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Internal investigations and privilege: big challenges ahead
Practical Law UK Articles w-004-9959 (Approx. 8 pages)
Internal investigations and privilege: big challenges ahead
by Colin Passmore, Senior Partner, Simmons & Simmons
Colin Passmore, Senior Partner at Simmons & Simmons, offers his thoughts on the implications of the decision in The RBS Rights Issue Litigation, Re [2016] EWHC 3161 (Ch) on the unavailability of legal advice privilege in interview notes made in the course of an internal investigation.
Introduction
A very important decision on the unavailability of legal advice privilege (LAP) in relation to the conduct of interviews in the course of an internal investigation was handed down last week by Hildyard J in The RBS Rights Issue Litigation, Re [2016] EWHC 3161 (Ch). The only good thing to come from this decision is a possibility that it will be appealed and will thereby allow our appellate courts (perhaps even the Supreme Court) to re-examine the policy reasons behind the much criticised Court of Appeal decision from 2004, Three Rivers (No 5).
Background
Three Rivers (No 5) is well known for its restrictive approach towards the availability of LAP where the client is a corporate institution, such as a bank. The Court of Appeal held in Three Rivers (No 5) that, in such circumstances, only communications made between those authorised by the corporate to seek legal advice on its behalf and its lawyers fell within the scope of the privilege. All communications within the corporate, even where geared to generating information needed by the lawyers to provide the advice being sought, fell outside the privilege and could only be protected if they fell within the wider litigation privilege (which was not available in Three Rivers (No 5)).
The decision has been consistently criticised, not least because of the challenges it gives rise to in terms of the corporate trying to determine whether it risks generating non-privileged communications, which may be discloseable in later litigation where those communications may become relevant. Even though Three Rivers (No 5) has not been followed in Australia, has been distinguished in Singapore and rejected outright in Hong Kong, it has remained the prevailing precedent under English law for 12 years now.
Context
RBS concerned the status of interviews of current and former bank employees, conducted in circumstances where litigation privilege was unavailable. This arose in various actions concerning an RBS rights issue taken up in 2008, just before the great financial crisis broke. Many years on RBS shareholders are seeking to invoke statutory remedies against RBS under sections 87A, 87G and 90 of the Financial Services and Markets Act 2000 (FSMA 2000). They are doing so to recover substantial investment losses incurred further to the collapse of RBS shares on the grounds that the prospectus for the rights issue was not accurate or complete. The actions are due to be heard in March 2017 (albeit that recent press reports suggested that many have settled).
The claims to privilege arose out of two internal investigations, one responding to two US Securities and Exchange Commission (SEC) subpoenas and the second following certain allegations made by a former employee.
The claimants sought disclosure of transcripts, notes or other records of 124 interviews conducted by or on behalf of RBS with current and ex-employees as part of both investigations. RBS's evidence was that the only documents in existence within these categories were interview notes prepared by RBS's in-house lawyers (in respect of the second Investigation) and by a US law firm (assisted by a London firm as their agents) in respect of the first. Each was said to summarise those interviews.
There was no dispute that:
- RBS authorised each of the interviewees to participate in the relevant interviews.
- All interviewees were told that the interview notes would be, and be kept, confidential.
- The notes would be subject to what was described to them as "attorney-client privilege".
RBS asserted LAP over the interview notes, or alternatively that the interview notes were lawyers' privileged working papers. RBS also resisted disclosure on the basis that the court ought to apply the federal law of the United States of America (US law), under which the interview notes were said to be privileged.
RBS's claims to privilege did not rely on the interview notes being part of client/lawyer communications in which legal advice was sought or given; nor did RBS suggest that the interviewees were themselves seeking or being provided with legal advice. Rather, RBS accepted that the interview notes and their communication comprised information gathered from employees or former employees at the instance of RBS's lawyers for the purpose of enabling RBS to seek legal advice from its external counsel.
Recognising that Three Rivers (No 5) was a major impediment to its claims to privilege, RBS contended that, under English and US law, any communication by an employee who is authorised to communicate with a legal adviser for the purpose of their employer seeking legal advice is privileged; and that it is no part of the test that the communication should consist of instructions rather than information. Accordingly, RBS submitted that the communication of factual information (in this case, evidenced in the interview notes) gathered by or for the purpose of being provided to its lawyers was privileged, provided that the person providing and communicating information was authorised to do so by RBS.
Decision
Ruling against RBS, Hildyard J noted last month's decision in Astex Therapeutics Ltd v AstraZeneca [2016] EWHC 2759 (Ch), where Chief Master Campbell said that it was unlikely, in most circumstances where a corporation is "seeking information" from employees and former employees, that persons who merely provide that information will be the "client" for the purposes of Three Rivers (No 5) (see Legal update, Generically listing privileged documents in Part B of list of documents not sufficient (High Court)). Hildyard J agreed, noting (1) that the client, for the purposes of privilege, consists only of those employees authorised to seek and receive legal advice from the lawyer, and (2) that legal advice privilege does not extend to information provided by employees and ex-employees to or for the purpose of being placed before a lawyer. He said:
"In summary, I consider and hold that the Interview Notes, albeit that they record direct communications with RBS's lawyers, comprise information gathering from employees or former employees preparatory to and for the purpose of enabling RBS, through its directors or other persons authorised to do so on its behalf, to seek and receive legal advice. It is clear from the judgment in Three Rivers (No 5) that 'information from an employee stands in the same position as information from an independent agent'… The individuals interviewed were providers of information as employees and not clients: and the Interview Notes were not communications between client and legal adviser. I do not consider that any sufficient basis has been demonstrated for not applying Three Rivers (No 5)."
Lawyers' working papers
From there, it got worse for us litigators, because the judge then rejected the argument that the interview notes could still fall within the scope of LAP as comprising "lawyers' working papers", it being common ground that in English law such papers are protected by LAP (see the Court of Appeal decision in Balabel v Air India [1998] Ch 317).
The application of these principles to notes of non-privileged communications, made by lawyers, has long been "out there". However, to date, it is something that has not had to be addressed directly by the courts. The usual response is to demonstrate that these notes are more than verbatim records of the communications concerned, and thus inflected with the lawyer's mental impressions. (Verbatim transcripts of unprivileged interviews would not themselves be privileged; Birss J held in Property Alliance Group v RBS (No 3) [2015] EWHC 3341 (Ch), at 24: "a record of a non-privileged conversation, whether in the form of a verbatim note or a transcript, cannot itself be privileged if the underlying conversation was not privileged".) The alternative is to demonstrate that the notes were used as the basis of a communication to the client for which a claim to LAP can properly be made, as in Re Sarah Getty's Trust [1985] QB 956. As Warren J noted in Stax Claimants v Bank of Nova Scotia [2007] EWHC 1153 (Ch), one can contrast a note which records the substance of a conversation (which would not be privileged) with a note which also records "the note-taker's own thoughts and comments on what he is recording with a view to advising his client" (which almost certainly would be privileged). Clearly then, such cases depend on the evidence before the court as to the nature of the communication concerned.
Necessary evidence
Hildyard J's starting point in RBS was that if RBS was not entitled to claim LAP in relation to the interview notes, it must follow that the starting point of the analysis in relation to the lawyers' working papers was that the interviews themselves were not privileged communications. Thus, RBS had to demonstrate some attribute of, or addition to, the relevant interview notes which distinguished them from verbatim transcripts, or revealed from an evident process of selection the trend of legal advice being given, and was such as to trigger their protection as lawyers' working papers. The claim therefore involved proving facts which demonstrated that the documentation for which privilege was asserted did have some attribute or addition such as to betray or at least give a clue as to the trend of advice being given to the client by its lawyer. The burden of demonstrating this fell upon RBS.
The judge accepted on the one hand that full account had to be taken of the fact that any notes of an interview, as distinct from a bare transcript, were likely to reflect, even if only to a limited extent, the particular interests, lines of inquiry and perception of the relative importance of the points covered (including those omitted) of the person making the note. To that extent at least, such notes may be taken to reflect the note-maker's "mental impressions" (as per the US lawyers' evidence). On the other hand, it also had to be borne in mind that the "mental impressions" rubric is routinely prayed in aid in the US.
In addition, the court was entitled to scrutinise the evidence, not least as to what it did not say, as well as to what it did, in assessing the claim to privilege. As to this, he held that RBS's evidence was conclusory in nature. It was based on the assumption that because the interview notes were not verbatim, they therefore must have contained legal input or selection justifying the claim to privilege. This did not address the objection that it could not be that the mere fact that a note is not verbatim, and therefore may betray some selection or line of enquiry (as recognised above), suffices. Something more is required to distinguish the case from the norm. Nothing beyond mere conclusory assertion was offered here. For example, RBS's evidence did not show anything substantial relating to its legal team's "analysis of the documents", nor even in the most general and careful terms did it give examples of the sort of legal input said to justify, and be capable of justifying, the claim of privilege. Even the reliance on the evidence that the interview notes reflected "mental impressions" was not backed up by any assertion that such interview notes did in fact, upon careful review, contain material that would or could reveal the trend of advice:
"In short, all that has really been offered by way of discharging the burden on RBS is that (a) the Interview Notes carry the annotation as to 'mental impressions' described above because (b) they reflect preparation which reveals the lawyers' 'train of inquiry' and because (c) being a note not a transcript, some greater or lesser degree of selection is reflected. This, in my judgment, is not sufficient: the evidence is not such as to substantiate the claim to privilege on the basis of 'lawyers' working papers'. My conclusion is reinforced by the consideration that there is a real difference between reflecting 'a train of inquiry' and reflecting or giving a clue as to the trend of legal advice …".
As a last point, Hildyard J rejected the bank's attempt to have the interview notes covered by US law privilege: he accepted the long-standing practice that it was only English law rules that applied.
Conclusions:
This is a very important decision. There have been waves of internal investigations since the great financial crisis, and the issue as to how to protect employee interview notes has long challenged litigators. Any comfort that the "mental impressions" practice will work has now been blown away: litigators will really need to think about how they can, if at all, get within the privilege. Of course, there is a major policy issue at play here, which is whether litigants and the courts should have the best evidence of what an opponent's employee witnesses thought at the time, or whether clients are entitled to prepare their positions in relation to an investigation that may give rise to potentially major litigation under the cloak of secrecy. The English court in this decision has swung the balance firmly in favour of the former position. Those on the receiving end of major investigations will not welcome this decision. However, the claimant community no doubt will (as will regulators). How to summarise this decision?
- It makes clear that unless and until the Supreme Court is invited to look at these issues, the challenges presented by Three Rivers (No 5) remain. As Hildyard J ruled, the "fundamental basis" of Three Rivers (No 5) is that LAP is strictly confined to communications between a lawyer and their client for the purpose of giving or receiving legal advice. Thus, in the absence of litigation privilege, LAP will not protect communications whose only purpose is the provision of factual information by employees to lawyers.
- There is therefore a very real danger of creating discloseable material as a consequence of employee interviews, in the absence of litigation. The mere fact that these are undertaken by lawyers does not get us home (nor does the fact that they are more than mere verbatim records). Something rather more is needed (and will need to be proved) to get within LAP.
- What will be the consequences? Lawyers and their clients will now have to think very carefully about whether to record, what to record and how to share whatever they do record with the client. The one avenue not expressly closed off in this case is an advice given to a client based upon the unprivileged employee discussions. That, however, is all very well in a simple case like Sarah Getty, but it is nigh on impossible where the lawyer takes 124 detailed proofs. This is now a real problem. We must expect more such challenges to the unprivileged interview process, not least from the Serious Fraud Office (SFO), who will no doubt approve of this decision.
Additional observations by the judge
In rejecting RBS's submissions, Hildyard J made a number of other observations worth noting:
- There can be no real doubt as to the present state of the law: Three Rivers (No 5) confines LAP to communications between lawyer and client, and the fact that an employee may be authorised to communicate with the corporation's lawyer does not turn that employee into the client or a recognised emanation of the client.
- However, Three Rivers (No 5) does not require that only a specially constituted committee of the company can be the client in every case. Hildyard J said that "such a proposition would be absurd, not least since … such committees are, if not now a rarity, certainly far from invariable."
- In relation to the claimant's argument that the authorities are clear that a company may only claim privilege in respect of communications between the "client" and its legal advisers where the client is a small number of identified company employees who are authorised to obtain legal advice, the judge took this to signify:"… that a corporation would in the usual course only entrust the process of communication with a legal adviser for the purposes of seeking or receiving legal advice to a restricted, and in all probability small, number of persons."
- As to this last point, the judge toyed with the possibility that, in a corporate context only, individuals singly or together constituting part of the directing mind and will of the corporation can be treated for the purpose of LAP as being, or being a qualifying emanation of, the "client". While it was not necessary for the judge to determine whether a further corollary or implication of the decision in Three Rivers (No 5) was to restrict the meaning of "client" in this way, he suspected that such a restriction would often reflect reality:
"a corporation is unlikely to authorise an individual to seek and receive legal advice on its behalf to an individual or body which is not its directing mind and will … So I do incline to the view that only communications with an individual capable in law of seeking and receiving legal advice as a duly authorised organ of the corporation should be given the protection of legal advice privilege."
One assumes that all members of the in-house legal function would be so regarded when seeking advice from external lawyers. But nothing seems that certain these days.
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