Wednesday, October 14, 2009

Upjohn Warnings in Entity Investigations (10/14/09)

In United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009), a nontax criminal case, the Ninth Circuit rejected a corporate officer's claim that his interview by attorneys representing the corporation in an internal investigation and representing Ruehle in related civil litigation. There was a dispute between Ruehle and the attorneys as to whether the attorneys had given the so-called Upjohn or "corporate Miranda" warning. See Upjohn Co. v. United States, 449 U.S. 383 (1981). The attorneys, not surprisingly, claimed that they had given the warning. Ruehle testified he could not recall that they did. The district court "seems to have disbelieved the Irell lawyers who took no notes nor memorialized their conversation on this issue in writing, and it apparently credited Ruehle's testimony that no such warnings were given." (See n.3.)

The Court of Appeals held, however, that Ruehle's assertion of attorney-client privilege to the communications failed. The court repeated its version of the standard attorney-client privilege definition as follows:
(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived.
The party asserting the privilege must prove the existence of each element. Here, Ruehle failed to meed the fourth element -- that the communication be made in confidence. Ruehle understood that the fruits of the investigation would be made available to the accountants.
The salient point from a privilege perspective is that Ruehle readily admits his understanding that all factual information would be communicated to third parties, which undermines his claim of confidentiality to support invoking the privilege. Ruehle's subjective shock and surprise about the subsequent usage of the information he knew would be disclosed to third-party auditors--e.g., information subsequently shared with securities regulators and the Justice Department now used to support a criminal investigation and his prosecution--is frankly of no consequence here.
These issues of course arise in entity investigations arising from tax cases. Upjohn itself was a tax case, and the issue has arisen in other tax cases (e.g., the KPMG prosecution).


  1. Jack,

    Excellent analysis!

    I agree with the 9th Circuit that the district court committed clear legal error in applying “reasonable belief” standard under the California attorney-client privilege instead of the eight-part standard attorney-client privilege under federal law. Ruehle, _ F.3d at _ (citing United Statesv. Bauer, 132 F.3d 504, 510 n.4 (9th Cir. 1997) (quoting Clarke v. Am. Commerce Nat. Bank, 974 F.2d 127, 129 (9th Cir. 1992)). As the Ruehle Court explained,

    “By approaching the exclusion question with a presumption that the privilege attached, the district court inverted the burden of proof, improperly placing the onus on the government to show what information was not privileged. See Gordon v. Superior Court of L.A. County, 65 Cal. Rptr. 2d 53, 59 (Cal. Ct. App. 1997) (“[C]ommunications between a lawyer and his client are presumed confidential, with the burden on the party seeking disclosure to show otherwise.” (citations omitted)).As the party asserting the privilege, Ruehle was obliged by federal law to establish the privileged nature of the communications and, if necessary, to segregate the privileged information from the non-privileged information. See Bauer, 132 F.3d at 507.

    Ruehle, _ F.3d at _.

    Under the applicable federal standard, the CFO failed to show the communications met the fourth element, that is, that the communications were “made in confidence” but instead were made “for the purpose of disclosure to the outside auditors.” The district court’s factual finding that a reasonable expectation of confidentiality was clearly erroneous.

    According to the Ruehle Court, the record clearly showed that the CFO and others understood the results of the investigation would be provided to the auditors “to convince the independent auditors of the integrity of Broadcom’s financial statements to the public, or to take appropriate accounting measures to rectify any misleading reports.” Ruehle, _ F.3d at _. As the head of the finance department, defendant Ruehle was aware of the disclosure obligations concerning financial matters to the outside auditors. The Court justifiably concluded:

    “Ruehle freely and voluntarily disclosed the information in June 2006 and did not mention an individualized privilege until nearly two years later, after having sat in on the very meetings where his allegedly-privileged information was disclosed. Ruehle’s assertion about his subjective intent in 2006 cannot sustain his privilege claim when he has freely admitted that the disclosure to Ernest & Young was planned. In sum, the overwhelming evidence demonstrates that Ruehle’s statements to [outside counsel] Heitz and Lefler were not “made in confidence” but rather for the purpose of outside disclosure. Accordingly, we hold that Ruehle has failed to meet his burden of establishing the existence of an individual attorney-client privilege with respect to the information provided to the Irell attorneys in the June 2006 time frame.
    Ruehle, _ F.3d at _ (citation omitted).

    As the Ruehle case clearly notes, federal privilege and not state law governed resolution of the waiver issue. The case is quite useful for considering how the circuit framed and considered the issues. On the facts of the case, the communications given during the internal investigation were waived and could be used in the subsequent criminal prosecution.



    1. Bad facts often make bad case law. The Ruehle decision is one such instance.

    2. Clearly, Mr. Ruehle, an accomplished and thoroughly sophisticated financial professional, attempted to abuse the attorney client privilege. The trial court did not get it right on the essential facts nor the applicable law. The trial judge applied the attorney client privilege jurisprudence applicable in the California state court system and not in the federal courts. The 9th. Circuit got it right and afforded the government the opportunity to properly use the evidence that knowingly and voluntarily came right from Mr. Ruehle's mouth.

    3. The 9th. Circuit's decision should serve as a clear and fair warning to anyone who wants to make sure that his or her rights and privileges are not waived that he or she must invoke the same clearly, early, often, consistently, and most important, with specificity. This is because, as a matter of applying the rule of plain common sense, a court (trial or appellate) is not likely to respect one's rights or privileges any more than the holder of the same.

    4. The 9th Circuit must be commended for taking the opportunity to educate the legal profession as well as the general public not only on the intricacies of the attorney client privilege but, much more importantly, on the highly nuanced distinctions between the remedies of "suppression" (including suppression of "fruits") and exclusion of evidence embraced by an evidentiary privilege. Indeed, I can sum up this decision with two words: very edifying.

  3. The following posting are excerpts from attorney Gregory P. Joseph's comments ( on the 9th. Circuit's decision in Ruehle. I am offering the same in an effort to impress upon your readers, especially your students, that any contemplated disclosure to third parties, including government officials, means that the statements were not conveyed in confidence, and are, thus, unprivileged.

    Planned Disclosure to Auditors and Government Means Statements Not Given in Confidence

    First, there is no dispute that Broadcom had an existing attorney-client relationship with Irell and, by electing to reveal the information gathered to Ernst & Young (and later to various agencies of the United States), deliberately waived any corporate attorney-client privilege it held with respect to all matters at issue. Second, the Equity Review and the civil securities suits, to which Ruehle was a party, both concerned the same general subject matter as of June 1, 2006 — i.e., the stock option granting practices of Broadcom. Finally, the district court concluded as a fact that Ruehle reasonably believed that Irell represented him individually with respect to the ongoing civil lawsuits when the June 1, 2006, meeting took place. Because this factual finding is not clearly erroneous, we approach the parties' arguments from the perspective that Irell had attorney-client relationships with both Broadcom and Ruehle individually.

    We, however, must inquire further. After all, "[a] party asserting the attorney-client privilege has the burden of establishing the relationship and the privileged nature of the communication." ***

    ...Typically, an eight-part test determines whether information is covered by the attorney-client privilege:

    (1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived.

    *** With the burden properly on Ruehle, and after carefully reviewing and evaluating the record, we hold that Ruehle fails the fourth element of the traditional eight-part privilege test. Ruehle's statements to the Irell attorneys were not "made in confidence" but rather for the purpose of disclosure to the outside auditors. That he might regret those statements after later learning of the subsequent corporate disclosure to law enforcement officials is not material to the privilege determination as of June 2006. ***



    I hasten to add that anything one says to another in the course of a professional relationship, including an attorney-client relationship, that is in any way intended to be conveyed to a third party is unprivileged. The scope of such unprivileged statements include but are certainly not limited to the following:

    1. Statements made to attorneys in connection with regulatory filings with the SEC or state securities administrators. Indeed, statements made in compliance with the requirements of Sarbanes-Oxley readily come to mind.

    2. Statements made to attorneys and CPAs that are intended to be conveyed in filings of informational and tax returns to the IRS, the Cal FTB or any other state, local or tribal revenue agency.

    3. Statements made to attorneys in connection with the preparation of petitions, schedules, statement of financial affairs, statement of intention or any other public filings in a pending or contemplated case or proceeding (including certain core and non-core Adversary Proceedings governed by Fed.R.Bank.P. 7001, et seq., and contested matters governed by Fed.R.Bank.P. 9014) under the US Bankruptcy

    The bottom line: The attorney client privilege is narrowly construed because it is in outright derogation of our time-honored common law rule of law that the public, especially our courts and grand juries, are entitled to the evidence held by every man, woman and child (competent to testify). Accordingly, anyone invoking an evidentiary privilege such as the attorney client privilege, must, as a matter of federal common law, assert and demonstrate that each and every communication (including statements on an item-by-item, line-by-line, if necessary) he or she claims as privileged comes within the ambit of the privilege.

    If there is any failure of proof, then the communication/statement is unprivileged and may be subjected to evidentiary use so long as it otherwise complies with the requirements of applicable law (i.e., as a general proposition, in the context of a court proceeding the statement is: (1) authenticated; (2) not hearsay or falls within a recognized exception the hearsay rule; (3) relevant (alternatively, per FRE 403 analysis, the relevancy is not substantially outweighed by prejudice to another party's substantial rights); and, (4) the original evidence/best evidence (unless, of course, one is not attempting to prove the contents of a document/record or another exception to the original evidence rule applies).

  5. Jack,

    I want to offer your readers, especially your students, the 5th Circuit's decision in In re: Grand Jury Subpoena, 419 F.3d 329 (5th Cir. 2005) as a source of authority for the proposition that the crime-fraud exception to the attorney-client privilege does not necessarily extend to all communications during the course of an attorney-client relationship.

    Here is the 5th. Circuit's decision in a nutshell.

    The government subpoenaed Appellant’s former counsel, seeking his testimony and notes relating to Appellant and his girlfriend. Counsel refused, citing the attorney-client and attorney work-product privileges. The government contended that the crime-fraud exception to the attorney-client privilege and work product privilege warranted an order compelling counsel to comply with the subpoena. The district court ordered counsel to appear for an in camera examination of Appellant’s and his girlfriend’s statements and recordings. The district court then ordered all materials produced, and Appellant appealed on the grounds that the government had failed to make a prima facie showing that Appellant’s or his girlfriend’s communications with counsel were made for the specific purpose of furthering a crime or fraud.

    The Fifth Circuit reviewed its own cases and those of other courts before holding that "the proper reach of the crime-fraud exception when applicable does not extend to all communications made in the course of the attorney-client relationship, but rather is limited to those communications and documents in furtherance of the wrongful conduct." 419 F.3d at 343. In this case, the government was not entitled to former counsel's entire file and information because the government had failed to prove that Appellant and his girlfriend had used counsel to obtain legal advice in aid of their perpetration of a crime or fraud. The government would only be entitled to discover documents or communications with counsel that were in furtherance of the wrongful conduct. The Fifth Circuit remanded the case for further proceedings, including a possible new and more focused, or better supported, government subpoena.


    The 5th. Circuit's decision strikes a reasonable balance between a criminal defendant's right to counsel and right to confidentiality with the government's potential need for information when the defendant abuses the attorney-client relationship.

    Three things I wish to point out:

    1. In this as in other recent cases, counsel's ignorance of a client's intended wrongs does not mean the crime-fraud exception does not apply since this exception is governed by the client's intention. Indeed, counsel's knowledge or belief about a client's intended wrongs are, for the most part, irrelevant.

    2. Although this was a criminal case, it seems likely that the 5th. Circuit would have readily taken the same approach to a civil case.

    2. While the court found that the government had not substantiated its demand for access to the entire file, it may well be that, on further post-remand proceedings, the government's burden in such circumstances would not be impossible to meet.

  6. Jack,

    Here is another posting I have excerpted from attorney Gregory Joseph's publication (

    State Ethics Violation Does Not Warrant Federal Suppression of Evidence

    "[A] state rule of professional conduct cannot provide an adequate basis for a federal court to suppress evidence that is otherwise admissible." United States v. Lowery, 166 F.3d 1119, 1124 (11th Cir. 1999); accord United States v. Keen, 508 F.2d 986, 989 (9th Cir. 1974) ("[E]vidence obtained in violation of neither the Constitution nor federal law is admissible in federal courts, even though obtained in violation of state law." (citations omitted)). To be clear, in some cases, material protected by the attorney-client privilege may come to light as a result of counsel's breach of a duty of confidentiality. But it is the protected nature of the information that is material, not the ethical violation by counsel. See Int'l Bhd. of Teamsters, 119 F.3d at 217 (holding that an individual could not assert individual privilege even though the law firm failed to clarify that it represented only his employer, in violation of state rules of professional responsibility).


    A few things:

    1. I agree with Mr. Joseph's views.

    2. It is imperative that we not confuse the Bar's (and the lore of the legal profession's) requirements for respecting client confidentiality with the attorney-client privilege. The former is an ethical rule that, generally speaking, does not afford a private party a substantial legal right. The latter does afford critically important procedural and substantive rights, but generally speaking, does not provide for protection from the derivative use of evidence unlawfully obtained in violation of that privilege. For example, an attorney who discloses communications protected by the attorney-client privilege to a judge, prosecutors or law enforcement could, under existing law, enable the proper authorities to search out evidence that could establish probable cause for a search warrant, arrest or even an indictment, for that matter. However, the attorney's disclosure of such privileged communications may not be introduced into evidence in an actual court proceeding. See Robert P. Mosteller, ADMISSIBILITY OF FRUITS OF BREACHEDEVIDENTIARY PRIVILEGES: THE IMPORTANCEOF ADVERSARIAL FAIRNESS, PARTYCULPABILITY, AND FEAR OF IMMUNITY, 81 Wash. Univ. Law Quaterly 961 (2003) (Link to that Article here:

    3. I would definitely urge your readers, especially your students, to read Professor Mosteller's article. As a preliminary matter, I would suggest that they can capture the essence of why Professor Mosteller's article is so important to gain a clear understanding of this important topic, by their immediate and searching review of the same, at pp. 961-969.

    I thank you, again, for the opportunity to share my observations with your readers, and especially your students.

  7. Anonymous,

    Another great commentary. Thanks.

    I am digesting all of your comments (more to follow), but I do comment on your point that federal privilege law rather than state privilege law applies. I know you are fond of Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960). I think that case relied heavily on California law, but I think now it is uniformly recognized that it is the federal common law of privileges that applies.

    I will post your later comments and make such further comments as I have time to formulate.

  8. Anonymous,

    On your posting at 10:42am, you make the point that information the client divulges to the lawyer for further dissemination outside the attorney-client relationship does not qualify for the privilege. There is the statement in some cases that information divulged to the tax return preparer (whether a lawyer or not, but see Judge Posner's analysis in United States v. Frederick, 182 F.3d 496 (1999)) are not privileged under attorney-client or its return preparer counterpart in Section 7525 because intended to be disclosed on the return.

    The problem is that all such communications are not intended for disclosure. Rather, a client comes in with a hodge-podge of information, and asks the professional (lawyer or tax preparer, it doesn't matter since under Frederick the test is the same) to help him sort through what should be disclosed as reporting positions on the tax return. Does that mean that all of the client communications are are intended for further dislcosure and not privileged? I don't think so. Does it mean that only the client communications that get placed on the return has its privilege waived. Certainly, the attorney client privilege for that particular piece of the client communication is waived, but what about the whole conversation that surrounded that piece of information affirmatively reported on the return? I don't know, but I think the privilege would still exist with respect to all of the rest (perhaps even a work product privilege might exist). And there are even further permutations that make any notion that just because some piece of client communications is disclosed and thus waiver, the rest is. I think the courts may do some type of subject matter waiver analysis, but haven't dug into that yet.

  9. Jack,

    I agree with Judge Posner's analysis in US v. Frederick. Judge Posner draws a clear distinction between accounting/tax return preparation services and legal services. Judge Posner also strikes the proper balance between privileged and unprivileged communications.

    A few more observations on this subject as well as on the closely related subject of Kovel (or, used as a verb, "Kovelizing" professionals such as accountants):

    1. I like your article entitled "Tax Return Preparation and the Attorney Client Privilge" (September 2000) (Link:

    2. I found your article entitled "The Accountants' Role- And Risks - In Koveling (September 2000) (Link: very edifying and would commend the same to your readers, especially your students.

  10. Continuing my previous posting on "Kovel", I would like to recommend that your readers, especially your students, take a close look at "Attorney-Client, Work-Product, and Fifth Amendment Privileges in Tax Practice and Litigation", authored by Steven Z. Kaplan (March 2001)

    Here is an important excerpt from that article:

    II. Adlman Expands The Potential Availability Of The Work-Product Privilege.
    In U.S. v. Adlman, 134 F.3d 1994 (2d Cir. 1998), a corporation contemplating a reorganization retained an accounting firm to study the possible tax consequences of the proposed transaction that might result in a claim for refund of more than $200 million of tax. In support of its analysis, the accounting firm provided the corporation with a 58-page memorandum discussing every conceivable tax law consequence of the proposed reorganization. After the corporation had filed its claim for refund, the IRS sought production of the memorandum because neither the president of the corporation nor the accountant were practicing lawyers and the communication could not have been protected by the attorney-client privilege.

    The Second Circuit in Adlman held that while there was no available attorney-client privilege, the memorandum might still be privileged as "work-product" if it had been prepared "in anticipation of litigation," a phrase meaning that litigation is not merely possible or foreseeable, but most likely certain. The Court of Appeals recognized that the preparation of the memorandum could conceivably have been "in anticipation of litigation," given that the claim for refund was so staggeringly high that the denial of the claim and the need to commence a refund suit were moral certainties. The Second Circuit concluded that the accountant's memorandum might have been prepared "in anticipation of litigation," even though, at the time that the memorandum had been prepared, the reorganization had not yet been consummated, no claim for refund had yet been filed, and any litigation would not commence until years later.

    (Of course, had the taxpayer retained a lawyer to advise it regarding the possible tax consequences of the proposed reorganization and had that lawyer, in turn, retained the accounting firm to provide the memorandum to him, the attorney-client and work-product privileges might have protected the memorandum. The failure to do so relegated the taxpayer to the relatively weak claim of "work product," which was ultimately rejected after the Court of Appeals remanded the case to the district court for findings as to whether that privilege could apply.)

    Id. at Part II.


    I agree with Mr. Kaplan's position.

  11. Continuing on "Kovel", I would recommend that your readers look at "The IRS v. Attorney-Client Privilege: Wrestling Secrets From Your Client", authored by Gary D. Borek (May 1999) (Link:


    This article is very edifying. The author takes us from Kovel (1961) to Adlman, Ackert and Fredrick. It has a good deal of humor.

  12. Here is a link to a good "Kovel" letter for an accountant:

  13. Jack,

    Ralph McCullough with Chris Whelchel and Sharyn Epley (2003) (Link: This article deals with the ability of a bankruptcy trustee to unilaterally waive a debtor's attorney-client privilege.

    Although this article does not deal with tax controversies, many taxpayers file for bankruptcy. I think that it would be reasonable for tax/white collar defense lawyers to be aware that their clients could, by the mere act of filing a voluntary bankruptcy petition, empower the trustee or other parties in interest to unilaterally waive the attorney-client privilege. NB: See 11 USC sections 1208(b) and 1307(b), allowing debtors in cases under chapters 12 and 13 of the US Bankruptcy Code to dismiss their cases upon request.

  14. Anonymous,

    The article you cite is quite interesting and entertaining. Thanks.


  15. Jack,

    Thank you for the opportunity to share information and ideas with your readers, especially your students.


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