United States: U.S. Sentencing Commission to Rescind Guideline That Conditions Sentencing Leniency on Waivers of Attorney-Client Privilege

The U.S. Sentencing Commission, which establishes criminal sentencing policies and practices for U.S. federal courts, has voted unanimously to rescind a controversial sentencing guideline that purports to condition leniency in sentencing on a business’s waiver of attorney-client privilege. This will take effect on November 1, 2006 unless Congress modifies or rejects the Commission’s decision.

Section 8 of the Sentencing Guidelines provides for sentence reduction in exchange for the accused organization’s cooperation during an investigation. The section sets out a formula that weighs the organization’s unlawful acts (e.g., tolerance of criminal activity, prior history of criminal activity, obstruction of justice) against its acts of contrition and cooperation (e.g., self-reporting, cooperation with investigation, acceptance of responsibility) to arrive at a "culpability score" for the purposes of sentencing.

In 2003, the Commission proposed amendments to section 8 in light of Sarbanes-Oxley and the climate of heightened corporate responsibility. One proposed amendment to the commentary to section 8C2.5 provided, "Waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score…unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization." This amendment took effect in 2004, despite opposition from the defense bar and in-house counsel, who argued that the amendment would (a) chill corporations’ incentives to conduct internal investigations; (b) discourage employees’ willingness to cooperate with in-house counsel; and (c) expose corporations to claims from the plaintiffs’ bar.

Opponents of the amendment renewed their attack a year later. A coalition that included the National Association of Criminal Defense Lawyers (NACDL), the Association of Corporate Counsel (ACC), the American Bar Association, the U.S. Chamber of Commerce and a group of nine former attorneys general, deputy attorneys general and solicitors general urged the Commission to reconsider the amendment. In testimony before the Commission, witnesses cited a survey of 800 inside and outside counsel conducted jointly by NACDL and ACC that found that 85% of outside-counsel respondents reported that the Department of Justice and the Securities and Exchange Commission frequently require "discussions" of waiver as part of settlement negotiations (i.e., in deciding whether to charge a company, accept a plea or settle civilly). More than 96% of outside corporate counsel reported that the amendment hinders an organization’s efforts to enforce and improve its internal compliance systems. In response, the Department of Justice argued that allegations of widespread demands for waiver were false—noting that one of the largest and busiest U.S. attorneys’ offices (the Southern District of New York) had requested a waiver in only four cases since the amendment took effect. In the end, however, the opponents of the amendment prevailed as the Sentencing Commission voted unanimously (6–0) to delete the relevant language from the commentary to section 8C2.5.

Rescission of this provision in the Sentencing Guidelines will allow organizations to earn sentence reductions without waiving the privilege. Preserving the privilege during an investigation will not only increase the efficacy of internal investigations (by encouraging employees to speak candidly and confidentially with in-house counsel) but also reduce an organization’s exposure to civil liability—especially in light of recent decisions holding that the privilege has been waived as regards all third parties by virtue of disclosure to government prosecutors and regulatory agencies.

Although this is a victory for businesses because no longer can the government condition sentence reductions on waiver of privilege, it is important to note that government prosecutors and regulators are still free to seek waivers of the privilege despite the Commission’s action. For example, the Department of Justice still takes into account an organization’s willingness to disclose results of internal investigations and waive the privilege in determining whether to charge an organization with criminal wrongdoing. Businesses are likely to still feel pressured to waive the privilege in order to resolve investigations before formal charges are filed.