Judge Rakoff’s Order Is a Strong Warning to Parties and Their Lawyers to Supervise Private Investigation Activities

August 2016Securities & Derivatives Alert

United States District Court Judge Jed S. Rakoff (S.D.N.Y.) recently issued a scathing opinion and order, criticizing defendant Uber Technologies, Inc. (“Uber”) and its in-house counsel for their role in retaining and failing to properly supervise unlicensed private investigators hired to conduct “reputational due diligence” on plaintiff Spencer Meyer and his counsel in connection with an antitrust lawsuit brought against Uber and its chief executive officer. See Meyer v. Kalanick and Uber Technologies, Inc., 2016 WL 3981369 (S.D.N.Y. July 25, 2016). The decision highlights the pitfalls of failing to properly vet and supervise the activities of investigators hired in connection with litigation. 

In December 2015, upon receipt of a complaint naming Uber and its chief executive officer as defendants in an action alleging violations of U.S. antitrust laws, Uber’s general counsel wrote to Uber’s chief security officer, inquiring as to whether the company could learn more about the named plaintiff and his counsel. The chief security officer forwarded this request to Uber’s director of investigation, who then retained Global Precision Research LLC (which was doing business under the name “Ergo”) to perform a “sensitive, under the radar investigation,” that was to be “general enough so that the research remains discreet from a discovery perspective.” Ergo was not licensed to perform private investigation work in New York, yet it accepted Uber’s offer and began its investigation.

Ergo contacted 28 acquaintances or professional colleagues of the plaintiff and his counsel, and made inquiries into their family life, career prospects, and living arrangements, among other things. In reaching out to these individuals, the investigator routinely made materially false statements as to the reasons for his inquiries, and in many instances, recorded telephone conversations without their consent (which is required in states like Connecticut and New Hampshire, where some of the unsuspecting acquaintances resided). Upon completion of its investigation, Ergo submitted a report on its findings to Uber and its in-house legal team.  

Plaintiff’s counsel became aware of Ergo’s activities and pressed Uber’s outside counsel in the antitrust litigation for an explanation. Uber’s outside counsel initially denied that Uber had any involvement in Ergo’s actions based on inaccurate representations made to him by Uber’s in-house counsel. When the plaintiff’s counsel nonetheless threatened to bring the matter to the Court’s attention, Uber’s in-house counsel admitted that Uber had hired Ergo.

Ultimately, the plaintiff brought the matter to the Court’s attention when Uber refused to produce Ergo’s report and all communications relating to the investigation. A legal battle ensued over whether the content of the report and the communications surrounding the investigation were protected from disclosure under the attorney-client privilege or the attorney work-product doctrine.

Ergo claimed that the work-product doctrine, asserted on behalf of Uber, protected Ergo’s investigation materials from being disclosed to the Court. Judge Rakoff rejected this argument on two grounds. First, he reasoned that Uber was estopped from asserting work-product protection because Uber claimed that the materials were prepared to determine whether the plaintiff constituted a “safety threat” to Uber’s CEO or other Uber employees - and not in anticipation of litigation - thereby destroying Uber’s work-product assertion as the doctrine requires that documents be created in anticipation of litigation. Judge Rakoff  noted, however, that he was “profoundly skeptical” of Uber’s claimed purpose for the investigation, and stated that the more likely explanation for the investigation was to unearth derogatory personal information for use in the instant lawsuit to “intimidate” plaintiff and his counsel or “prejudice the Court against them.”

Second, Judge Rakoff explained that even if Uber wasn’t estopped from asserting work-product protections, the “crime-fraud” exception compelled Uber to produce the investigation materials. Indeed, he found that Ergo engaged in fraudulent and potentially criminal activity in performing the investigation, and many of the documents and communications Ergo sought to protect were intended to facilitate Ergo’s fraudulent activities. Despite these facts, Ergo claimed that the crime-fraud exception was inapplicable where, as here, the plaintiff did not suffer any actual damages as would be necessary to establish the crime of fraud.  

Judge Rakoff swiftly rejected this argument, reasoning that Ergo “fundamentally misapprehends the nature of the crime-fraud exception” and that to accept Ergo’s reading would allow perverse results incompatible with the policies behind the exception. Instead, he found that the crime-fraud exception applied, as Ergo engaged in a deliberate pattern of misrepresentations that were known to, and encouraged by, Ergo’s highest levels of leadership. Accordingly, the Court found that all materials submitted by Ergo to Uber were not protected from disclosure, and had to be turned over to the plaintiff.

In addition, the Court enjoined Uber from using any of the information obtained from Ergo’s investigation in any manner in connection with the instant litigation. The Court further enjoined Uber and Ergo from conducting any additional personal background investigation of the plaintiff and his counsel through the use of false pretenses or other unlawful or unethical means. Finally, the Court explained that while it had the ability to fine Uber if it found that Uber acted with “wanton disregard for its ethical and legal obligations,” it need not reach that question, as Uber agreed to pay the plaintiff a “reasonable” (publicly undisclosed) sum to reimburse him for the costs of bringing the motion.

As Judge Rakoff stressed, Uber’s in-house counsel were required by Rule 5.3 of New York’s Rules of Professional Conduct to adequately supervise the Ergo non-lawyers that Uber hired. Indeed, such supervision is necessary, as non-lawyers retained in that capacity may not engage in activities that would violate ethical rules if a lawyer were to perform them. For example, Rule 4.1 the Rules of Professional Conduct states that “in the course of representing a client, a lawyer shall not knowingly make a false statement of fact or law to a third person” - something Ergo apparently did repeatedly in its investigation for Uber. Moreover, as Judge Rakoff explained:

Even beyond the rules of professional conduct … litigation is a truth-seeking exercise in which counsel, although acting as zealous advocates for their clients, are required to play by the rules.  [  ]  It would plainly contravene this truth-seeking function if non-lawyers working for counsel, such as Ergo, could make fraudulent representations in order to surreptitiously gain information about litigation adversaries through intrusive inquiries of their personal acquaintances and business associates.

Meyer, 2016 WL 3981369, at *7.

Judge Rakoff’s decision is a useful reminder for in-house counsel regarding their responsibility to monitor the activities of investigators retained by them or others on behalf of the company during the course of litigation. In-house and outside counsel should be vigilant in their selection of investigators who adhere to ethical requirements, insist on compliance with those ethical requirements throughout the investigation, and remain engaged and involved with investigators to reduce the likelihood that improper tactics are employed. In-house and outside counsel should also make sure that members of upper-management are aware of the potential consequences to the company if unethical third-parties are engaged. In addition, if upper-management employs investigators during the course of a litigation, in-house counsel should insist that they be consulted regarding the selection of such investigators and be kept in the loop regarding the approach to the investigation, as the failure to supervise unethical investigators may be imputed to in-house counsel regardless of whether in-house counsel selected the investigator.


© 2016 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.