The Essential Role of Counsel in Effective Crisis Management

Earlier this year, the Eaton fire left behind devastating destruction across parts of Los Angeles County. The utility company whose power lines that some alleged ignited the fire immediately offered support to firefighting efforts and community relief programs while initiating its own investigation into the cause. In the coming weeks, the company released information at a regular cadence on what it knew about the fire, along with updates on the company’s efforts to restore power.

In early February, the company released a report with initial findings from its investigation that said the company was not yet able to determine the source of the fire, noting the absence of physical evidence that would suggest active power lines were involved. The report indicated that the focus of the company’s investigation had shifted to whether idle lines in the area could have played some role, based on damage to grounding equipment and highly unusual wind conditions at the time the fire started. Even though the company had not reached any conclusions, it reported that it had taken precautionary steps to strengthen its safety practices with respect to idle lines. The company continues to cooperate with state and local authorities that have launched their own investigations. The latest news reports suggest that a full investigation will take many months to complete, if not longer.

Despite an incomplete investigation, a barrage of lawsuits have been filed against the utility company in the fire’s aftermath. These lawsuits range from mass tort actions brought on behalf of impacted property owners to securities fraud and shareholder derivative actions brought by investors claiming the company underplayed the risk of wildfires. These types of lawsuits are not unusual after a destructive event like the Eaton fire, especially when the public sets its sights on a large company as the party at fault. But in this case, the utility company’s swift, responsive action may prove critical to its defense in the litigation and mitigate the risk of liability that the company may face.

Whether it be environmental disaster, a product defect or some other event, a company’s immediate response to a crisis can have a material impact on the outcome of any ensuing litigation or government investigation. Company counsel — both in-house and outside counsel — play a critical role in advising the company’s board and executives as they navigate these types of crises. This article outlines key considerations for counsel in dealing with crisis.

Crisis Management Plan

In thinking about how to manage a crisis, the first thing counsel should do is ensure that the company has a written plan in place. According to the PWC Annual Corporate Directors Survey in 2023, approximately 48 percent of directors surveyed said that their company had not created a crisis management escalation policy. Interestingly, 96 percent of the same directors expressed confidence in their ability to guide the company through a crisis, leading PWC to conclude that “Boards may be overconfident in their crisis preparedness.” If a crisis management plan does not yet exist, company counsel should lead efforts to develop a plan.

Among other things, a crisis management plan should describe escalation processes and identify the roles and responsibilities of senior management and the board once a crisis is escalated, which can often be a source of confusion. Careful thought should be given to decisions regarding the appropriate delegation of responsibility and decision-making authority in a crisis. These matters are often fast-moving, and it can be cumbersome or unworkable to involve the CEO or full board in all decisions. Typically, the more effective route is to delegate authority to one or more executives to manage and/or oversee the immediate response to a crisis. Nevertheless, the board should be kept apprised of all material developments.

A crisis management plan should outline initial steps that company personnel should take immediately after escalation of a problem and should be tailored to the types of issues that the company is most likely to encounter. For example, almost all (if not all) companies rely upon information technology and operational technologies, and many manage and store confidential data in some form, including confidential employee and customer information. Accordingly, it would be hard to find a company that should not consider the risk of a large-scale cyberattack that affects business operations and continuity and could lead to breaches of sensitive information. Similarly, for companies that handle large quantities of hazardous materials, the plan should consider a scenario in which the materials are not handled properly and cause harm to employees or the surrounding communities.

Amid a crisis, panic and confusion abound. It is easy to forget that the company has written plans at all, let alone what they say. So it is important to periodically review the plan with the C-suite and board and to better prepare and identify potential gaps or points of confusion.

Communications Strategy

A communications strategy is a key component of an effective response to a crisis. The company should consider the different constituencies with which it needs to communicate (e.g., affected populations, employees, shareholders, customers, regulators, the public, etc.), the message to each constituency and the channels or people through which those constituencies will receive the message. For public communications, it may be appropriate for the CEO or another senior executive to be the public face of the company, to reflect the level of significance the company places on its response to the issue. The company should consider retaining public relations and communications specialists that have experience in dealing with crisis situations and that bring an outsider’s perspective on how different constituencies may receive a message.

It is not uncommon that external sources begin to circulate false information or stories about the problem at issue or that leaks emerge from within the company. And in the early stages of a crisis, the company typically faces immense pressure to speak, even though the company is still investigating. It is critically important that the company take control of the situation early, speak with a single voice, and carefully vet all information that it disseminates externally and internally. In crafting internal communications, the company should operate under the assumption that any broadly disseminated information will be leaked externally and plan accordingly.

While the company may not have all the answers, it should provide a clear message describing the information it knows and what it is still investigating. The company should establish itself as credible, responsive and a source of reliable information. If conflicting information comes out from different sources within the organization, or the company publishes false, inaccurate or misleading information, the communications problem will exacerbate the emerging crisis. When appropriate, the company may note when it expects to provide additional information, but it should take care not to overpromise or overcommit, which could diminish credibility if the company is unable to deliver and undermine the company’s investigation efforts. Regular communications with key constituencies, even if there is no new information to report, can be helpful in quelling anxiety or uneasiness that can come from the absence of new information, which can be perceived as stonewalling.

Retention of Outside Experts and Consultants

Counsel should promptly consider retention of outside advisors that regularly deal with the type of problem at issue. Indeed, it is best practice for the company and counsel to have identified and vetted potential advisors in advance. Experienced advisors can provide a steady hand and guidance in a crisis. They also provide needed expertise, credibility and additional resources and manpower, given inhouse subject matter experts are often stretched thin. Further, the company often will need to respond to the crisis and remediate damage and simultaneously investigate the facts (e.g., root cause, scope, severity). In addition to assisting on the response to a crisis and in remediation efforts, outside consultants can help scope, structure and carry out an appropriate internal investigation.

Important Privilege Considerations

In subsequent litigation and regulatory investigations, plaintiffs and regulators will seek company documents and communications regarding the response to the crisis and the company’s investigation. Attorney-client privilege and the work product doctrine provide important shields to discovery that allow for candid conversations at the highest levels of the company without fear that those communications will later be turned over to third parties. Where possible, company counsel, the board and company executives should ensure their communications qualify for privilege protections by involving company counsel in managing and advising on the situation. Also, while counsel may be familiar with privilege and work product parameters, the board and executives may be less familiar with the contours of the protections. Overly broad conceptions of privilege lead to the creation of documents and communications that the author does not think are discoverable but in fact are. In many instances, it is wise for company counsel to provide a quick refresher course to relevant executives and employees on document creation, discovery, attorney-client privilege and the work product doctrine, and common privilege waiver pitfalls at the outset of a crisis response or investigation.

In addition, company counsel may be intimately familiar with privilege and work product in the U.S., but other jurisdictions have much narrower conceptions of privilege and work product. For example, in Europe, communications with in-house counsel do not always qualify for privilege protection in the same way as communications with outside counsel. So counsel should consider whether the privilege laws of other countries where subsequent litigation or regulatory proceedings may occur and funnel communications through outside counsel as necessary.

Documents and communications exchanged with third-party advisors and consultants present special privilege considerations, and company counsel should proceed with caution in the creation and exchange of these documents before assuming they are privileged. Typically, the company waives privilege over communications and documents shared with third parties. But litigants have argued successfully that communications involving third party advisors during a crisis do not waive privilege under the Kovel exception (i.e., the involvement of the third-party advisor was necessary to assist the lawyer in understanding complex issues) or “functional equivalent” doctrine (i.e., the third-party advisor was a functional equivalent of a company employee). In Texas specifically, communications with a “lawyer’s representative” (i.e., “a person employed by a lawyer to assist in the rendition of professional legal services”) qualify for privilege protections under Texas Rule of Evidence 503.

Documents created by or exchanged with third-party subject matter experts working at the direction of counsel in the course of an investigation are likely to qualify for work product protections, assuming the company anticipates litigation or regulatory investigations. And work product protections are not necessarily waived simply because a document or information is shared with a third party. However, some courts have taken narrow views in specific cases with unique factual circumstances and ordered production of third-party expert reports created in connection with an investigation on the grounds that the reports were generated in the normal course of a business response to a crisis and not “but for” the prospect of litigation — for example, see the decision by the U.S. District Court for the District of Columbia in Guo Wengui v. Clark Hill. To avoid this outcome, it is sometimes better to retain an outside consultant that the company does not already use for regular support in normal operations.

Courts have taken different approaches with respect to privilege and work product claims over communications with public relations consultants. While some courts have been receptive to claims that communications to and from public relations consultants still qualify for attorney-client privilege, whether under the Kovel exception, functional equivalent doctrine or otherwise, others have been less so and found waiver in specific circumstances, including where it appears the communications with public relations consultants are for the purpose of formulating public relations strategies, not for facilitating legal advice or litigation strategies. Courts are open to arguments that communications from attorneys to public relations consultants reflect work product and are protected. But in some cases, such as Anderson v. SeaWorld Parks & Entertainment in the Northern District of California, communications from public relations consultants to attorneys may receive work product protection only if they implicitly reflect an attorney’s work product, which can lead to difficult, fact-intensive questions.

In any event, counsel should oversee the retention of outside consultants that assist in the company’s response and investigation. And outside counsel, rather than the company itself, should engage any third-party advisors. Engagement through outside counsel better positions the company to claim privilege and work product protections over any communications, investigative reports and findings involving the consultants. While the Texas Supreme Court held in University of Texas System v. Franklin Center for Government & Public Integrity that a “lawyer’s representative” does not need to be engaged by counsel directly to qualify for the privilege, engagement through outside counsel is a helpful fact that shores up privilege claims. And keep in mind, other courts and jurisdictions have taken different approaches, and the retention of an advisor by the company instead of outside counsel may weigh against the application of privilege protection in those jurisdictions.

Finally, as the company learns additional information through its investigation, it should carefully consider any waiver implications before it publicly releases that information. Courts have found that the disclosure of the company’s conclusions or factual findings from an investigation does not waive privilege over any underlying communications or documents from the investigation so long as the disclosure does not reveal a “significant part” of any communication or document at issue, as the California Superior Court held in Southern California Gas Company v. Dura-Line Corp. But given the potential consequences of a broader waiver, counsel should closely examine, and take measures to mitigate, any potential waiver risk. One potential solution to waiver concerns is to conduct parallel investigations from the outset, a privileged investigation led by counsel and a non-privileged investigation led by company personnel dealing strictly with facts that can be freely shared, allowing the company to better protect the more sensitive analysis that may come out of counsel’s investigation against waiver based on a public disclosure of factual findings.

Regulator Outreach

As part of crisis management planning, company counsel should evaluate whether a particular crisis would implicate mandatory regulatory disclosure obligations, what those obligations entail (including any mandatory timing requirements) and the plan for satisfying those obligations. In addition, it is helpful to identify ahead of time certain contacts at relevant regulatory agencies with whom the company could coordinate in response to a crisis. It is important to maintain credibility with the regulators, and in many instances, a proactive approach with regulators will lead to the best outcomes both for the immediate response to a crisis and later when a regulator considers whether to take any action against the company.

Corrective Action

Lastly, company counsel should make sure that the company takes necessary corrective actions as appropriate to address the root cause of the crisis and to avoid the same crisis or issues in the future. Depending on the circumstances, a crisis may require immediate corrective action (e.g., a product recall, termination or suspension of a senior executive, changes to safety practices) with further corrective action after a more fulsome investigation. The board should be involved in review and approval of the corrective actions, given fiduciary duties may require that the board institute policies and practices intended to address serious issues facing the company, as the Delaware Chancery Court held in In re Boeing Co. Derivative Litigation. Counsel should build a record that reflects the board’s involvement in corrective action.

Conclusion

The hope would be that your company never finds itself in the middle of a crisis. But for companies with large operations, it is almost inevitable that something unexpected and unwanted will eventually occur. Preparation is the key to a successful response. Consideration of the issues above will best position the company for the aftermath of the event, including any litigation or investigations. And when crisis strikes, you will be well-positioned to successfully manage the response.