FTC Loses Another Privilege Battle

23 September 2013 IT-Lex Technology Law Publication
Author(s): Melinda F. Levitt

IT-Lex Technology Law

In two recent cases, the FTC has brought federal court challenges to either parties’ or subpoena recipients’ claims of privilege – and so far, the FTC has lost both times. For attorneys who regularly practice before the FTC, or indeed, any federal agencies, these decisions should help navigate the difficult and often elusive boundary between what is and what is not privileged. Likewise, even for those attorneys and their clients engaged in civil litigation, both matters provide important guidance and remind us all that privilege determinations can be exceedingly difficult (and tedious!) to make, especially when dealing with large-volume electronic document productions. As loathsome as a task it may be, these opinions remind us that drawing the proper line and preparing a detailed privilege log remains a vital task for attorneys to undertake.

Turning first to the most recent decision – FTC v. Cephalon, 2013 U.S. Dist. LEXIS 129472 (E.D. Pa. Sept. 11, 2013), a class action matter – the Court was called upon to consider a challenge raised by the FTC to three categories of documents, totaling fifty-four documents, that Cephalon had withheld or produced in redacted form. These included documents that were part of Board of Director presentations; documents prepared by an outside consulting firm working with Cephalon’s employees; and, documents created by Cephalon’s non-attorney employees. In each case the court, after conducting an in camera review, sustained the claim of privilege.

Regarding the Board of Director’s minutes, the court found that the privilege was properly claimed not only where the speaker was an attorney, but also when the President of the company (a non-lawyer) was reporting on legal advice received from in-house counsel and relaying that advice to the Board to assist it in making an informed decision about possible settlement of pending legal matters. OK. But, those are pretty easy calls (although clearly the FTC did not see it that way).

But what about when the communications are between an outside consultant and its employees and the company’s employees – and no attorney is necessarily copied on those emails or other communications? Can those sorts of communications be privileged? Yes, according to the Cephalon court. In this particular case, the consultant’s employees and certain company employees were formed into a “Business Strategy Team” and were in regular communications about the company’s affairs. The FTC argued that communications involving or shared with a consultant’s non-lawyer employees who were assisting the company with business, not legal, matters could not be privileged. The court disagreed and noted that many other courts have extended the privilege to non-employees/consultants where they act “as the functional equivalent” to employees and the fact that the person(s) are not on the company’s payroll is of no meaning. Rather, “where a consultant performs a similar role to an employee, confidential communications made for the purpose of obtaining or providing legal advice should be subject to the attorney-client privilege regardless of whether the consultant was hired for a litigation or business purpose.” Cephalon, 2013 U.S. Dist. LEXIS at *33.

Based on these principles, after reviewing the documents, the court found that the challenged documents were entitled to protection, with one important exception. That exception concerned the initial engagement letter that was authored by the consulting company and which contained a description of the company’s attorney’s views about how best to achieve a certain legal goal. Because the engagement letter was drafted before the consulting company was hired, the court found that it was not acting as the functional equivalent of an employee and, therefore, the letter had to be produced unredacted. Id. at 34, n.1.

Finally, on the question of communications that either were created by or exchanged solely among the company’s non-attorney employees, the court ultimately was satisfied that these documents also were entitled to protection. First, the court noted that “a document need not be authored or addressed to an attorney in order to be properly withheld on attorney-client privilege grounds.” Id. at *37 (citing Santrade Ltd. V. Gen. Elec. Co. (150 F.R.D. 539, 545 (E.D.N.C. 1993)). Instead, the proper inquiry is whether the communication was made in order to relay information requested by an attorney or to disseminate legal advice from the attorney to the company’s employees. Id. Based on this approach – and its actual review of the documents – the court found that the writings either were responses by non-employees to questions raised by attorneys, requests by employees for legal advice from the attorneys, or attorneys’ responses to questions asked by employees. Id. at 37-40.

However, of special interest to those of us who have had privilege logs challenged, the Cephalon court did note that it was sympathetic to the FTC’s complaint that the privilege log entries were either incomplete or so vague that they were insufficient on their face to establish the application of the privilege. Id. at 38. On the other hand, earlier in the opinion, the court showed some sympathy towards Cephalon by stating that although a detailed privilege log had been submitted, the log descriptions were too general to permit resolution of the dispute without reviewing the communications themselves, but that the general nature of the log entries were necessary to some extent because the party asserting the privilege faces the difficult task of providing enough detail to establish its claim of privilege, but not so much detail that it inadvertently discloses the content of the communications. Id. at 25. Because of this tension, the court explained that its decision to review the documents in camera should not be viewed as an indication of any deficiency in Cephalon’s privilege log or support of its privilege claim. Id. The court’s sympathies to both sides notwithstanding, this portion of the opinion does little to help guide a legal team in the throes of preparing a log. Where is the line? Alas, it appears nobody really knows.


The second case concerns an FTC administrative subpoena issued to Boehringer Ingelheim Pharmaceuticals, Inc. as part of an investigation into a settlement agreement that the company had entered into with a generic drug manufacturer. This matter, FTC v. Boehringer, 286 F.R.D. 101 (D.D.C. 2012) was heard by ediscovery and privilege log expert, Magistrate Judge John Facciola, who issued two separate opinions a few days apart, one addressing privilege questions and the second addressing whether the FTC could force Boehringer to spend about $25 million to search and produce documents from years’ worth of back-up tapes. On both questions, Judge Facciola sided with Boehringer, but not without some of his classic warnings and admonitions about how to proceed. The FTC, however, did not go gentle into that ediscovery good night, but filed an appeal on the first opinion to the D.C. Circuit, where final filings were submitted just last week. So, the saga continues, with another chapter to come in the not too distant future.

The FTC first challenged Boehringer’s claim that various forecasts and spreadsheets, as well as some handwritten notes, were not protected either by the attorney-client privilege or the work-product doctrine on the grounds that they were business documents and not ones involving either protectable attorney opinion work-product or were not the types of exchanges worthy of protection, especially when an attorney was neither the author nor the recipient of the writing. Judge Facciola reviewed some 600 documents in camera and made the following determinations.

The spreadsheets and similar documents in question were described in the privilege log as “Analyses of Co-Promotion Agreement, Forecasting Analyses and Financial Analyses Used to Evaluate Potential Settlement Options.” Boehringer maintained that these documents were not created in the normal course of the company’s business, but specifically were created at the request of counsel and for the purpose of informing counsel whether a proposed settlement offer should be accepted. Judge Facciola agreed, crediting the affidavits of both the company’s in-house and outside counsel as to the genesis and use of the documents and finding that because the process of deciding whether to settle a case necessarily arises because of existing or potential litigation, documents created as part of that process at the request of counsel – even if not created by attorneys – fall under the protection of the attorney work product. Id. at 109.

Judge Facciola also made short shrift of the FTC’s argument that even if the documents constituted protectable work-product, the agency’s compelling need for the information overrode the normal protections granted to such materials. First he noted that an argument of “substantial need” is not sufficient to support the release of opinion work-product and that where attorney opinion is so interwoven with factual matters such that they cannot be segregated, the protections will not give way to claims of substantial need. Id. 110. Moreover – and most interestingly – Judge Facciola explained that after looking at the documents themselves he found that “there are no smoking guns” contained in the documents, but rather are typical types of spreadsheets and the like that a company will examine when exercising due diligence in considering a settlement option and in themselves contain no information about whether the deal was intended to or did result in anticompetitive conduct. Id. In short, he conducted the substantive analysis that the FTC was hoping to undertake for itself – a point that the FTC is sure to bring up in its appeal.

On the question of emails, handwritten notes and similar documents that focused on the different potential settlement scenarios as developed by the company’s attorneys or consultants, Judge Facciola again found that protection was warranted even where the documents were circulated solely between or among the company’s executives. As the FTC did in the Cephalon matter, it argued that attorney-client privilege cannot apply to documents that were exchanged solely between non-attorneys. And Judge Facciola, like the Judge Goldberg in Cephalon, found the FTC’s argument without merit on the grounds that the documents either were prepared during discussions with counsel or at counsel’s request and many of them on their face so indicated. Id. In other words, Judge Facciola certainly was not troubled by the fact that attorneys were not the authors of the documents or the recipients of them, noting that “communications among employees of a client are still afforded the protection of the privilege, so long as the communications concern legal advice sought or received that was intended to be confidential. Id. at 111. (citations omitted).

However, Judge Facciola made clear that when dealing with email strings, each email within the string would need to be examined to determine whether it met the criteria of responding to or seeking legal advice – and where it did not, the email must be produced in redacted form. He also found that an email sent by a lawyer as part of a longer email chain relating to a proposed media plan could not be protected where the attorney’s email stated only “Here are my edits to the last version.” In that case, because it was not clear whether legal advice was being sought or whether the attorney was merely commenting on typographical and grammatical errors, the entire email chain was deemed not to be privileged. Id. at 112.

Having provided these general guidelines, and in an effort to bring the long-brewing debate about these documents to an end, Judge Facciola, in his classic style, directed that on an on-going basis, Boehringer was to produce no less than 100 documents a day until the production was completed. However, he warned that “I will hold counsel for [the company] strictly to the obligation imposed by Rule 26(g) . . . and expect the redactions it makes to be not one word more than necessary to protect the privilege. If that is not done, I will sanction [the company] and, at a minimum, [the company] will forfeit its privilege as to that document. Id. (emphasis added.). To the FTC, Judge Facciola, instructed that he hoped that by seeing the documents in redacted form, they could “reasonably decide whether any additional battle over the documents is truly necessary” because “[d]emanding a document that, even as redacted, is innocuous and does not really advance its investigation may lead to similar consequences for the FTC, and again, if a pattern emerges, I will consider upholding the privilege as to all remaining documents.” Id. Thus, it seems that Judge Facciola was threatening that overly aggressive decisions on either side would lead to a form of sanction that would not take into account on a document-by-document basis either the merits of the claim of privilege or the belief that the information was improperly withheld. Rather, “abusive” conduct would lead to blanket decisions regarding how the documents were to be treated. One wonders whether such a sanction would be upheld.

Judge Facciola’s second opinion in the matter, FTC v. Boehringer, 898 F. Supp.2d 171 (D.C. 2012), would have been more interesting, and more instructive, if the FTC had not backed away from demanding a search of all company back-up tapes from January 2003 to October 2010, instead eventually requesting only the back-up tapes for the period February-August 2008. Thus, what Boehringer originally argued would be a $25 million undertaking was reduced to a more manageable amount and did not represent the type of burden that “threatens to unduly disrupt or seriously hinder normal operations of a business.” Id. at 175 (quoting FTC v. Texaco, 555 F.2d 862 (D.C. Cir. 1977). Thus, Judge Facciola ordered Boehringer to proceed and to be guided by the privilege principles that he had articulated in his September 27, 2012 opinion to the extent that privileged documents were retrieved from the back-up tapes. Id.

What is interesting about the opinion, however, is how the dispute leading to the demand for back-up tapes arose in the first place. Simply put, the FTC issued its subpoena and, as if often the case in these situations, in-house and outside counsel examined the subpoena and then initiated a custodian focused review. Id. at 173. A document hold notice also was issued to employees who the company deemed were likely to have responsive documents. However, the FTC argued that Boehringer failed to disable the computer system’s automatic 90 day email deletion program when the subpoena was issued and that between that failure and what the agency maintains were inappropriate manual deletions of emails, important documents were lost. Therefore, the FTC demanded that Boehringer undertake the review of all backup tapes over a seven year time period. Id. Certainly, the FTC’s position was exceedingly harsh – and given the burden that it would have imposed on the company – it seems a safe bet that Judge Facciola would not have sustained the demand even with the much broader scope of inquiry that is permitted with an agency administrative subpoena as compared to requests for documents in the context of civil litigation. See id. at *6 (discussing standards applicable to an administrative subpoena). However, with the FTC’s significantly reduced demand, the question disappeared.

Take all together, both Cephalon and the continuing Boehringer matter demonstrate that the FTC recently has been taking very aggressive positions regarding document productions and claims of privilege. Two recent courts have curtailed those efforts, but until future guidance emerges from the D.C. Circuit, it is not possible to say whether the FTC (or other government agencies) will be able to continue such a stringent approach to claims of privilege. Practitioners, stay tuned.

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