Schooled in Ethics

SCHOOLED IN ETHICS By: Alex B. Long

Williford Gragg Distinguished Professor of Law University of Tennessee College of Law

BAD BLOOD AND THE ATTORNEYCLIENT PRIVILEGE

As I sit down to write this column, the government’s fraud case against Theranos founder, Elizabeth Holmes, enters its third week of trial. It will likely go on for several more. Holmes’ tale was told in the book Bad Blood by John Carreyrou. For anyone who has not read the book or any of the myriad news stories, documentaries, or podcasts about the case, you should do so. Immediately. It’s fascinating. But the short version is that Holmes, as a 19-year old wunderkind Stanford dropout, set out to revolutionize the blood-testing industry through her company Theranos. According to the government, Holmes, unable to crack the scientific code necessary to make good on her claims about Theranos’ revolutionary blood-testing procedures, “engaged in a multi-million dollar scheme” to defraud investors, doctors, and patients.

From a legal ethics standpoint, the case raises numerous issues. But one of the more timely ones is an issue concerning the attorneyclient privilege as it applies to corporations, officers, and employees. Superstar lawyer David Boies and his Boies Schiller Flexner firm represented Theranos and Holmes in an intellectual property matter beginning in 2011. Boies eventually filed an action as counsel for both Theranos and Holmes in the matter. Thus began what Holmes calls a “unique relationship” between Boies and Holmes, which involved Boies advising Holmes and Theranos on a variety of matters over the years up until 2016. But there was never an engagement letter designating Holmes as a client of the firm or designating Boies as engaging in a dual representation of the two parties. Moreover, Boies stated in an interview that he did not represent Holmes individually. Nonetheless, Holmes claims that she reasonably believed that Boies’ representation was joint throughout the entire period and that he represented her as an individual in addition to representing Theranos.

The reason why any of this matters is because the Department of Justice may end up using thirteen documents involving communications between Holmes, Theranos’ in-house counsel, and Boies Schiller Flexner attorneys during the fraud trial. In most instances, Holmes was the author of the communications and was seeking legal advice. Holmes argued that the communications were subject to the attorney-client privilege based on what she claimed was the firm’s dual representation of Theranos and Holmes.

But in July, the trial court ruled that that the documents in question were subject to the corporate privilege but that Holmes could not personally assert the privilege. The judge noted that “[a] party asserting the attorney-client privilege has the burden of establishing [the existence of an attorney-client] relationship and the privileged nature of the communication.”1 Holmes argued that the court should apply a “subjective belief” standard, under which an attorney-client relationship exists where the client’s belief that such a relationship existed was subjectively reasonable. Instead, the court held that the appropriate test to determine privilege issues involving corporate employees is the Bevill/Graf test, named for a pair of decisions from the Third and Ninth Circuits.2 Under this test, the party asserting individual privilege must satisfy each of the following factors to establish a joint representation: First, they must show they approached counsel for the purpose of seeking legal advice. Second, they must demonstrate that when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities. Third, they must demonstrate that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise. Fourth, they must prove that their conversations with counsel were confidential. And fifth, they must show that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company.3

According to the court, Holmes could not establish a joint representation because she could not satisfy several of the elements of the Bevill/Graf test.4 Most notably, Holmes failed to establish that when she approached Boies and his firm for legal advice, she made it clear that she was seeking legal advice in her personal capacity. The court specifically pointed to the absence of any engagement letter and the absence of any evidence of financial records establishing that Holmes paid the firm from her own personal finances.5 In addition, the court observed that the communications concerned “general affairs of the company” as opposed to Holmes’ individual legal interests. Therefore, Holmes could also not satisfy the fifth requirement from Graf. As such, Holmes could not assert the attorney-client privilege.

Holmes’ situation should serve as a cautionary tale for lawyers who represent corporate entities and, possibly, their employees. While the Sixth Circuit Court of Appeals has not expressly adopted the Bevill/Graf test in this context, it has cited Bevill with approval and noted that many federal courts have adopted the test. Moreover, consistent with Bevill’s first element, the court has stated that a corporate officer seeking a personal privilege must “clearly announce a desire for individual advice.”6 The Tennessee Supreme Court has likewise cited Bevill and Graf with approval in a 2019 decision involving a related question.7 Thus, it seems likely that if confronted directly with the question of the applicable test where a corporate employee claims an individual privilege, both courts would adopt the Bevill/Graf test.

Holmes’ case also serves as a reminder to corporate lawyers of the need to clarify the scope of representation at the outset of representation and to remind corporate employees throughout the representation of the fact that, unless otherwise agreed to, the lawyer represents the corporation, not the individual employee. As such, the privilege belongs to the corporation.

1 United States v. Ruehle, 583 F.3d 600, 607 (9th Cir. 2009). 2 In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 05 F.2d 120, 124 (3d Cir.1986);

U.S. v. Graf, 610 F.3d 1148 (9th Cir. 2010). 3 Graf, 610 F.3d at 1160. 4 United States v. Holmes, Case No. 18-cr-00258-EJD-1 (NC), 2021 WL 2309980, *3 (N.D. Cal. June 3, 2021). 5 Id. 6 Ross v. City of Memphis, 423 F.3d 596, 605 (6th Cir.2005). 7 Dialysis Clinic, Inc. v. Medley, 567 S.W.3d 314 (Tenn. 2019).