A recent decision in the criminal case against the founder of a now-defunct-but-once-cutting-edge life science start-up affirmed that corporate attorney/client privilege lies in the hands of estate fiduciaries, not the company or its executives. The decision should also serve as a reminder to executives that to ensure that their communications remain privileged, they should delineate their personal interests in contrast to those of their company.
Background on Theranos and Elizabeth Holmes
Elizabeth Holmes was the founder and chief executive officer of Theranos, Inc., a once-promising health technology company that offered rapid pinprick blood testing. At its peak, Theranos was valued at $9 billion.
During 2011, Holmes and Theranos retained Boies Schiller Flexner LLP in connection with an intellectual property dispute. Soon after, the firm continued to render legal services to Theranos related to Theranos’s patent portfolio, press interactions, and inquiries from government agencies and departments. During this time, Holmes believed that the law firm jointly represented her and Theranos.
Theranos turned out to be a fraud: The technology turned out to be fake, and Theranos had overstated its revenues. Now defunct, Theranos was forced to transfer its assets to an assignee for liquidation and disbursement.
The U.S. Attorney for the Northern District of California eventually indicted Holmes for wire fraud and conspiracy. Holmes sought to exclude several documents from admission that the U.S. Attorney tried to admit by invoking the attorney/client privilege. Notably, Theranos’s liquidating assignee did not assert the attorney/client privilege in resisting disclosure of the documents at issue. The question, then, was whether Holmes could assert the privilege given her past dealings with the firm, notwithstanding the liquidating assignee’s decision not to do so.
Application of Privilege
The court turned to U.S. v. Graf[1] to determine whether the law firm represented Holmes jointly in her individual or representative capacity. If the latter, the privilege would not apply given that Theranos’s assignee appeared to have given the government the disputed documents.
Under Graf, the court held that Holmes bore the burden to:
- show that she approached counsel for the purpose of seeking legal advice;
- show that she made it clear that she was seeking legal advice in her individual rather than in her representative capacity at the time she approached the law firm;
- demonstrate that the law firm saw fit to communicate with her in her individual capacity knowing that a possible conflict could arise;
- prove that her conversations with the law firm were confidential; and
- show that the substance of her conversations with counsel did not concern matters within the company or the general affairs of the company.
Holmes, however, failed to meet the Graf standard to show that the law firm represented her in an individual capacity. Holmes never signed an engagement letter, nor did the law firm provide any formal guidelines describing the scope of its representation of Holmes. Further, Holmes did not separately pay the law firm for its services or show that her conversations with the law firm were confidential. In a similar vein, Holmes could not identify a single document that supported her belief that the law firm represented her in a personal rather than a representative capacity. Lastly, Holmes failed to show that the substance of her conversations with the law firm was unrelated to Theranos.
Given that Holmes failed to marshal facts showing that the law firm represented her individually rather than in her capacity as a corporate executive of Theranos, the court ruled that Holmes did not hold the attorney/client privilege in her personal capacity. Accordingly, it admitted the documents that Holmes claimed were protected from disclosure under the attorney/client privilege.
Conclusion
The key lesson from this recent order is that a corporate executive’s communications with counsel are not necessarily privileged where the corporation itself agrees to disclosure. Thus, executives would be wise to document their relationships with counsel, including by (among other things) entering into an engagement letter identifying the executive as an individual client and defining the scope of engagement to include the executive’s personal interests.