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Appeals court ruling could put attorney-client privilege at risk


NEW YORK — Court rulings compelling an attorney to testify against his former client in a Foreign Corrupt Practices Act case could undermine the attorney-client relationship, said a directors and officers liability insurance expert.

In the case, In re: Grand Jury Subpoena, the 3rd U.S. Circuit Court of Appeals in Philadelphia upheld a federal judge's order that the unidentified attorney testify before a grand jury investigating alleged FCPA violations by an unidentified company based in the United Kingdom.

The company had been retained as a financial adviser to companies to obtain bank financing.

In 2008 and 2009, the company paid more than $3.5 million to the sister of a bank official who was responsible for overseeing the financing process, according to the ruling. The banker and his sister subsequently were arrested in the United Kingdom, and their prosecution is ongoing, according to the ruling.

A grand jury subpoenaed the company's former attorney, and the government moved to compel the attorney to testify under the “crime-fraud exception” in anti-corruption law. The exception allows an attorney to disclose information communicated by the client or in an attempt by the client to use the lawyer's services to commit or cover up a crime or fraud.

A federal judge in Philadelphia ordered the attorney to testify, an order that a three-judge panel of the appeals court upheld unanimously.


“Despite their importance, the protections afforded by the (attorney-client) privilege are not absolute,” the appeals court ruled in February.

That ruling broke new ground, said Ann M. Longmore, New York-based executive vice president at Willis North America Inc.

“We have never seen that exclusion used to avoid the attorney-client privilege in the foreign FCPA arena,” Ms. Longmore said after a session on D&O liability coverage at Business Insurance's Risk Management Summit in New York earlier this month.

“It was very worrisome that the court would do that,” she said. A possible result is that companies, fearful of attacks on the attorney-client privilege, would not seek “legal counsel in the first place,” she said.

Also speaking at the session was John F. McCarrick, a partner at law firm White & Williams L.L.P. in New York, who said he does not expect D&O litigation by shareholders against Minneapolis-based Target Corp. in response to the massive data breach it reported in December to succeed.

What happened to Target was an operational issue, not a board-level issue, Mr. McCarrick said.


Directors should benefit from the “business judgment rule,” which is the presumption that if the directors relied on advisers, followed normal protocols “and did all the things they were supposed to be doing, the court cannot substitute its own judgment in the matter,” he said after the session.

Mr. McCarrick also warned during the session against “structural issues” that towers of D&O liability insurance can create. “As claims get larger, and you require a larger and larger tower of insurance comprised of multiple insurers to cover that claim or event, it's increasingly important that the terms of those contracts are aligned, because if they're not, all you're doing is creating a set of firewalls that insureds have to fight through to work their way up the tower to get coverage,” he said after the session.