circumstance, “it cannot argue for a contrary position at trial without introducing evidence explaining the reasons for the change.”

The deposition of a corporate designee presents both risks and opportunities for a corporation or other entity involved in litigation. By understanding the rules that govern such depositions, both in-house and outside counsel for entities can use them to great effect while minimizing the risks to their client’s litigation positions.

Originally published in The Legal Intelligencer on July 16, 2014.

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ABA Blawg 100 – From the Sidebar

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Please consider nominating From the Sidebar for the ABA Blawg 100. In years past, we have been awarded the ABA Blawg 100 and ask that you help us continue our tradition.   We really appreciate all your support and interest in our legal blog.  For the past 3 years, From the Sidebar has been a great experience for all of us. Nominations can be submitted here.

 Yours with gratitude,

Hayes

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Psychology In the Courtroom – Is Social Science “Common Sense” or a Tool to Correct Juror Misconceptions?

By Thomas G. Wilkinson and Thomas M. O’Rourke

brain.jpgThe Pennsylvania Supreme Court recently issued two decisions regarding the use of social science experts in criminal cases.  As noted by University of Pittsburgh law professor David Harris, however, the opinions appear to “come from two different worlds.” In one, Commonwealth v. Walker, the Court held that expert testimony regarding memory and human perception could be used to educate jurors on the potential fallibility of eyewitness identifications, holding that such evidence may assist the jury in weighing the evidence presented at trial.  In the other, Commonwealth v. Alicia, the Court held that an expert was not permitted to explain the psychological factors that could result in a false confession.  Unlike in Walker, the Alicia Court did not provide any discussion of the underlying scientific research.  Rather, a divided Court simply held that the proposed expert testimony would infringe on the “jury’s role as arbiter of credibility.”

The Court’s divergent approach to social science in these cases raises important questions about the current and future role of social science in the courtroom.

The Limits of Eyewitness Identification

In Commonwealth v. Walker, the Court reversed its prior position on the use of expert testimony regarding the reliability of eyewitness identifications, holding that such evidence is no longer perEyeWitness.jpg se impermissible in Pennsylvania.  In doing so, the Court followed the “unmistakable trend” in recent cases across the country and joined 44 other states and the District of Columbia in permitting expert testimony on this issue.  Specifically, the Court was convinced that “advances in scientific study have strongly suggested” that eyewitness identifications may be inaccurate, particularly when the crime involves a weapon and the perpetrator is of a different race.  In the Court’s view, effective cross-examination and closing arguments may be insufficient to inform the jury of these risks. 

Writing for the majority, Justice Todd explained that trial courts should have the discretion to permit an expert to “educate” the jury about the psychological factors that may impact eyewitness identifications.  In so holding, the Court dismissed the Commonwealth’s argument that such testimony would invade the jury’s role as fact-finder.  The Court noted that experts would only be permitted to address general psychological principles, not the credibility of a particular witness or the accuracy of any particular identification.  In the majority’s view, such testimony would improve juror decision-making by opening their eyes to the potential fallibility of human memory and perception in high stress situations.  lemming.jpg

Chief Justice Castille and Justice Eakin issued dissenting opinions, with Chief Justice Castille also joining in Justice Eakin’s dissent. Chief Justice Castille criticized the majority for blindly following the trend in decisions of other states, without independently evaluating any psychological research. In refusing to “sign on to the Majority’s enshrinement of this contested social research in these circumstances,” Chief Justice Castille expressed skepticism about the social science underlying eyewitness identification and questioned whether expert testimony on memory and perception would actually assist jurors. He went on to say that “I understand the attraction of the lemmings to the sea approach, but I also try to keep in mind the cliff awaiting[.]” He also questioned whether the benefits of expert testimony, as opposed to the traditional approach of exploring flaws in eyewitness identification through effective cross-examination, “will justify the price-tag” of competing experts.

“The Phenomenon of False Confessions”

In Commonwealth v. Alicia, the majority took a more skeptical view of developing social science. In Alicia, a man with “low intelligence” and “mental health issues” confessed to firing a gun that killed an innocent bystander. Of the eyewitnesses, only one pointed to the defendant – the others claimed it was one of two other men. Before trial, the defendant convinced the trial court that he should be permitted to offer an expert to explain psychological research regarding how false confessions may result from interrogation.

The Commonwealth took an interlocutory appeal from the trial court’s decision, asserting thatheads.jpg the proposed expert testimony invaded the jury’s exclusive role as the arbiter of credibility. A divided panel of the Superior Court affirmed. In an opinion authored by Justice McCaffrey, the Supreme Court reversed, holding that “[g]eneral expert testimony that certain interrogation techniques have the potential to induce false confessions improperly invites the jury to determine that those particular interrogation techniques were used to elicit the confession in question, and hence to conclude that it should not be considered reliable.” Such issues, rather, are “best left to the jury’s common sense and life experience[.]”

Unlike its decision in Walker, the Court offered no discussion of the scientific studies on false confessions or the prevailing position of social science on the issue. In the opinion of David Harris of the University of Pittsburgh, the Court’s omission of any such discussion is “troubling,” as the research on false confessions “is there. It’s well done. It’s reliable. And yet, it’s not even mentioned in the Alicia opinion. [The Court] just ignore[s] it.”

Scientific Testimony or Common Sense?

The primary distinction between the Court’s treatment of social science in Walker and Alicia is the subject matter of the research. Although the Court has refused CreativeIdea.jpgto endorse the validity of the body of psychological research behind false confessions, it has given defendants license to use similar research to challenge eyewitness identifications. One possible reason for the different outcomes is that police interrogations and confessions are familiar territories for the Court, while psychological findings regarding “weapons focus” and “cross-racial identification” are outside the Court’s experience. Indeed, the admissibility and reliability of confessions are already the subject of Miranda and other constitutional protections that have long been a staple of criminal procedure.  

Setting aside for a moment the question of whether the Court has simply given greater credence to the more extensive body of social science underlying faulty eyewitness identifications over false confessions, one thing is clear – the Court will approach expert testimony in this area with caution. The Court clearly was reluctant to admit expert psychological or psychiatric testimony that would serve as a direct challenge to witness credibility, a matter viewed as “well within the range of common experience, knowledge, and understanding of a jury”.

As the Court recognized in Walker, however, social science experts can educate the jury that its common sense may be wrong in certain circumstances. Such expert assistance may improve decision-making. But, as noted by Chief Justice Castille, experts are expensive, and “not allcommonsense.jpg disciplines self-denominated as scientific are as objectively reliable as others.” While costs should not alone justify excluding important exculpatory evidence in criminal cases, practical concerns regarding whether expert testimony bolstering or undermining the testimony of eyewitnesses to a crime clearly warrants further scrutiny on a case-by-case basis, ensuring that the requisite elements of Pennsylvania Rule of Evidence 702 and the Frye test have been satisfied.

It remains to be seen to what extent the Court’s ruling in Walker will generate frequent expert challenges to eyewitness testimony. For now, it is up to the trial courts and criminal defense attorneys to determine which cases will likely benefit from social science experts and what quantum of expertise they must possess to qualify to “teach” the jury about the pitfalls of eyewitness identification.

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Thomas G. Wilkinson, Jr., is a member of Cozen O’Connor in Philadelphia, where he practices in the Commercial  Litigation Department (twilkinson@cozen.com).  He is the Past President of the Pennsylvania Bar Association and past chair of its Civil Litigation Section.

Thomas M. O’Rourke is an Associate at Cozen O’Connor, where he practices in the Commercial Litigation Department (tmorourke@cozen.com). 

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Criminal Conduct & Sports: Luis Suarez – World Class Biter

By Hayes Hunt and Calli Varner

Suarez2.jpgYesterday, Uruguay striker Luis Suarez bitbite2.jpg Italian defender, Giorgio Chiellini’s shoulder like a piece of pizza. Uruguay advanced to the knock-out round of the World Cup and Italy was eliminated. Suarez also took a huge bite out of Uruguay’s chances of winning the World Cup. This was the third time he has bitten a player during a soccer match.  FIFA has opened an investigation into the incident and Suarez will likely be suspended for the remainder of the World Cup.

Last year, Suarez, while playing for Liverpool, was suspended for 10 games for biting a Chelsea player.  Suarez issued a public apology and paid a fine.  British Prime Minister, David Cameron, stated that Suarez’s conduct set “the most appalling example” to children. Like a child, Suarez attempts to resolve his anger by biting other people.  Unlike most children, Suarez does not learn from being punished, accept responsibility, or show remorse for his bad behavior. In 2010, he was banned for 7 games when he bit PSV Eindhoven player, Otman Bakkal.  As a result, he earned the nickname the “Cannibal of Ajax” and now, “Count Suarez.”   

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Unlike soccer, American football, hockey, and boxing are based on repeated physical assaults. These occurrences raise questions about the liability athletes face (or do not face) for acts of aggression taking place on the field during the game. Of course, when a player steps into that zone, he or she assumes certain risks — the risk of any loss, damage, or injury that may occur to him or her while on the playing field. The athlete also has given informed consent to any injuries that may occur — he or she has full knowledge of the risks associated with athletic competition and consents to those risks. Under these theories, it would seem as if athletes are protected from tort liability for incidents or injuries administered to an opponent. What happens, though, when the conduct at issue extends beyond aggressive competition and rises to the level of criminal conduct?

FIFA.jpgHere, Suarez’s actions, if taking place off the field, would be deemed criminal. You cannot walk down the street and bite someone without criminal punishment. Suarez, however, has never been charged criminally; he was merely suspended for a number of games, despite the fact that this is not his first offense. This incident, of course, brings up memories of the 1997 Tyson v. Holyfield fight, where Tyson bit off a portion of Holyfield’s ear. Rather than face criminal penalties, Tyson was fined $3 million and his boxing license was temporarily revoked.dog1.jpg

Evasion of criminal liability, however, is not always the norm. There are numerous incidents where the conduct of NHL hockey players has resulted in criminal charges. Most recently, Todd Bertuzzi of the Vancouver Canucks punched Steve Moore of the Colorado Avalanche in the back of the head, rendering Moore unconscious. Bertuzzi then fell on top of Moore, crushing him into the ice. Moore sustained numerous injuries, including fractured vertebrae and a concussion. In addition to fines and suspension, Bertuzzi was criminally charged with assault causing bodily harm and faced up to one and a half years in prison. Bertuzzi later pled guilty to the charge and was sentenced to 80 hours of community service and one year’s probation.

The inconsistencies in these sanctions show that there are no “rules of the game” when it comes to criminal conduct on the playing field. Governments may enact legislation if FIFA and other governing agencies fail to punish the repeated criminal acts of a player.

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Judge the Fighting Judge – How Would You Rule?

By Hayes Hunt and Thomas O’Rourke

robots.jpgOn June 2, 2014, a fight broke out in the hallway of a Brevard Country, Florida courtroom.  The fight was between an assistant public defender and the presiding Judge, Retired Army Reserve Colonel, John Murphy, who threatened the attorney after he refused to waive his client’s speedy trial right.  Specifically, after stating that he would “throw a rock at him” if he had one,  Judge Murphy demanded to see the attorney “out back” so that he “could beat [his] ass.”   The video of the incident, which can be seen in full here, shows that the two men then rushed out to a back hallway outside of the camera’s view where a violent fight apparently erupted.  The judge ultimately returned to the courtroom alone where he received a round of applause and was offered a drink of water.  He then proceeded to conduct court, setting a trial date in the defendant’s case.

 What, if anything, should the Florida Judicial Qualifications Committee do? 

  1. Take no action. Soccerreferees.jpg
  2. Take no action, unless the lawyer makes a complaint to the Committee.
  3. Dismiss the judge.
  4. Require the judge to take a leave of absence and attend anger management classes.

Note:  The Chief Judge of the 18th Judicial Circuit in Florida has temporarily reassigned the Judge’s pending cases and he has agreed to seek anger management and treatment during a leave of absence. 

Illustrationexplosion.jpgWhat, if anything, should the Orlando prosecutor do?

  1. Charge the judge with a crime, such as assault, battery or disorderly conduct.
  2. Nothing. Don’t waste any more time on the matter.

Note: It is reported that the lawyer will not be pressing charges.

 

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Prohibiting Discovery of Attorney-Expert Communications

By Jeffrey M. Monhait

lightbulb1.jpgAre communications between attorneys and their retained experts discoverable?  For now, the answer appears to be no, as a divided Pennsylvania Supreme Court recently affirmed a Superior Court decision “creat[ing] a bright-line rule denying discovery of communications between attorneys and expert witnesses.”  Barrick v. Holy Spirit Hosp. of the Sisters of Christian Charity, No. 76 MAP 2012, 2014 Pa. LEXIS 1111, at *2 (April 29, 2014). 

 Background

Plaintiff Barrick brought this suit against defendants for injuries he sustained when a chair in which he was sitting collapsed in the cafeteria of Defendant Holy Spirit Hospital.  Defendants served a subpoena on Barrick’s treating surgeon for all relevant medical files.  The surgeon, upon advice of plaintiffs’ counsel, withheld certain documents pertaining to Barrick on the basis that they were not created for treatment purposes.  Defendants filed a motion to enforce the subpoena, and plaintiffs objected on the basis that they had designated the surgeon as an expert witness.  Thus, plaintiffs contended that all communications between their counsel and the surgeon were protected pursuant to Pa.R.C.P. 4003.3 and 4003.5. 

The trial court conducted an in camera review, and granted defendants’ motion to enforce the subpoena.  When an expert is to be called at trial to advance a party’s case in chief, the trial court concluded that opposing parties are entitled to evaluate whether and to what extent “the nature of the expert’s testimony may have been materially impacted by correspondence with counsel.” 

Plaintiffs immediately appealed to the Superior Court.  Initially, a panel of three judges affirmed the trial court, concluding that defendants “were entitled to discover whether the expert’s conclusions were his own or guided by Plaintiffs’ counsel.”  Plaintiffs then petitioned an en banc panel of the Superior Court, which reversed, concluding that: 1) the records were beyond the permissive scope of expert discovery under Pa.R.C.P. 4003.5(a)(1); 2) defendants had failed to show “cause” under Rule 4003.5(a)(2) to obtain additional discovery; and 3) that “Rule 4003.3’s protection of work product shielded the correspondence from disclosure.” 

The Supreme Court granted review on the issue of whether “the Superior Court’s interpretation of Pa.R.C.P. 4003.3 improperly provides absolute work product protection to all communications between a party’s counsel and their trial expert.”  The Court, however, deadlocked, with three justices on each side.  Thus, the Superior Court decision was affirmed.

expert1.jpgOpinion in Support of Affirmance (“the Affirmance”)

According to the Affirmance, the work product protection codified in Rule 4003.3 “supports our judicial system, based on the adversarial process by allowing counsel privacy to develop ideas, test theories, and explore strategies in support of the client’s interest, without fear that the documents in which the ideas, theories and strategies are written will be revealed to the opposing counsel.”  Meanwhile, Rule 4003.5 allows a party to “discover ‘facts known and opinions held by an expert’ through interrogatories.”  Thus, attorney-expert communications can bring these rules into conflict.

This conflict will arise frequently, because “most correspondence between counsel and an expert witness will necessarily entail substantial overlap and intermingling of core attorney work product with facts which triggered the attorney’s work product, including the attorney’s opinions, summaries, legal research, and legal theories.”  Although the trial court could review these materials and protect work product from disclosure, the Affirmance “conclude[d] that attempting to extricate the work product from the related facts will add unnecessary difficulty and delay into the discovery process.”  Discovery of redacted correspondence, followed by in camera review, would result in needless, expensive, and time-consuming litigation.  “[W]e conclude that it is preferable to err on the side of protecting the attorney’s work product by providing a bright-line rule barring discovery of attorney-expert communications.”

The Affirmance also cited the proposed amendment to Rule 4003.5 that would embrace this bright-line rule.  However, it took pains to note that its “consideration of the proposed amendment . . . is entirely separate . . . from the determination of the case before us.”

Opinion in Support of Reversal (“the Reversal”)

ideas.jpgThe Reversal took a straightforward position—that the rules “simply do not establish a categorical prohibition” against discovery of attorney-expert correspondence, and thus the Superior Court’s contrary decision should be reversed.  The Reversal also took umbrage with the Affirmance using the case “as a vehicle to modify the existing rules.”

For the Reversal, the “truth-determining process of a trial requires meaningful cross-examination of expert witnesses,” and such cross-examination is only possible where counsel can discover, before trial, any and all information an expert relied upon.  Furthermore, absent discovery of attorney-expert communications, there would be no way to investigate whether “manipulative counsel” influenced the expert’s opinions, or even wrote the expert’s report.

Rather than bar discovery of all communications between attorneys and experts, the Reversal sought to balance the broad scope of discovery with the protections afforded attorney work product.  Thus, “purely factual or other information . . . that does not represent core attorney work product, although contained within communications between counsel and an expert witness, does not fall within Rule 4003.3’s protective scope.”  When a communication contains a mixture of “work product and other material, both sets of policy objectives are served if that portion of the document consisting or core work product is protected, while the remainder is subject to discovery.”  Since trial courts typically conduct in camera reviews to evaluate privilege assertions, the Reversal disagreed with the Affirmance that such reviews would be overly burdensome.

Lastly, the Reversal objected to the Affirmance’s consideration of the proposed rule change, arguing that an appeal is an improper vehicle to amend the rules.  Rulemaking is “ordinarily prospective in nature,” and cases must be decided based on “the governing provisions in force at the time.”

What Next?brightline.jpg

The Affirmance and Reversal might agree that, in theory, where attorney-expert correspondence contains a mix of protected work product and other material, the non-work product is technically discoverable.  However, the Court split on whether to allow trial courts to review, identify, and separate out the protected portions of all attorney-expert correspondence.

For now, the Superior Court’s “bright-line rule” seemingly allows attorneys to withhold all communications with their experts.  However, the Court’s divided position warrants caution, as the Court may revisit this issue again in the near future, especially following the July 2013 arrival of Justice Correale Stevens to replace former Justice Orie Melvin.  In any event, attorneys should continue to follow a fundamental rule of correspondence—before hitting “send,” consider the impact the email (or letter) would have upon a jury, or in a deposition.

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Attorney-Client Privilege & Corporate Dissolution

By Hayes Hunt and Arthur Fritzinger

redeye.jpgAllegheny County Court of Common Pleas Senior Judge R. Stanton Wettick Jr.’s recent ruling in Red Vision Systems v. National Real Estate Information Services, No. 14-0411 (Comm. Pls. Feb. 26, 2014), that the attorney-client privilege does not apply to corporations no longer in business has garnered significant attention, including an appeal and the filing of amicus briefing by the Association of Corporate Counsel. The ACC, which represents more than 33,000 in-house lawyers from more than 10,000 organizations, warns that allowing Wettick’s ruling to stand “would substantially inhibit the full and frank exchange of relevant information necessary for corporations to receive effective sound legal assistance.” However, Wettick’s opinion is hardly an outlier and corporate communications with counsel are subject to disclosure in many circumstances inapplicable to an individual’s relationship with his or her attorney.

The challenge to Wettick’s ruling rests principally on the argument that dissolved corporations should be treated the same as deceased individuals for purposes of the protection of confidential communications. Since the U.S. Supreme Court’s ruling in Swidler & Berlin v. United States, 524 U.S. 399 (1998), courts have continued to protect a person’s private conversations with their lawyer from disclosure after death. Corporations are even more dependent upon attorneys than individuals, particularly in light of the increasing number of regulations with which they must comply. Attorneys depend on the candor and openness of the officers of the corporations they represent and, according to the ACC, “abolishing the privilege after an entity’s death will affect its interests before its death by interfering with its ability to obtain sound legal advice and effective representation.” Corporate representatives who have fewer assurances that their communications will remain confidential are less likely to be fully candid. 

However, the appellant and the ACC are likely to face significant hurdles. Courts have oftetightrope.jpgn subjected confidential corporate communications to disclosure in circumstances inapplicable to individuals. Nearly 30 years ago, the Supreme Court ruled in Commodity Futures Trading Commission v. Weintraub, 571 U.S. 343 (1985), that the right to assert privilege transferred from management to the trustee appointed during Chapter 7 bankruptcy proceedings. In reaching this conclusion, the court noted that the corporate attorney-client privilege is normally controlled by management and, in the context of bankruptcy, the trustee’s “duties most closely resemble those of management.” In contrast, the rights of the corporation’s previous management are “severely limited.” They consisted only of turning over the corporate assets to the trustee and providing information to the trustee and creditors.

Since the Supreme Court’s ruling in Weintraub, similar reasoning has been applied to rehabilitation and liquidation proceedings, as well as to regulatory takeovers by agencies like the Federal Deposit Insurance Corp. Each of these rulings is grounded in the generally accepted principle that present, active management controls a corporation’s attorney-client privilege and may choose to assert or waive that privilege consistent with its fiduciary duty. Past managers have little say in the matter, even if the communications at issue were made by them during their tenure at the company.

However, transferring the right to assert the privilege on behalf of the corporation may not be the same as abolishing it altogether after the corporation has dissolved. In situations where new management or a trustee decides to waive privilege, those individuals have duties to the corporation and are charged with acting in its best interest. If the corporation loses its privilege entirely following dissolution, its records and communications with counsel could become an open book for regulators, potential claimants or parties seeking information about other entities in the possession of the dissolved company. In such circumstances, the defunct corporation would be entirely unrepresented.

skulls.jpgNonetheless, most courts to consider the issue have agreed with Wettick that the attorney-client privilege dies with the corporation. These courts reason that once the corporate entity ceases to exist, or no longer has any officers or directors with authority to assert or waive the privilege, the attorney-client privilege no longer applies. Non-operating corporations have no management capable of asserting the privilege, nor do they have good will or reputation to maintain. The Restatement (Third) of the Law Governing Lawyers supports this view as well, noting that when “a corporation or other organization has ceased to have a legal existence such that no person can act in its behalf, ordinarily the attorney-client privilege terminates.”

The principal area of disagreement among courts concerns an issue not present in Red Vision: whether a corporation that has ceased operations but has not completed the winding-up process is entitled to assert the privilege. Some courts have ruled that such entities still enjoy protection of the privilege, noting that the corporation is still being managed in some respects. Importantly, the winding up of their affairs often involves the pursuit of claims against debtors or the defense of the corporation against creditors.

Other courts, however, have held that the privilege ceases along with operations, even prior to complete dissolution. They reason that during dissolution only the “shell of the corporation” continues to exist, operating for the sole purpose of marshaling and distributing assets. Without active management operations, some courts have held that the entity “is, for all intents and purposes, dead,” as in Bagdan v. Beck, 140 F.R.D. 660, 667 (D.N.J. 1991).redsunglasses.jpg

Regardless of whether Wettick’s decision in Red Vision is upheld, it is important for corporate counsel to understand and communicate to management that there is no guarantee that any officer’s communications with counsel will remain confidential in perpetuity. Courts have uniformly held that the privilege belongs to the corporation, and that present management has the absolute right to assert or waive the privilege consistent with its fiduciary duty. Officers and directors are often replaced, and new management may not wish to protect every communication made by their predecessors. Informing corporate officers of this reality is yet another aspect of general counsel’s responsibility to make it clear that they represent the corporation and not its individual representatives.

Originally published in The Legal Intelligencer on May 21, 2014.

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Prosecuting a ”Faceless” Corporation – Indictment of a Company

By Hayes Hunt and Thomas O’Rourke

facelessbusinesspeople_174745505.jpgOn Sept. 9, 2010, a pipeline running through a residential neighborhood in San Bruno, Calif., ruptured, permitting natural gas to escape into the air. The gas ultimately ignited, resulting in an explosion and a fire that killed eight people and injured 58 others. The fire also ravaged the neighborhood, damaging 108 homes, 38 of which were completely destroyed.

Earlier this month, federal prosecutors indicted PG&E Corp., the pipeline operator allegedly responsible for the ruptured line. In a 12-count indictment, PG&E was charged with violations of the Natural Gas Pipeline Safety Act, which requires pipeline operators to maintain inspection records and develop a maintenance program to ensure the continued integrity of their pipelines. The indictment alleges that PG&E “knowingly and willfully” failed to address recordkeeping deficiencies and failed to investigate the seriousness of threats to its pipelines. Specifically, it is alleged that PG&E disregarded serious known threats to the pipeline at issue and knowingly relied on erroneous and incomplete information when evaluating it. PG&E faces a penalty of $500,000 per count, or $6 million.

U.S. Attorney Melinda Haag stated that the “indictment is an important step in providing justice for the individuals, families and community devastated by the 2010 pipeline explosion and fire in San Bruno.” Critics of the PG&E prosecution, however, question whether justice will be served, absent the indictment of the individuals responsible. For example, Jane Barrett, professor of law and director of the Environmental Law Clinic at the University of Maryland Francis King Carey School of Law, said in an interview with Forbes that the PG&E prosecution will have little deterrent effect, since the decisions “to ignore the law and to fail to do what is required are made by people and not a faceless corporation.” She further said that the penalty PG&E was facing was “ridiculously low” and noted that “if all you do is fine corporations, the fines become a cost of doing business and the laws are meaningless.”

Policecriminal_124156036.jpgThe PG&E indictment raises a difficult question: When should a corporation be criminally charged? The United States Attorneys’ Manual recognizes that prosecuting corporations “enables the government to be a force for positive change of corporate culture, and a force to prevent, discover and punish serious crimes.” According to the manual, prosecution of corporations is beneficial to the public because, for instance, “corporations are likely to take immediate remedial steps when one is indicted for criminal misconduct that is pervasive throughout a particular industry, and thus an indictment can provide a unique opportunity for deterrence on a broad scale. In addition, a corporate indictment may result in specific deterrence by changing the culture of the indicted corporation and the behavior of its employees.”

Prosecution of a corporation, however, “is not a substitute for the prosecution of criminally culpable individuals within or without the corporation,” according to the manual. Indeed, “individual criminal liability may provide the strongest deterrent against future corporate wrongdoing.”

Corporate criminal liability, like civil liability, hinges on common-law agency principles, which hold a corporation responsible for the action of its employees, if the actions are performed within the scope of their employment or with the apparent authority of the corporation, as in United States v. Automated Medical Laboratories, 770 F.2d 399, 406-07 (4th Cir. 1985). To be attributed to the corporation, an employee’s actions must generally be performed to benefit the corporation itself, at least in part. But an employee’s violation of express instructions or corporate policies does not necessarily absolve the corporation from criminal liability, as in United States v. Beusch, 596 F.2d 871, 878 (9th Cir. 1979). A corporate compliance program designed to uncover and prevent criminal wrongdoing, however, could convince prosecutors to pursue corporate employees, rather than the corporation itself.

avatarprofilepictures_182323595.jpgOne of the main considerations for prosecutors in deciding whether to indict a corporation is the corporation’s diligence in policing the actions of its employees. A corporate compliance program that is effectively designed to prevent and detect wrongdoing and that is enforced by corporate management “may result in a decision to charge only the corporation’s employees and agents or to mitigate charges or sanctions against the corporation,” according to the manual. This is particularly the case if the program is designed to detect the particular types of misconduct most likely to occur in the corporation’s line of business.

In the PG&E case, it is alleged that the corporation failed to maintain a complete set of records to evaluate the safety of its pipelines, despite the fact that employees and state agencies informed PG&E of its deficiencies. As a result, it is alleged that PG&E did not know the actual thickness of approximately 42 percent of the pipeline that ruptured or the manufacturer of approximately 80 percent of the pipeline. In addition, it is alleged that the pipeline was installed in 1956 in violation of industry standards and had significantly less strength than was recorded and relied upon when PG&E evaluated the integrity of the line. These allegations are of institutional failure over the course of many years, not of wrongdoing by a few rogue employees.

In such situations, the prosecution of a “faceless” corporation may be the most effective way tofacelesscrowd_133941344.jpg avoid future tragedy and change the way an industry does business. The indictment of PG&E will no doubt get the attention of all corporations in the field and force them to closely assess the integrity of their lines, as well as their safety procedures. The problem is that when a corporation’s actions result in death, injury or serious property damage, a fine seems like a small price to pay. This practical limitation on corporate criminal liability may make the indictment of a corporation feel unsatisfying for victims of corporate crime and the general public.

Ultimately, criminal penalties against corporations are designed to ensure that corporations are actively and effectively policing their employees to make sure that the law is being followed and that the public is safe. If this role is taken seriously, tragedies like the San Bruno pipeline rupture should be avoided. Further, if a corporate crime is committed despite an effective corporate compliance program, it should be easy to identify the rogue employees who violated the law and enable prosecutors to effectively pursue the specific individuals who are responsible and who should be held accountable for their crimes.

Published in The Legal Intelligencer on April 16, 2014.

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Consumers & Binding Arbitration – Company Websites & Social Media

By Hayes Hunt & Jeffrey Monhait

coupons.jpgCan a company require that you give up your right to sue the company if you download a coupon from the company’s website?  What if you “like” one of the company’s products on Facebook?  Over the last month, General Mills raised these questions, and then quickly responded to consumer backlash.

In early April, General Mills quietly changed the legal terms on its website, ostensibly to require a consumer who received any sort of benefit from General Mills to vindicate any complaints via email negotiations or binding arbitration.  Consumers and the media were vocal in opposing the new policy, especially after an April 16 report by The New York Times.  Last weekend, in response to this backlash, General Mills reverted back to their original legal terms of use.

For the company, arbitration policies make perfect sense, as litigation is expensive for everyone involved.  In particular, there has been a swell in consumer class action litigation over the last few years.  As recently as March 26, a California federal court denied General Mills’ motion to dismiss three class actions alleging that General Mills deceptively advertised its Nature Valley products as “100% Natural” when they contained processed ingredients.  See, e.g., Janney v. General Mills, No. 12-cv-03919, 2014 U.S. Dist. LEXIS 41452, at *2 (N.D. Cal. Mar. 26, 2014).  

While rescinding the new policy, General Mills postured that arbitration was good for consumers as well: “We rarely have disputes with consumers – and arbitration would have simply streamlined how complaints are handled.  Many companies do the same, and we felt it would be helpful.”  See Foster, We’ve listened.  Although these arbitration policies are typically one-sided in favor of the companies, the Supreme Court has expressed a clear preference for enforcing arbitration clauses, even where state contract law would render them void as unconscionable.  See, e.g., AT&T Mobility v. Conception, 131 S.Ct. 1740 (2011).  However, many trial courts, ine-coupon.jpg weighing the enforceability of an arbitration clause, allow discovery into issues such as whether an adversary agreed to the arbitration clause.  See, e.g., Porreca v. The Rose Grp., No. 13-1674 (E.D. Pa. Dec. 11, 2013).  Therefore, although companies like General Mills are in a favorable position to enforce arbitration clauses, it is unlikely that a court would allow a mere post on a website, without any explicit consumer agreement, to thwart all consumer lawsuits.

Notably, this particular example demonstrates the power of social media as a tool for navigating the tricky relationships between companies and consumers.  Rather than resorting to protracted litigation to determine the enforceability of its new policy, General Mills responded to consumer complaints.  The lesson for company and consumer is to find prompt and practical resolutions to disputes before insisting on  litigation.

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Maintaining Privilege With Consultants – Practical Guide

By Hayes Hunt and Arthur Fritzinger

building.jpgPreviously, we talked about the legal standards applied to claims of attorney-client privilege between a company’s general counsel and outside consultants. Now, let’s talk about practical tips for maintaining that privilege.

We explained the two different approaches that courts have taken to claims of privilege between a company’s general counsel and outside consultants. The majority of courts have protected these communications if they meet the traditional requirements for application of the privilege in the corporate context, and the consultant is the “functional equivalent” of an employee. As with employees, under the majority approach, communications with consultants are privileged if, by virtue of their role, those consultants possess or have access to confidential information necessary for the provision of legal advice.

A minority of courts, however, impose the additional requirement that the consultant be hired to perform a function necessary to actual or anticipated litigation. Under this approach, even if confidential and necessary for the provision of legal advice, communications with consultants are not protected if they are hired to perform routine business functions. 

confidential1.jpgWith these standards in mind, general counsel can take a number of steps to protect confidential communications with outside consultants from disclosure.

Fundamentally, it is critical to carefully define the circumstances of the consultant’s work for the company. Counsel should be heavily involved in drafting the consulting agreement during the initial engagement and, if you have a standard initial agreement, update it. Under either standard, confidential communications will only be privileged if the consultant is considered the “functional equivalent” of an employee. Courts consistently focus upon whether the consulting agreement includes characteristics that are typical of an employment relationship in deciding whether the privilege should apply.

For example, courts have found that requiring the consultant to sign confidentiality and noncompete agreements weigh strongly in favor of protecting the privilege. Similarly, managerial or supervisory control over the consultant are strong indicators that the consultant is the “functional equivalent” of an employee. Identifying which specific individuals will be assigned by the consultant to perform work for the company will also be helpful. If it is practical to do so, reserve some office space at the company for the consultant’s use. Essentially, the closer the relationship between the consultant and the company, the more likely it is that a court will find the relationship to be worthy of protection.

expert3.jpgExplicitly defining the consultant’s role is particularly important if the company becomes involved in litigation in a jurisdiction that has adopted the more restrictive application of the privilege. Under this standard, communications are only privileged if the consultant was hired to perform a function “necessary in the context of actual or anticipated litigation,” according to In re Bristol-Myers Squibb Securities Litigation, No. 00-1990 at * 4 (D.N.J. Jun. 25, 2003). Accordingly, if a consultant’s work for the company can reasonably be characterized as being related to ongoing or potential litigation, reference to that issue, or the specific litigation, should be made in the retention agreement.

In many cases, particularly where the consultant is hired in the regular course of business to provide long-term or recurring services, this may not be possible. Many times, however, companies obtain outside consultants to provide independent evaluations or public relations advice about pivotal issues that could potentially lead to litigation. Indeed, companies spend nearly $4 billion annually on public relations alone. Where reasonable to do so, it should be explicitly stated in the initial agreement, or in subsequent writings, that the consultant’s work relates to an issue that could potentially be the basis of future litigation.

lightbulb.jpgDefining the consultant’s role in writing is important even under the majority approach. Communications will only be privileged if they relate to confidential information shared with consultants because of their work with the company. Permitting a consultant to have access to confidential information that is not necessary to the work he or she is performing may result in waiver of the privilege. Thus, it is crucial that the consultant’s role is unambiguous from the beginning and that the consultant is only allowed to access information related to that role. A clear engagement agreement that defines the consultant’s role can serve as a valuable reference when deciding what information to share with the consultant as their work continues to progress.

Companies can also implement policies during the course of the consultant’s work that will help protect the confidentiality of communications with counsel. Any confidential communications made for the purposes of providing or obtaining legal advice should be clearly identified. They should also be kept separate from communications that have only a general business purpose. It may be difficult for a court to later determine whether a message between corporate counsel and outside consultants is privileged if it is sandwiched between statements that are commercial in nature. Keeping legal and commercial communications separate, to the extent possible, will help avoid redaction and in camera review during later litigation.

Additionally, as with internal confidential communications, it is important to limit the dissemination of statements made by consultants to the company’s general counsel. Simply including counsel on an email sent to a large number of people will not be sufficient to maintain privilege. Ideally, communications that are intended to be privileged should be made directly and privately to counsel. Counsel should take on the responsibility of following up on the information provided by the consultant. While it is not always practical to have one-on-one communications with counsel, generally limiting the number of recipients is a strong indicator to courts that the information was intended to be kept confidential.

policy.jpgEach of these elements should be included in the company’s written policies for retaining and communicating confidential information to outside consultants. Counsel should be involved in drafting and reviewing the retention agreement to be sure that it includes the provisions mentioned above. Employees should be made aware of the company’s policies for communicating with consultants. Those policies should be in writing and made easily available. It is impossible to anticipate whether specific communications will later become the subject of litigation or a criminal investigation. Consistently controlling the circumstances of the consultant’s relationship with the company, and maintaining good communication practices throughout the consultant’s engagement, are the only way to reliably protect the company’s attorney-client privilege.

Make it your policy.

Originally published in The Legal Intelligencer on March 19, 2014.

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Posted in Corporate Compliance
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Hayes Hunt concentrates his practice in the representation of individuals, corporations and executives in a wide variety of federal and state criminal law and regulatory enforcement matters as well as complex civil litigation. Hayes is a partner in the firm's Commercial Litigation Department as well as its Criminal Defense and Governmental Investigations Group.
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