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American Bar Association

ABA Section of Business Law


Volume 14, Number 5 May/June 2005

Business lawyers: Listen up!
Attorney-client privilege isnit just for trial lawyers
    By Thomas E. Spahn

Some business lawyers think that only litigators have to know about attorney-client privilege. To be sure, litigators go to court to defend their client's privilege or to assault their adversary's privilege claims. But often they are trying to overcome their business partner's mistakes, or take advantage of the other side's business lawyer's ignorance. If the truth be told, the attorney-client privilege affects all lawyers every time we communicate with anyone — there is no more important legal doctrine.

If any of us needed a reminder, consider the World Trade Center insurance coverage litigation. That titanic struggle has already spawned four separate Southern District of New York decisions about the privilege. Prestigious law firms such as Wachtell, Lipton, Rosen & Katz and Cadwalader, Wickersham & Taft lost their efforts to protect from disclosure key communications, documents and statements at meetings. Who can calculate the hundreds of millions (or even billions) of dollars that were won or lost because what the lawyers wanted to protect was ultimately revealed?

This short article goes back to the basics — describing the attorney-client privilege's elemental rules, along with some good and bad trends.

The attorney-client privilege developed in Elizabethan England. Once transplanted to the United States, it took essentially the same shape in every state (with one important exception, discussed below). Most foreign countries have not been as generous. Many European countries do not protect communications to or from in- house lawyers as privileged. Even in the United Kingdom (which created the privilege and takes a broader view than most European countries), the House of Lords recently refused to expand the privilege covering U.K. corporations to employees below the "control group." Companies with overseas operations should never assume that other countries provide as much protection as our courts do.

The attorney-client privilege still reflects a tension apparent from its birth. The privilege provides absolute protection to most confidential communications between clients and their lawyer, so that clients will feel free to share all of the facts with those who can guide their conduct in the right direction. After 500 years, courts continue to emphasize that the privilege's absolute protection rests on the same basic principle — lawyers cannot help their clients (and guide them toward lawful conduct) if the clients worry that third parties might later learn what clients tell their lawyers.

On the other hand, the privilege undeniably hides the truth. What could be more relevant than what a recently arrested criminal defendant tells her lawyer — yet no one will ever be able to know. As a result of this tension, the privilege provides insurmountable protection to those who apply it correctly, but is narrowly construed and extremely fragile.

This is why business lawyers must know the rules — they most often engage in the communications that might deserve protection, and they have the opportunity every day to train their business clients about the privilege.

Reflecting its original purpose, the attorney-client privilege provides protection to clients asking their lawyers for legal advice, or providing the facts that the lawyer needs.

This basic rule did not translate easily into the world of corporations. Courts universally recognize the incorporeal institution as the "client." This means that whoever controls the corporation controls the privilege — including bankruptcy trustees and purchasers of a company's subsidiary.

Business lawyers assisting a client in spinning off a subsidiary should remember that the subsidiary's new owners now control the lawyer's former client — and those new owners generally can ask for the lawyer's files generated while representing the subsidiary, waive the privilege that covers the pre-spin communications, etc.

The law also had a difficult time deciding who "speaks" for the corporation for privilege purposes. At first, courts only protected communications to and from a corporation's "control group" of upper management (and those who advise them). In 1981, the U.S. Supreme Court rejected this "hierarchical" test in a case called Upjohn Co. v. United States, 449 U.S. 383 (1981).

The Supreme Court instead adopted a "functional" test — which protects a corporation's lawyer's communications with any company employee regarding information the lawyer needs to give the corporation legal advice. To earn this protection, lawyers must identify themselves, describe their communications' purpose and advise the employee to keep the communication confidential.

Some states still follow the control group test, including Illinois. In an especially frightening scenario, Illinois state courts sometimes apply their own state's restrictive "control group" test to corporations from other states that happen to be sued in Illinois — stripping the protection from communications that would have been protected when and where they were made.

There is good news and bad news in courts' application of the privilege to other corporate employees or agents. Once most courts abandoned the hierarchical approach and focused on an employee's particular knowledge, they generally began to apply the privilege even to former corporate employees with pertinent knowledge. Lawyers dealing with former corporate clients should memorialize the privilege's applicability in some written document, preferably signed by the former employee.

Similarly, courts are increasingly treating as full-time employees those independent contractors who are the "functional equivalent" of employees. Viacom Inc. v. Sumitomo Corp. (In re Copper Market Antitrust Litig.), 200 F.R.D. 213, 220 & n.4 (S.D.N.Y. 2001) (public relations advisers). Any corporation that outsources important functions will want to follow this helpful trend — documenting how such independent contractors act as the "functional equivalent" of full-time employees. Unfortunately, corporate benefits folks might push back on this issue, hoping to avoid the adverse consequences of such a characterization.

The bad news involves other client agents — investment bankers, environmental consultants, financial advisers, reorganization consultants, etc. A few courts apply the privilege to communications to or from (or in the presence of) such agents, but the vast majority of courts find that communications made in the presence of these client advisers do not deserve privilege protection, and that sharing privileged communications with them waives the protection (a related doctrine discussed below). See, for example, American Legacy Found. v. Lorillard Tobacco Co., 2004 Del. Ch. LEXIS 157 (Del. Ch. Nov. 3, 2004) (holding that Wilmer Cutler's client had waived the privilege by sharing the law firm's advice with its public relations firm).

This is perhaps the most counter-intuitive privilege rule, and clients generally do not understand it. Clients put together "teams" of problem- solvers, and naturally want to share one adviseris thoughts with the entire "team." Business lawyers must stop them. If they need a concrete example of just how fragile the privilege can be, they should remind their clients that Martha Stewart lost the privilege covering her e-mail to her lawyer by sharing it with her own daughter. United States v. Stewart, 287 F. Supp. 2d 461 (S.D.N.Y. 2003).

If a client loses the privilege by sharing a communication with her only daughter, who would expect it to survive disclosure to an environmental consultant or accountant? Clients and lawyers must treat privileged communications as the corporation's "crown jewels," and rarely if ever share them with other company advisers.

Privileged communications also involve lawyers.

Only a few complications arise when analyzing this aspect of the privilege. In the United States, in-house lawyers receive the same privilege protection as outside lawyers (even communicating in states where they are not licensed). Most courts even protect communications to and from foreigners (such as patent agents) who perform functions in their countries that lawyers perform here. As mentioned above, most European countries are not as generous to in-house lawyers.

In a critical distinction between clients and lawyers, courts generally protect communications to or from (or in the presence of) a lawyer's agents — if the agents are assisting the lawyer in giving legal advice. Thus, an accountant providing independent advice to a client is an outsider to the attorney-client relationship, while an accountant helping a lawyer understand financial statements usually will be treated just like a lawyer's paralegal — inside the intimate attorney-client relationship.

Clever lawyers have tried to take advantage of this key distinction by retaining consultants that the client needs, and "laundering" their independent advice through the lawyer back to the client. Courts reject these efforts, and examine the bona fides of such arrangements. Lawyers preparing a legitimate relationship with consultants who are helping them give legal advice should carefully document the consultants' role and how the consultants are assisting the lawyers.

Some lawyers focus so intently on client and lawyer participants that they forget another key element of the attorney-client privilege — it protects only client-lawyer communications relating to legal advice.

When quizzed, some sophisticated business clients will say that they can make something privileged by putting a "privileged" legend on it, or by sending a copy to a lawyer. These clients sometimes ask lawyers to attend a meeting so the "meeting will be privileged." These and similar misconceptions can lead to disaster.

Business lawyers must constantly remind their clients that the privilege only protects communications relating to legal advice. It does not cover the facts and circumstances of the communication (such as where and when clients and lawyers meet or talk); it does not cover a general description of the lawyer's services; it does not cover historical facts (the light was either red or green — and that fact does not become privileged because the client and lawyer discuss it); and it generally does not cover information that lawyers learn from third parties and relay to their clients.

Clients and lawyers should train themselves to articulate — in the body of their communication — how the communication relates to legal advice.

To make it even clearer that their communications relate to legal advice, clients and lawyers should get into the habit of separating their communications from the widespread type of e-mail message traffic that permeates today's corporations. For instance, if a client wants the CFO's and the in-house lawyer's thoughts about a draft contract, the client generally should send two separate communications.

In the same vein, the privilege only protects communications with lawyers acting as legal advisers — not acting as lobbyists, directors, friends or — especially — business advisers. If a lawyer's communication contains a mixture of business and legal advice, courts generally look for the communication's "primary purpose." Because in- house lawyers so frequently provide nonlegal advice, courts usually place a heightened burden on them to establish that they meet this "legal advice" element. In-house lawyers should try to articulate the privileged nature of important documents containing their legal advice (rather than simply slap a "privileged" legend on the document).

Fortunately, most lawyers never face one additional issue dealing with a communication's content — the "crime fraud exception." The law would never protect communications about future criminal conduct.

Courts have wrestled with two issues: (1) what wrongdoing does the exception cover (all courts say crimes and frauds, and some expand the exception to other intentional wrongdoing); and (2) what connection must there be between the communication and the wrongdoing (most courts require the communication to have been "in furtherance of" the wrongdoing).

Courts analyzing the privilege do not only look at a communication's participants and its content — they also examine the context. As indicated above, the privilege provides absolute protection so that clients will feel free to air all necessary information with their lawyers in confidence. That justification evaporates if either the client or the lawyer does not treat the communication with the confidence the law demands.

As indicated elsewhere, communications in the presence of a third party (even family members) usually will not deserve privilege protection. Similarly, the privilege generally will not cover communications or documents that the client ultimately intends to reveal beyond the intimate attorney-client relationship — some courts do not even protect drafts of such documents.

One exception to this general rule — the "common interest" exception — has led some lawyers astray, and cost them and their clients the privilege. The "common interest" doctrine started with the common-sense notion that jointly prosecuted criminal defendants or civil co-defendants represented by separate lawyers should nevertheless be able to plan a common litigation strategy without forfeiting the privilege protection.

Some courts expanded this doctrine, but the recent trend has been to restrict it. Recent decisions have emphasized that the "common interest" exception applies only to those with an identical legal interest who are in litigation or facing litigation, and jointly plan a litigation strategy.

Business lawyers hoping to take advantage of this doctrine should remember that Wachtell Lipton lost its argument that a large bank could share privileged communications with its investment advisers because they shared a "common interest." A New York court found that any "common interest" was commercial rather than legal, and that the sharing therefore forfeited the privilege. Stenovich v. Wachtell, Lipton, Rosen & Katz, 756 NYS 2d 367 (N.Y. App. Div. 2003). They should also remember that even a properly created "common interest" agreement disappears if the participants later become adversaries.

Even if clients and their business lawyers have taken all the proper steps to correctly create the privilege, they can still lose its protection if they are not careful. Disclosing or relying on privileged communications can cause a "waiver" of the protection. Business lawyers play an especially important role in warning their clients not to waive the privilege.

An "express" waiver occurs if the client actually discloses privileged information — either intentionally or accidentally.

An intentional disclosure can involve sharing privileged communications with another company adviser (discussed above), the government, an outside auditor, etc. The privilege is so fragile that even a careful confidentiality agreement generally does not prevent a waiver — remember Martha Stewart's daughter.

Even sharing privileged communications too widely inside the corporation can waive the privilege. Verschoth v. Time Warner Inc., No. 00 Civ. 1339 (AGS) (JCF), 2001 U.S. Dist. LEXIS 3174 (S.D.N.Y. Mar. 22, 2001). Business lawyers should remind their clients to share privileged communications only with those in the corporation having a "need to know" in order to perform their jobs. As indicated above, clients should treat privileged communications as the company's "crown jewels," and be wary of outdated e-mail recipient lists, etc.

Clients and lawyers might inadvertently disclose privileged communications by sending an errant e-mail or letting a privileged document slip through during a document production connected with litigation. Some courts take a forgiving approach, but others find a waiver in such circumstances.

Lawyers (and their clients) should also remember that the intentional or even inadvertent disclosure of privileged communications can destroy the privilege forever, and for all purposes. Thus, another third party (such as eager plaintiffs or their lawyers) might later obtain access to the communications whose protection was stripped away by too wide a circulation.

The other — and more frightening — type of waiver is called an "implied" waiver. This type does not involve the actual disclosure of privileged communications, but rather a client's or lawyer's reliance on the fact of the privileged communication to gain some advantage. In many circumstances, simple fairness requires the actual disclosure of the communications. For example, litigants cannot seek to avoid liability by claiming that they relied on their lawyer's advice — without disclosing that advice, and what facts they gave their lawyer before obtaining that advice.

The implied waiver doctrine has grown recently. For instance, a defendant in a hostile work environment case hoping to rely on the affirmative defense of having conducted a thorough investigation and taking remedial steps will almost always have to reveal otherwise privileged communications relating to the investigation and remedial steps.

To make the waiver issue even more frightening, most courts apply the "subject matter" waiver doctrine — requiring a party who discloses some privileged communication (or relies on some privileged communication) to reveal all privileged communications on the same subject matter.

Again, fairness dictates this result. Clients cannot expect to defend themselves by relying on a helpful letter from their lawyer without having to cough up all communications with their lawyer on the same topic. Some courts even apply this scary doctrine to the mistaken disclosure of privileged documents. VLT Inc. v. Lucent Techs. Inc., 54 Fed. R. Serv. 3d (Callaghan) 1319 (D. Mass. 2003). This is yet another reason business lawyers should train their clients to treat privileged communications like the company's "crown jewels."

Although many lawyers equate or confuse the attorney- client privilege and the work-product doctrine, they are totally different protections.

The work-product doctrine applies only at certain limited times (when a company reasonably anticipates litigation). The doctrine can protect documents created by any client agent — not just lawyers — as long as the agent was motivated by litigation in creating the documents (in other words, the document would not have been created but for the anticipated litigation). Unlike the privilege, the doctrine provides only a qualified protection, because an adversary can obtain work product if it has "substantial need" for the documents and cannot obtain the equivalent without "undue hardship."

Finally, because the doctrine does not rest on confidentiality, work product can be shared with friendly third parties without waiving its protection. For instance, although Martha Stewart was found to have waived the privilege by sharing a protected e-mail with her daughter, the court found that she did not waive the separate work product protection covering the e-mail.

Business lawyers whose clients might be involved in litigation should familiarize themselves with the crucial differences between the attorney-client privilege and the work product doctrine.

Business lawyers who leave it to their litigation partners to understand the attorney-client privilege risk confusion, embarrassment and malpractice. They should learn the basics, and then train their clients.

Spahn is a partner at McGuireWoods LLP, in McLean, Va. His e-mail is tspahn@mcguirewoods.com.


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