When Deputy Attorney General Paul McNulty published his new guidelines for corporate investigations, the in-house bar reacted with a tentative sigh of relief. While the new memo promised the DOJ would be more judicious in its demands for privileged documents and would not hold refusal to waive privilege against a company, it also left some lingering questions.

First, the McNulty Memo addresses only the practices of the DOJ and is powerless to change policies at the SEC, FCC, FTC and other agencies, which can be just as aggressive in their demands for waivers. An even greater concern is that whenever a company willingly gives the government privileged information, third-party litigants get free access to use that information in civil suits against the company–effectively punishing any company that cooperates with the government.

The in-house legal community has long suggested selective waiver–a rule that would allow a company to disclose information to a government agency without waiving the privilege with regard to private entities–as a potential solution to this problem. And during the past several months, that idea has picked up a great deal of steam. At press time, the Supreme Court's advisory committee on the Federal Rules of Evidence was on the verge of finalizing revisions to FRE 502(c) that would make selective waiver a reality.

“The McNulty Memo set off a steamroller effect,” says Rebekah Poston, a partner at Squire, Sanders & Dempsey. “The revised rule is going to pass. People from all sides want it to happen.”

But selective waiver may not prove to be the panacea some hope it will be. And some are concerned it will make the waiver quagmire even worse.

State Uncertainty

One thing the new rule will do is resolve a disagreement between federal courts about whether selective waiver is allowed under federal law. The vast majority of circuits currently hold that once a company shares a piece of information with an outside party, the privilege is permanently waived. The 8th Circuit is the only federal appellate court to allow a company to waive the privilege to the government but still assert it against other parties. The 4th Circuit has recognized selective waiver in the limited circumstance of opinion work-product, reasoning that federal law gives an attorney's legal analysis a higher degree of protection than it does to facts revealed in an investigation. The rest of the circuits have rejected the idea outright.

“The new rule will take the dice rolling out of giving information to the government under a confidentiality agreement,” says Doug Houser, a partner at Bullivant Houser Bailey in Portland. “Judges will have a clear rule to follow in upholding the validity of those agreements.”

But increased certainty in federal court only tells half the story. The wording of the revised Rule 502 explicitly says that state court rules regarding privilege apply to state court proceedings–meaning that a plaintiff could sue in a state court that does not recognize selective waiver and force a company to turn over documents it had given to a federal or state government agency.

“With the current wording of the provision, a company has no certainty that a confidentiality agreement with a federal agency will mean anything,” says Carol Cure, an in-house attorney at an Arizona-based company, who testified before the advisory committee about the rule change in January. “There's a high likelihood that many venues will not recognize it as valid.”

However, as a practical matter, most lawsuits that follow on the heels of a federal investigation or regulatory inquiry will involve federal laws and, therefore, will have to be tried in federal court. But Lauren Rosenblatt, an associate at McGuireWoods, notes that in certain areas of law where state laws closely mirror federal law–such as securities law–plaintiffs would be able to craft claims that could stay in state court while

still capitalizing on the fruits of a government investigation.

Ripple Effects

On top of the risks in state court, many in-house counsel have expressed concern that the creation of a selective waiver will make it harder for a company to resist a government request for privileged information and increase the likelihood that prosecutors will interpret refusal to waive privilege as an admission of wrongdoing. The logic behind this concern is that a company would theoretically have nothing to lose by providing information to the government unless it was guilty of illegal activity.

“This could fuel the government to use abusive or coercive tactics,” Cure says. “The McNulty Memo and the amendment are encouraging, but it still needs to be made clearer that waiver should be a voluntary decision and that charging decisions should not be based on whether a company waives privilege.”

There are also some troubling ambiguities as to the scope of the revised Rule 502. It's unclear, for instance, whether the rule would allow multinationals to protect information they disclose in the scope of an investigation by a foreign regulator. It's also questionable whether the rule applies to information disclosed in routine inspections by government agencies or only to situations that may result in litigation or enforcement actions. A particularly troubling issue is the lack of clarity about whether a company could disclose privileged information to an auditor while retaining its claims to privilege against outsiders.

“The big accounting firms put a lot of pressure on companies to give them privileged documents,” Poston says. “This rule doesn't address what happens in those circumstances.”

Despite these problems, there's still a consensus that the new rule will be a significant improvement over the current situation. “The truth is that the government has means of getting the information that it seeks–either by cooperation or through the judicial process,” Rosenblatt points out. “At least with the revision, companies get comfort that if they try to expedite the investigation by cooperating they're not ultimately helping third parties sue them.”

Finding Fixes

That better-than-nothing logic is exactly why almost every observer believes the advisory committee will approve the revised rule within the first half of 2007, probably without substantial changes.

And that might not be a bad thing. If the rule goes into effect in its current form, bar associations or Congress may find ways to plug some of the loopholes it creates.

For instance, the ABA is encouraging all state bar associations to form committees to consider adding selective waiver to state court evidence rules. And many states have already created such committees. Further, Poston says, many state court rules of evidence follow the federal rules. So it may only be a matter of time before state courts adopt the new federal rule, giving companies a higher degree of certainty that waivers made to the federal government or state agencies will not be held against them in state litigation.

Finally, there is a possibility that when the Supreme Court passes the revision along to Congress for its approval, the judiciary committee might take steps to address some of its problems.

“Congress could take action to strengthen the rule,” Rosenblatt says. “With the current wording, people are not sure that it's going to work.”