As we step into the sixth week of the trial of Elizabeth Holmes, former founder and CEO of the disgraced Theranos who faces 12 charges of wire fraud, it’s a good time for lawyers, company founders, and high execs to take a step back and distill some learnings from some of the most “catastrophic mistakes” made by different agents involved in this case.
One of the attorneys that has been keeping a finger on the pulse of the latest developments in Silicon Valley’s “trial of the century” is Emily Ward, senior associate at Smith, Gambrell & Russell, with a focus on white-collar defense and civil litigation including healthcare, business, and environmental litigation.
We recently sat down with Ward to analyze the main takeaways that attorneys and employees can get from the dual representation controversy and discuss some tips for organizations dealing with litigation for the first time.
And since Ward represents clients of all sizes, from small businesses to major organizations, she also shared some of the strategies she uses to help her clients battle big opponents, especially when discovery involves thousands of documents and all options available seem highly unfavorable.
The Attorney-Client Privilege Controversy: Who Represents Whom?
For those out of the loop, back in June 2021, U.S. Magistrate Judge Nathanael Cousins of the Northern District of California ruled in favor of the U.S. government that 13 emails between Holmes and Boies Schiller (Theranos’s former outside counsel) on the government’s exhibit list were not shielded by Holmes’s claim of attorney-client privilege with the firm and, therefore, could be used in her criminal trial.
Holmes failed to demonstrate Theranos’s counsel jointly represented both her company and herself individually. Among other things, when presented with the Graf test, Holmes was unable to prove she had made payments to the law firm from her personal accounts.
In her recent interview for The Recorder and article on SGR’s blog, Ward sent a note of advice to all lawyers and law firms (regardless of their size) regarding the need to document everything that has to do with attorney-client privilege and make sure clients always understand who they are represented by.
Logikcull: Emily, do you have any tips on how to prevent these kinds of pitfalls in corporate environments? How can companies avoid getting involved in dual representation controversies?
Emily Ward: The most important thing you can do, regardless of your company’s size, is to have clarity on who is an attorney, who is not an attorney—since sometimes attorneys are not acting as attorneys, but as business people—and also who the client is.
When you’re running your regular business operation, there might be a GC who is on a business team. Therefore, it needs to be clear for people sitting on a board meeting that the GC is acting as counsel for the company—not as any sort of individual counsel.
Additionally, if an internal investigation arises, it needs to be made clear who represents whom, and whether outside counsel or inside counsel should conduct it. You also need to consider if and when bringing in external representation for employees might be necessary.
Overall, there are many different things that you need to consider regarding privilege, but by taking time to address them on the front end, and by making things clear to all involved from the start, companies, lawyers, and clients can try to avoid some of the problems that Theranos and Miss Holmes are going through right now because there wasn’t any clarity back then. And you never know how the world is going to look like seven years down the road.
There are many different things that you need to consider regarding privilege, but by taking time to address them on the front end, and by making things clear to all involved from the start, companies, lawyers, and clients can try to avoid some of the problems that Theranos and Miss Holmes are going through right now.
Logikcull: Engagement letters are one of the mechanisms to avoid this sort of confusion, but when is the right time for an employee to engage counsel, and what should be the scope of it?
Emily Ward: Generally, the in-house counsel for a company is only going to represent the company, not an individual employee. If an individual needs representation, that would happen with an outside attorney.
Here’s an example of a case I’m working on right now: I am representing the company, but we arranged for another lawyer in a different law firm to represent a number of individuals who are being interviewed as part of an investigation.
We reached out to a colleague we had worked with before, explained the high-level situation, and then asked if they were conflicted out. Once we made sure there wasn’t any conflict, we made that person available to the employees. Employees then had the choice to get their own attorney or go with that person, who would be paid by the company, but wouldn’t be representing the company.
That’s a good way to establish a clear demarcation between who represents the company and who represents the individual. In our case, it was only once we got someone who was able to represent the employees that an engagement letter was signed. Engagement letters are signed between the employee and the new lawyer.
Since you can’t predict what’s going to happen in the future, you're not going to know when an employee is going to need outside counsel, and that would be the point when I would expect someone to sign an engagement letter—when we’re talking about an inside/outside counsel situation with employees.
Logikcull: The Theranos case also prompts some important questions for founders and CEOs. At what point should a company’s founder, CEO, or high executive bring in individual representation? How can this high executive/founder understand whether there’s a conflict between their interests and the company’s interests?
Emily Ward: As a general rule, if somebody and his friend are just starting a company in their garage, they probably don't need individual representation at that point. But when investors start coming in or when you begin the process of going public, the interests of the individual founders and the company might start to diverge.
Although there’s not a clear line, once you're starting to have outside people take an interest in a company, that’s a good time to get somebody to talk with.
I tell people this all the time: When you're starting a business, the five thousand dollars you spend talking to a lawyer to make sure that you're set up correctly and putting halfway decent policies in place to protect yourself, are going to save you tenfold that amount of money if you get sued later on. These are the kinds of things you really need to prepare for.
If you are a company founder and your company is starting to get bigger or is about to get a big investment, that would be a great time to sit down with a trusted lawyer, and determine if you need to get legal representation or if everything is going along correctly.
The five thousand dollars you spend talking to a lawyer to make sure that you're set up correctly and putting halfway decent policies in place to protect yourself, are going to save you tenfold that amount of money if you get sued later on.
If we're talking about an executive within a more or less established company, however, determining when they need to seek individual representation is going to be incredibly situation-specific.
For example, if there is an executive that has a concern about something that is going on in the company (they might think they’ve witnessed a “whistleblower” situation, for example), it could be appropriate to sit down and have a conversation with in-house counsel to alert them to the situation and let them make the most appropriate decision. They might advise that person to get an attorney or start a formal investigation of the fact. It's really going to depend on the nature of each situation.
As a general rule, if a person is not too comfortable talking with in-house counsel, it’d be a good idea to engage outside counsel. Ultimately, it will all boil down to the structure of the company and the comfort level of that executive with in-house counsel.
Litigation 101: Tips for Founders and CEOs Experiencing Litigation for the First Time
Logikcull: And what advice would you give to founders and CEOs who are experiencing litigation for the first time? How should they navigate any potential conflicts? How should their approach to litigation vary when faced with a civil suit vs. a prosecution, for example?
Emily Ward: First of all, if you’re dealing with any type of investigation or litigation, you want to make sure that you don't put your head in the sand and delay taking some basic remedial actions to protect yourself.
At the very first sign that something wrong has happened or is being investigated, you need to make sure that there is a document retention policy in place and some sort of litigation hold letter has gone out to the people involved. The right people must know what is going on, which doesn't mean that you need to send an email to all 400 people in your company, but it does mean that in-house counsel needs to know about it and, if there’s a compliance officer, they need to know about it too.
At that point, you need to have any decision-makers at the company determine if outside counsel needs to do an internal investigation or can otherwise help shape the initial response to either the investigation or the civil litigation.
At the very first sign that something wrong has happened or is being investigated, you need to make sure that there is a document retention policy in place and some sort of litigation hold letter has gone out to the people involved.
As soon as a company finds out that something is going on (even before civil litigation begins or before the authorities get involved), it would be incredibly appropriate to do an internal investigation. The work that the company puts into identifying the issue and figuring out how to fix it could protect the company in the future if an external investigation or litigation is initiated. And even if an investigation never materializes, by conducting that internal investigation and fixing whatever errors were being made, the company will be able to protect itself in the future and save a lot of money.
The work that the company would put into identifying the issue and figuring out how to fix it could protect it in the future if an external investigation or litigation is initiated.
Lessons for In-House Counsel When Things Start to Look Ugly
Logikcull: Emily, as we follow the developments in the trial of Elizabeth Holmes, we recently saw how the ex-Theranos lab director testified that the company cared more about “fundraising than patient care,” and that few months into the job he started noticing unreliable test results and growing doctor and patient concerns, which were allegedly ignored by Holmes.
In your view, how should a company’s in-house counsel act in a situation like this? When there is serious internal suspicion on severe compliance issues.
Emily Ward: In a situation like the one that occurred at Theranos where a lab director, who was somebody that had influence and credibility within the company, brought this kind of concern to the in-house counsel, they would need to determine if the situation was serious enough to be brought to the executives.
From a lawyer-protection perspective, lawyers want to make sure that if that concern is raised in person, it gets documented in writing. This way, if the company gets investigated later on, they can’t say that you ignored potential complaints. You want to prove that you took things seriously.
If the situation is so serious that talking about it with executives is not sufficient to alleviate your concerns, it would be appropriate to do an internal investigation. If it's a very serious situation, like the one which occurred at Theranos, it would be a good idea to get outside counsel brought in to provide a fresh approach. By having that outside counsel look at documents and talk to employees, they could see things that in-house counsel or executives may be too involved to see. They would therefore make recommendations on things the company could correct or re-evaluate, or warn the company about where it’s heading.
Small Business Battling Theranos-Sized Companies: How To Elevate Your eDiscovery Game
The discovery process usually takes up to 70% of all litigation costs and most companies are not as well resourced as Theranos. They’re small businesses that too often have to decide between an unfavorable settlement or spending hundreds of thousands of dollars on eDiscovery—often to lose the case anyways.
Logikcull. Emily, how do you advise your smaller size clients when these kinds of investigations or third-party requests arise? How can they successfully battle heavy opponents with limited resources?
Emily Ward: Business owners have to deal with these types of considerations all the time, although it may not always be in the litigation context.
Weighing the cost and benefit of any given situation is what great businesses do well.
In the litigation context, there has to be a balancing of the cost of litigation, the cost of any public disclosure, or the cost of a settlement, and if a settlement could be reached. You also need to evaluate if there's going to be any sort of government enforcement action or inability to take government contracts. These are all things that companies have to consider as they are weighing the option of either going to trial, going through litigation, or seeking a settlement.
One of the things that I advise my clients to do as we're considering litigation costs, is to think about what we actually need to find or research for the specific situation.
In this day and age, the volumes of data created by people doing business are vast. So, one of the best things that you can do when first starting an investigation or litigation preparation is to not getting every single email from every single person in the company and go through all of them to find the smoking gun—or to prove there's no smoking gun. Instead, you need to be thoughtful about who the most important custodians are, and start your discovery review with those most likely to be intimately involved in the issue.
Weighing the cost and benefit of any given situation is what great businesses do well.
By limiting your initial search to those “most likely custodians,” you can save a ton of lawyer and document review time while also saving lots of processing costs for the sheer amount of data that would have to be produced.
You just need to invest a little time to explain the situation to your attorneys and have them get familiar with the players involved to make thoughtful recommendations that can help narrow down the cost.
If the company sends out the document hold letter and institutes a freeze on any electronic deletions, there's little risk that emails are going to disappear if you decide not to upload the data from all custodians from the start. This way, if 6 months down the road you need to add one more person to the discovery custodian list, you can go back and do it. But if you find the data you need from the primary custodians, you can avoid processing and reviewing that person's 30K emails, and save a lot of money.
Prioritize and make sure you have the right policies in place to reiterate later on.
It's really just about being thoughtful and not going through every single document, as it might be the first instinct for some people. Prioritize your work while making sure you have the right retention policies in place to fall back on if your needs change later on.
Logikcull: Do you have any eDiscovery tips on how attorneys can find crucial evidence quickly while spending little time and money in the process?
A good way to get started is to start looking at the documents that you think are going to be the most important for the matter.
For example, if there is a one-week period where there's an allegation that some stocks were sold improperly, you should start your review by the documents generated in that time frame by the most important players. So, if you look at the emails and documents from that one-week span and then expand or tweak your search based on custodians, relevant search terms, or references to other companies or entities from that time period, you’re going to be able to find hot documents more quickly, because you've already narrowed down the time and place where hot documents and communications may be.
You should also leverage the tools available out there that can help with culling and review, and make sure you have partners that are up to date on these tools. Some of the companies I work with do very little culling, so I can see the same email eight times because it was in eight different inboxes, while other companies really narrow it down so I can just see the most recent email, while all the other ones are marked as duplicates and segregated into a separate area that I can check if needed. This type of tool didn’t exist five years ago but it does now and can save you dozens or even hundreds of hours of time in a given case.
This type of tool didn’t exist five years ago but it does now and can save you dozens or even hundreds of hours of time in a given case.
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