Theranos Founder Elizabeth Holmes’s Trial Tests Attorney-Client Privilege
Elizabeth Holmes, founder and ex-CEO of now-defunct blood testing start-up Theranos, is once again making headlines, this time for her upcoming criminal trial and related court proceedings.
Holmes and Theranos have been in the news for more than a decade, with initially favorable publicity about a purportedly innovative blood-testing technology, followed by investigative reporting and regulatory action concerning whether the technology worked (or even could be dangerous), and culminating in Holmes’s indictment on federal criminal charges.
In Holmes’s criminal case, the United States successfully asked a federal judge to order Holmes to disclose communications between Holmes and Theranos’s law firm. Holmes resisted the disclosure, contending that the communications were protected by the attorney-client privilege because she had sought legal advice in her personal (not her corporate) capacity. The court ruled that none of the documents was protected from disclosure.
While Holmes’s latest legal misfortune arises in the context of her criminal case, the trial court’s ruling is a good reminder to companies and their stakeholders about the importance of the attorney-client privilege in anticipation of civil litigation.
A Company Stakeholder Must Have an Independent Lawyer-Client Relationship With Company Counsel for the Attorney-Client Privilege to Apply
The attorney-client privilege generally protects only those communications between an attorney and their client for which the client had a reasonable expectation of confidentiality when those communications were made. If a company stakeholder participates in a conversation with the company and its counsel in her personal capacity, the stakeholder must have a lawyer-client relationship with counsel independent of the lawyer’s representation of the company in order for the stakeholder to claim the conversation is privileged. Unless she and the company can show that they share a common interest, the privilege is the company’s to assert, not the individual’s.
And while Holmes claimed that the communications that she had with Theranos’s outside counsel sought personal legal advice, in fact, other Theranos employees were involved in each communication and she was unable to offer evidence that she had independently sought such advice. That defeated any reasonable expectation of confidentiality that Holmes could have had.
Two Steps to Avoid Missteps
Companies and their stakeholders should consider taking the following steps to help ensure that communications an individual and an entity want to protect will remain protected.
1. Engage Personal Counsel. Company stakeholders should consider engaging their own counsel when the stakeholder’s and the company’s interests may diverge. As we have previously explained in our Solving Disputes series, corporate stakeholders – like Holmes – cannot rely on the attorney-client privilege to protect their communications with company counsel from disclosure to certain others in litigation. United States v. Holmes demonstrates this risk in the criminal context. The risk is equally present in litigation involving disputes among stakeholders or between stakeholders and the company. By engaging and communicating with their own counsel, company stakeholders stand a far better chance of shielding those communications from disclosure in litigation, because the communications will likely be made with the expectation of confidentiality.
2. Define the Relationship in an Engagement Letter. Companies and their stakeholders are best served by ensuring that their attorney-client relationships are clearly defined in an engagement letter or otherwise documented. If Theranos and Holmes had obtained an engagement letter from company counsel that clearly explained the scope of its representation, Holmes would have been on notice that the firm did not represent her in her personal capacity, which may have prompted her to engage her own counsel.
A clearly worded engagement letter that defines the clients and the scope of the engagement helps ensure that all relevant parties will understand whether and to what extent they are clients of company counsel. To the extent that stakeholders are represented by counsel, those stakeholders should ensure that the engagement letter clarifies whether they are represented in their personal capacity, their corporate capacity, or both. Along the same lines, it may be prudent for companies to ensure that their engagement letters state that the company counsel does not represent stakeholders in their personal capacities, if the representation is, in fact, limited to the company.
To the extent the scope of the representation changes, companies and their stakeholders are best served by ensuring that the engagement letter is amended. In Holmes’s situation, the law firm’s representation of Holmes and Theranos evolved over the course of the relationship. But there was no engagement letter to establish the scope of the representation. The engagement letter may need to be modified as additional issues arise, and companies and their stakeholders should ensure that company counsel thoroughly check for any potential conflicts – including conflicts involving potential liability of executives or other stakeholders.