The United States Court of Federal Claims recently issued an Order in Starr International Company, Inc. v. United States, No. 11-779C, regarding the consequences of an intentional waiver of the attorney-client privilege by the United States Government. This order should be of interest to institutional investors, as it illustrates the risks and remedies to both parties that exist where one party elicits testimony that serves to waive its attorney-client privilege.

Prior to trial, the Department of Treasury and the Federal Reserve Bank of New York (the “Government”) retained Davis, Polk & Wardwell LLP (“Davis Polk”) as outside counsel to provide advice on a number of the events at issue in the Starr suit. At trial, two attorneys at Davis Polk were called as witnesses by the Goverment and examined by the Government. During its examination, the Government purposefully elicited testimony which disclosed privileged information that benefited the Government’s case. The disclosure was so broad that the Court found that the Government had waived its attorney-client privilege with regards to “any communication involving the law firm of [Davis Polk] relating to AIG.” As a result, it ordered the immediate production of both any communication between the Government and Davis Polk regarding AIG and any internal communication at Davis Polk regarding AIG.

Pursuant to the Court’s order, the Government produced more than 30,000 documents to the Plaintiff during the last two weeks of trial. The production was not completed until just three days before the conclusion of the trial. After the close of evidence, the Court concluded that the Plaintiff did not have a fair opportunity to review many of the documents produced by the Government before the conclusion of trial. Noting that it may “take additional testimony” – including documentary evidence – at its discretion, the Court concluded that it would be unfair to the Plaintiff to preclude it from supplementing the evidentiary record. See Wisc. Elec. Power Co. v. United States, 90 Fed. Cl. 714, 769 (2009). The Court noted that the Government intentionally used the attorney-client privilege as “both a sword and a shield,” keeping privileged documents from the Plaintiff during discovery and waiving the privilege where it was beneficial. The Government’s own actions prevented the Plaintiff from reviewing the documents before trial and effectively cross-examining the attorneys about the statements in the documents. As a result, the Court granted the Plaintiff’s motion to admit 84 additional documents.

The Court briefly referenced the Government’s waiver of its attorney-client privilege in its recently-published Final Opinion and Order. It noted that, at trial, the Court had found the Government’s waiver to be so broad that “at this point anything [relating to] AIG has been waived involving Davis Polk.” It also added a few facts that were unmentioned in the original Order, such as the fact that the Court required the Government to go back and uncover redactions from documents it had already offered into evidence.

In addition, the Court directly quoted from at least one e-mail from an attorney at Davis Polk, which appears to have been previously deemed privileged. According to the Court, the Government and Davis Polk performed legal analysis of the Federal Reserve’s authority to demand equity and voting control from AIG, and determined that it most likely lacked authority to do so. The e-mail, which appears to have been sent within Davis Polk, stated that “[m]aybe it’s an implied power of setting the conditions for lending money under 13(3) of the [F]ederal [R]eserve [A]ct, but the [Government] is on thin ice and they know it.” Clearly, neither Davis Polk nor the Government intended for this e-mail to be seen, let alone quoted and used against the Government in a final judgment by the United States Court of Federal Claims. Thus, while the Court did not expand on its original Order, it further illustrated the scope of the Government’s waiver and the far reach of the consequences, and exposed at least one e-mail communication that the Government no doubt assumed would remain privileged.

The Court’s order illuminates the danger to both parties inherent in the use of attorneys as witnesses. Because it waived the privilege, the Government – and, by proxy, Davis Polk – was required to turn over to the Plaintiff thousands of previously privileged documents, many of which were sensitive in nature, and at least one of which was quoted as playing a role in the Court’s decision. At the same time, the Court’s remedy arguably did not entirely cure the prejudice suffered by the Plaintiff. Due to the late disclosure of the documents, the Plaintiff was unable to effectively cross-examine the two Davis Polk attorneys. As the order shows, both parties are harmed where the attorney-client privilege is waived at the trial stage. The order should thus spur institutions to carefully weigh the risks and benefits of taking such actions