On June 3, 2021, United States Magistrate Judge Nathanael M. Cousins of the Northern District of California issued a six-page order holding that claims of attorney-client privilege did not prevent the admissibility into evidence of thirteen corporate documents.
The ruling drew attention as the latest development in the prosecution of Elizabeth Holmes, the founder (in 2003) and former CEO of Theranos, on charges of wire fraud, in connection with the company’s representations that its proprietary technology and devices could, using only a few drops of a patient’s blood, conduct a variety of diagnostic analyses that would otherwise require several different machines.
Background
Wall Street Journal reporter John Carreyrou’s best-selling account, Bad Blood (2018), of Theranos, Holmes, and Ramesh “Sunny” Balwani (who was the company’s president and chief operating officer, and whose separate trial is pending) does not discuss privilege in detail. However, it shares with the court order the theme of confidentiality, especially in the context of parallel personal and professional roles and relationships.
Perhaps the simplest is the allegation that Holmes and Balwani had been “romantically involved.” Carreyrou notes that even though “[t]here were no rules against that sort of thing in Silicon Valley’s private startup world[,] Holmes seemed to be hiding the relationship from her board. . . . If Holmes wasn’t forthright with her board about her relationship with Balwani, then what else might she be keeping from it?”
On a different plane of confidentiality, “Many companies in Silicon Valley make their employees sign nondisclosure agreements, but at Theranos the obsession with secrecy reached a whole different level.”
As legal enforcers of this obligation, David Boies—“arguably the country’s most famous lawyer” and “one of the most powerful and prominent lawyers in America”—and his firm, Boies Schiller Flexner LLP (BSF), aggressively pursued not only the filers of a competing patent, but also (for allegedly retaining trade secrets of, and/or defaming, or preparing to defame, Theranos) Carreyrou, several of his sources, and the Wall Street Journal itself.
Two of the book’s most compelling confrontations involve some form of privilege.
In a meeting in the Wall Street Journal’s offices in June 2015, Carreyrou and the newspaper’s executives invoked journalistic privilege when refusing to identify their sources to a Theranos team that included Boies, two other BSF partners, and the company’s in-house counsel (herself a former BSF partner).
One month earlier, Tyler Shultz, a Theranos employee (and Carreyrou source), while visiting his grandfather George Shultz—a Theranos board member and a former Secretary of State—was “blindsided” (“’[T]here are two Theranos lawyers upstairs,’ George said. ‘Can I go get them?’”) by two BSF partners who threatened to institute a lawsuit alleging that he had violated the company’s confidentiality requirements.
Although Balwani had dismissed a Theranos colleague’s suggestion with the response that information technology professionals “are like lawyers, avoid them as long as possible,” Tyler would resist signing a BSF-prepared affidavit, saying, “A Theranos lawyer has drafted this with Theranos’ best interests in mind. . . I think I need a lawyer to look at it with my best interests in mind.”
Tyler subsequently retained a lawyer who “arranged for [his parents] to have their own legal counsel. That way he could communicate with them through attorneys and those conversations would be protected by attorney-client privilege.”
The Board– Including (2015-2016) Boies
Bad Blood questions the effectiveness of the board, and particularly its high-profile directors (including fellow former secretary of state Henry Kissinger, and several former senior military officials; from 2010 to 2012, Holmes had interested the military in “the idea of using Theranos devices on the battlefield,” although the proposal failed because the FDA had not reviewed and approved the device for commercial use).
Carreyrou reports that a less prominent director who privately raised governance concerns with Theranos’ chairman in 2007 was told that Holmes wanted him to resign from the board; when he subsequently identified what he considered “irreconcilable discrepancies” in board documents and proposed that Theranos retain more experienced managers than Holmes, the chairman told him, “Well, I think you should resign.”
In mid-2011, Holmes told a prospective employee that “The board is just a placeholder. . . I make all the decisions here.” Two and a half years later, she “forced through a resolution that assigned one hundred votes to every share she owned, giving her 99.7 percent of the voting rights. . . . When he was later questioned about board deliberations in a deposition, George Shultz said, ‘We never took any votes at Theranos. It was pointless. Elizabeth was going to decide whatever she decided.’”
Technically, that would not have been true of the board’s decision-making—despite her domination of the shareholder vote, and her ability thereby to remove any dissident directors—unless Holmes had separately arranged to have a decisive number of multiple votes as a director.
In late 2015, after the publication of Carreyrou’s first article on Theranos, the “aging ex-statesmen all left [the Theranos board] to join a new ceremonial body called a board of counselors. In their place, Theranos made a new director appointment that signaled an escalation of hostilities: David Boies.”
Boies would remain on the board until late 2016 or early 2017, “a few months” after the company’s general counsel returned to her partnership at BSF, which “stopped doing legal work for Theranos after falling out with Holmes over how to handle the federal investigations.”
Indeed, the magistrate judge noted that Holmes claimed to have believed that Boies and his firm represented both herself and Theranos “up to the point when she retained separate counsel to represent her in the Securities and Exchange Commission and Department of Justice investigations into Theranos in 2016.”
Parenthetical: Concurrent Counsel for the Company and a “Constituent”
Such a dual representation, if it had existed, would not necessarily have violated the ABA’s Model Rules of Professional Conduct, whose Rule 1.13(g) provides that “A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the [Rules’ prohibition of conflicts].”
Official Comment 10 to Rule 1.13 adds that if the company’s and the constituent’s interests conflict, counsel should advise the individual that he cannot represent her, and that she “may wish to obtain independent representation. . . . Care must be taken to assure that [she] understands that [in such a situation, their discussions] may not be privileged.”
Outside Counsel as an Outside Director
Separately, Official Comment 35 to Model Rule of Professional Conduct 1.7 observes that a conflict might be created by the service of a company’s counsel as one of its directors.
Such counsel should therefore consider “the frequency with which such situations may arise, [and] the potential intensity of the conflict,” among other factors. “If there is material risk that the dual role will compromise the lawyer’s independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation’s lawyer when conflicts of interest arise.”
Moreover, “The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer’s recusal as a director or might require the lawyer and the lawyer’s firm to decline representation of the corporation in a matter.”
Similarly, the ABA’s Formal (Ethics) Opinion 98-410 (1998) reminds a lawyer/director to “reasonably assure at the outset of the dual relationship that management and the other board members understand the different responsibilities of legal counsel and director; [and] understand that in some circumstances matters discussed at board meetings with the lawyer in her role as director will not receive the protection of the attorney-client privilege. . .”
In his New York Times “Deal Professor” column on February 3, 2016, Steven Davidoff Solomon noted of Boies’ simultaneous status as outside director and as outside counsel, “This gets complicated for Mr. Boies, because Theranos is a corporate governance disaster. Ms. Holmes [through her special class of stock] controls the company. This is a problem because the company is essentially Ms. Holmes. . . . If the technology is shown to be flawed, she may not be quick to admit that to the benefit of the remaining shareholders. . . . What if Ms. Holmes resists changes that would be in the interest of shareholders?” Solomon concluded that “for someone so successful and savvy to put himself in a position that is bound to be problematic is puzzling.”
BSF as Shareholder (2011- )
In fact, even before he joined the board, Boies and BSF had been more than simply outside counsel to Theranos: as Carreyrou explains, in 2011, as payment for its legal services, “Elizabeth had granted [BSF] 300,000 Theranos shares at a price of $15 per share. . . . [Boies thus] had a vested financial interest in Theranos that made him more than just its legal advocate. It helped explain why, in early 2013, Boies began attending all of the company’s board meetings.”
A client’s compensating counsel with an ownership interest in the client is generally permitted by Formal (Ethics) Opinion 00-418 (2000), so long as: the transaction is fair to the client; the lawyer “specif[ies] in writing the scope of the services to be performed”; and the client “has had an opportunity to consult with independent counsel” about the arrangement.
In addition, “At the outset, the lawyer should also inform the client that events following the stock acquisition could create a conflict between the lawyer’s exercise of her independent professional judgment as a lawyer on behalf of the corporation and her desire to protect the value of her stock,” and that such a conflict might result in her withdrawing as counsel, or at least recommending that the client retain another lawyer for a particular matter.
Documenting Dual Roles (and Their Risks)
If Formal Opinion 00-418 required the “lawyer as shareholder” relationship to be expressed in writing, Formal Opinion 98-410 suggests that in the case of a “lawyer as director,”
“Because of the need for the lawyer and the corporation’s management and board to give ongoing attention to potential conflicts, attorney-client privilege protection and other issues that may arise as a result of the dual role, the lawyer-director should consider providing a written memorandum in addition to an oral explanation. A written memorandum is of particular assistance in describing the lawyer’s role as counsel for the corporate entity and not for its constituent officers or directors and in explaining the differences between serving as a director and serving as counsel.” (emphasis added)
If BSF and Theranos did clarify these issues in writing, it does not appear to have been publicly reported.
In fact, the second paragraph of the court’s order observes:
“After the representation began [on a patent matter, in 2011], BSF continued to offer Holmes and Theranos a variety of legal services in relation to Theranos’ patent portfolio, press interactions, and inquiries from government agencies and departments. . . Despite the breadth and duration of BSF’s involvement, Holmes and BSF did not sign an engagement letter or establish any formal guidelines describing the scope of BSF’s representation.” (emphasis added)
The court held that the standard for determining joint representation was not “Holmes’ subjective belief,” but the test enunciated by U.S. v. Graf, 610 F.3d 1148, 1161 (9th Cir. 2010), which required Holmes to show that:
(1) she “approached counsel for the purpose of seeking legal advice”;
(2) she “made it clear that [she was] seeking legal advice in [her] individual [capacity]”;
(3) “counsel saw fit to communicate with [her] in [her] individual capacit[y], knowing that a possible conflict could arise”;
(4) her “conversations with counsel were confidential”; and
(5) “the substance of [her] conversations with counsel did not concern matters within the company or the general affairs of the company.”
Holmes could not, ruled the court, establish factors (2), (4), and (5).
Under (2), although she claimed that the dual representation “is a matter of public record,” Holmes could not document this. By her own admission, “there was no engagement letter relating to Mr. Boies’ or his firm’s representation of Ms. Holmes and/or Theranos,” (emphasis added). Nor did Holmes produce “any financial records showing that she paid Boies or BSF from her own accounts, not Theranos’.”
With regard to (4), “None of the contested documents include conversations exclusively between Holmes and Boies or BSF. . . [T]he presence of Theranos employees and attorneys destroys the [assertion of personal] privilege.”
Finally, under (5), “None of the [documents at issue] discuss Holmes’ individual legal interests. All thirteen documents related to her ‘official duties’ or the ‘general affairs’ of the company like conversations with investors, billing, and media strategy.”
Because the entity assigned the right to invoke the privilege on Theranos’ behalf had already waived it, the documents were admitted as evidence.
In other words—the immortal words of The Godfather’s (1972) Michael Corleone (Al Pacino)—the court held that, with regard to the attorney-client privilege that Holmes had attempted to invoke, “It’s not personal, Sonny. It’s strictly business.”
Boards reviewing these developments and issues might consider adopting some of the following policies:
First, ensuring that the company executes “engagement letters”/”retention agreements” with all outside counsel working for the company.
Second, requiring that individual outside counsel who also serve as members of the board—and individual counsel (and/or their firms) whose are being compensated for their legal services with shares in the company—provide in writing the clarifications indicated by the ABA’s Formal Opinions and its Rules of Professional Conduct.
Third, developing simple methods to indicate, during board and committee meetings (and in other communications, including e-mails), when a director who is also a lawyer—whether she serves as the company’s in-house counsel or outside counsel, or even if she is an outside director who (and whose firm) does not formally represent the company– is participating (by making statements, asking questions, or even listening silently) in her role as director (for purposes of making business decisions) rather than as a lawyer (rendering, whether explicitly or tacitly, legal advice). Those processes should include policies that govern designations for communications sent to the lawyer/director by directors and officers.
Fourth, in this context, regularly reviewing, during board meetings and/or by distributing a written reminder, the factors involved in determining when board (or committee) discussions that include a director who is also a lawyer—and/or e-mails or other individual communications to the lawyer/director—might be privileged.
Fifth (the “table-clearing option”), including as part of the company’s (nonbinding) corporate governance guidelines/principles, or enunciating as a separate rule, that no director of the company will simultaneously: (a) serve as (or as part of) the company’s in-house counsel; (b) serve as outside counsel to the company, to the board, to any board committee, or to any one or more of its directors and officers personally, in any matter; or (c) (for outside counsel) be a member of a firm that represents any of the individuals or groups identified in (b).
If, as it is said, “Honesty is the best policy,” simplicity (or, at least as much simplicity as possible) might run a close second place.
