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Business Law Today

Attorney-client privilege
Pitfalls and Pointers for Transactional Attorneys
By Raymond L. Sweigart
Attorney-client privilege is not just for litigators. Many clients and their lawyers would like to cloak their transactional deals in confidentiality, and the attorney-client privilege appears to be a ready-made vehicle for doing so. But achieving confidentiality in the transactional setting is easier said than done. Simply having a lawyer involved in a transaction does not automatically confer the right to suppress all communications about the deal on the grounds of privilege.

Many clients, and too often their lawyers, are surprised to learn that when a lawyer negotiates a business deal for a client, there may actually be no attorney-client privilege available to shield or protect communications between the client and the lawyer. This may come as a rude awakening if not considered carefully before candid e-mails and memoranda are sent. The key question in determining whether privilege will apply in the transactional setting is whether the transactional lawyer will later be deemed by a court to be functioning solely or primarily as a business negotiator rather than a legal advisor. The answer in each case will turn on the specific facts. However, as a general rule, a lawyer serves solely as a negotiator (which falls outside the cloak of privilege) when the services provided by the lawyer are sufficiently divorced from legal issues and could have been provided by someone who is not a lawyer. Although this appears to be a straightforward matter, it is not. As the cases discussed below illustrate, lawyers serving as negotiators frequently provide their clients with ser-vices that incorporate both legal and non-legal advice. Indeed, many lawyers tout their ability to provide expertise in business--as well as legal--settings. What happens, then, if the deal goes bad, the parties end up in litigation, and one side seeks to discover communications about the deal from the other side's legal counsel?

The courts will often look to what they consider the "dominant purpose" of the communication to determine whether the attorney-client privilege applies. Under this test, if the predominant purpose of the communication is to provide non-legal advice, such as giving clients business recommendations or strategies, then the attorney-client privilege may not apply. A court's determination as to whether the attorney-client privilege applies may also affect the applicability of the work product protection, although the latter is usually further limited by the requirement that there be a real, tangible threat or anticipation of litigation--otherwise, there's no fallback to shield the lawyer's business strategies and thought processes either. Keep in mind that the painful fact that any deal could conceivably end up in court does not earn a free pass to work product protection.

Defining Attorney-Client Privilege
The classic definition of the attorney-client privilege was articulated by John Henry Wigmore as applying "[w]here legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications relating to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser, except the protection may be waived." While Wigmore's formulation specifically relates to communications made by the client to the lawyer, the modern approach in most U.S. jurisdictions protects communications from the lawyer as well. However, don't be surprised by the argument that the lawyer's answer to the client may only be protected if it, in turn, would reveal the client's question. In any event, the purpose of the privilege is usually stated as meant to ensure full and open communication, candor, and confidentiality between the lawyer and the client.

So, that all sounds rather helpful. Why shouldn't a client in a transaction just as much as in litigation want to have full and open communications, candor, and confidentiality? In applying the attorney-client privilege, however, courts have decided that the privilege does not apply to communications made to or by a lawyer who is transacting business that might have been transacted by another agent who is not a lawyer. The concern, of course, is that privilege is seen as obstructing the search for the truth and depriving the fact finders of relevant evidence. Further, there are obviously clients who may try to cloak non-privileged communications by hiring legal counsel to conduct business negotiations, even though legal advice, strictly speaking, is not actually needed or sought. Courts have also raised the concern that if all communications between lawyers and clients are deemed privileged, regardless of whether legal advice is involved, clients able to hire lawyers to negotiate on their behalf would have an advantage over those who use lay negotiators. Such an outcome could be seen as inherently unfair to clients who cannot afford to hire a lawyer to negotiate on their behalf. This concern was raised in Montebello Rose Co. v. Agric. Labor Rel'n Bd., 119 Cal. App. 3d 1 (Cal. Ct. App. 1981).

In-house corporate counsel face an additional challenge in preserving the attorney-client privilege while functioning in the dual role of legal counselor and business advisor. As the Court of Appeals of New York explained in Rossi v. Blue Cross and Blue Shield of Greater New York, 73 N.Y.2d 588 (N.Y. 1989), unlike outside lawyers who are retained to provide legal advice for a discrete, particular legal issue, in-house counsel may be corporate officers with a combination of business and legal responsibilities who have a continuing relationship with their corporate clients. In Rossi, the court held that in light of the closeness of that ongoing, permanent relationship, in-house counsel should be subject to stricter scrutiny when they assert the attorney-client privilege. As such, in-house counsel should be aware that some courts may demand heightened evidence indicating that the communications between the lawyer and corporate client were for the purpose of providing legal advice.

Lawyer Serving Solely as Negotiator
As a general rule, if a transactional lawyer or in-house counsel serves purely as a negotiator, then the client risks losing the attorney-client privilege. In the seminal case of Georgia-Pacific Corp. v. GAF Roofing Mfg. Corp., No. 93 Civ. 5125, 1996 U.S. Dist. LEXIS 671 (S.D.N.Y. Jan. 25, 1996), Michael Scott, an environmental lawyer and in-house counsel for defendant GAF, was asked to review various documents related to GAF's proposed acquisition of Georgia-Pacific's assets, and to comment on various environmental issues raised by the acquisition. Scott did that and also served as the negotiator for various environmental provisions in a contract related to the acquisition.The deal fell apart, and Georgia-Pacific filed suit. Georgia-Pacific sought to compel Scott's testimony regarding his recommendations and other communications about the negotiations. In response to GAF's contention that the communications were protected by the attorney-client privilege, Georgia-Pacific argued that Scott was not acting in his legal capacity but rather as a negotiator, and thus the privilege was not applicable.

The court held that the attorney-client privilege did not apply. The court reasoned that Scott was not exercising a lawyer's traditional function. Rather, the court found that Scott was acting as a negotiator on behalf of management in a business capacity. The court concluded that conversations regarding the status and development of the negotiations, the trade-offs that Scott perceived Georgia-Pacific was willing to make, and GAF's options, all involved business judgments of environmental risks. The court held that such reporting of developments in negotiations was sufficiently divorced from legal advice and not protected by the attorney-client privilege.

Georgia-Pacific has been criticized by some scholars, including Carol A. Needham (see When Is an Attorney Acting as an Attorney: The Scope of Attorney-Client Privilege as Applied in Corporate Negotiations, 38 S. TEX. L. REV. 681 (1997)). Needham charged that Georgia-Pacific was at best, "poorly reasoned," and noted that the facts of the case indicated that Scott provided at least some legal advice. The then-chair of the American Bar Association Section of Litigation, Barry F. McNeil, also complained in an August 1997 ABA Report on Attorney-Client Privilege for In-House Counsel that Georgia-Pacific's ruling would subject in-house counsel to a stricter standard that is unwarranted and misguided. Despite these criticisms, Georgia-Pacific suggests that the attorney-client privilege may not apply if the court determines that the lawyer-negotiator is acting only as a negotiator. That should be a sufficient word to the wise--proceed with caution.

More recently, a similar issue arose in MSF Holdings, Ltd. v. Fiduciary Trust Co. Int'l, No. 03 Civ. 1818, 2005 U.S. Dist. LEXIS 34171 (S.D.N.Y. Dec. 7, 2005). In this case, two e-mail communications by FTCI's senior vice president and deputy corporate counsel regarding whether to honor a letter of credit were found to fall outside the scope of the attorney-client privilege. In MSF Holdings, the court noted that the analysis of whether the e-mails were protected was complicated by the fact that the business decision of whether to honor the letter of credit was influenced by a consideration of FTCI's legal obligations. Reasoning that the attorney never alluded to a legal principle or engaged in any legal analysis, the court determined that the e-mail communications were predominantly commercial in nature and thus not privileged. The court concluded by noting that the attorney simply did what any business executive would do in deciding whether to honor a letter of credit: she collected facts. The attorney thus primarily relied on her commercial knowledge rather than her legal expertise in making her decision.

Dual Purpose Communications
In today's legal marketplace, lawyers frequently claim with some justification that they can "add value" by bringing both legal knowledge and business acumen to work for the benefit of the client. A transactional lawyer's communications thus quite often serve a dual purpose, incorporating both legal and business advice. As the United States District Court for the Southern District of New York noted in a 1995 decision, Note Funding Corp. v. Bobian Investment Co., No. 93 Civ. 7427, 1995 U.S. Dist. LEXIS 16605 (S.D.N.Y. Nov. 9, 1995), commercial entities that engage in large and complex financial transactions are inclined to engage the services of lawyers who have the training and experience to handle sophisticated legal and business issues. However, dual purpose communications can present special challenges for the assertion of the attorney-client privilege.

In Note Funding, there was a demand to Bobian Investment to produce several hundred documents related to business negotiations. Note Funding argued that many of the communications handled by Bobian's attorneys concerned business negotiations and analyses and did not involve legal advice; therefore, the privilege should not apply and the documents should be produced. After conducting an in camera review, the court determined that the majority of the documents sought by Note Funding were protected by the attorney-client privilege. The fact that Bobian's attorneys' advice encompassed business as well as legal considerations did not strip the documents of their privilege. The court stated that in cases where the attorney's advice rests "predominantly" on an assessment of legal issues, the privilege should be recognized. In contrast, in cases where the lawyer is consulted solely for business advice based on commercial, rather than legal expertise, the lawyer's communications are not protected.

After reviewing each document separately, the court found that while the majority of the challenged documents included discussions of financial questions and issues of commercial strategy and tactics, they did so in a context that made it evident that the Bobian lawyers were relying predominantly on their legal expertise. The court thus concluded that the documents were protected under the attorney-client privilege. Not all of Bobian's documents were deemed protected, however. The court also found that some documents were simply reports related to the developments of the negotiations, or mere discussions of commercial prospects and financial considerations, and thus were not covered by the privilege. The district court held that the reports on negotiations, divorced from legal advice, were not protected.

So, whether you face a court more persuaded by the Georgia-Pacific or the Note Funding reasoning, there is clearly no blanket protection available simply because an attorney is involved.

Work Product Protection
A related issue that transactional lawyers who serve as negotiators should keep in mind is the possible loss of work product protection. This protection, strictly speaking, is not a privilege and belongs to the lawyer rather than the client. The work product doctrine protects the notes, mental impressions, and legal analyses and conclusions prepared by a lawyer during the course of and in anticipation of litigation, whether or not communicated to the client. A determination that the dominant purpose of the ser-vices provided by a lawyer is non-legal may also affect the lawyer's ability to assert work product protection.

An illustrative case is Watts Industries, Inc. v. Superior Court, 171 Cal. Rptr. 503 (Cal. Ct. App. 1981). The case involved a suit for rescission of the sale of a condominium on the grounds that the buyers made fraudulent representations about their intentions to live in the condominium in order to close the deal. During the negotiations prior to the sale, an officer of Watts Industries had a telephone conversation with the attorney for the buyers. Watts later claimed that it agreed to sell to the buyers on the basis of representations made by the buyers' attorney during this conversation. In discovery, Watts sought to compel the lawyer's answers and notes about the contents of the phone conversation. The court held that where the lawyer acts "merely as a business agent" by conveying the client's bargaining position to a contracting party, the attorney's notes of the conversation should not be protected. The court reasoned that if the privilege were recognized in this type of situation, there would be increased incentive to use attorneys as business agents, and non-attorneys and clients negotiating for themselves would be at a disadvantage because their notes about negotiations would not be protected. The court concluded that the work product protection applies to documents related to legal work performed for a client, "not to notes memorializing acts performed as a mere agent." Accordingly, the court of appeals ordered the trial court to compel production of the attorney's notes of the telephone conversation. Again, we see the important distinction drawn between legal work provided by an attorney and non-legal work that could be provided by any agent.

A final point to keep in mind is that privilege rulings in litigation can be a blunt-edged instrument. If a court finds that non-legal, business purposes predominate, the door can be opened to disclosure of communications that were really entitled to protection but got lost in the static; once the cat is out of the bag, it is very difficult to get it back in.

Conclusion
Transactional lawyers and in-house counsel cannot escape the fact that they often provide business as well as legal advice. Lawyers who serve a dual role as both legal advisers and business consultants should carefully consider whether communications with clients may be protected by the attorney-client privilege. It is never safe to assume that they will be, as a court may limit the applicability of the attorney-client privilege, particularly in negotiation settings. The following practice pointers may be helpful in avoiding an unintended outcome later on:

  • Become familiar with your state's approach to the attorney-client privilege. Different states take different approaches regarding whether the privilege applies when a lawyer acts as a negotiator.

  • Watch the choice of law and forum selection provisions in the contract, as those could also impact the protection available.

  • Communicate with your client. Discuss what advice the client is seeking and for what purpose the advice is being given. Specifically, it is important to warn the client of the possibility that the privilege may not apply to some communications if litigation were to ensue.

  • Document the purposes of your engagement and representation with a clear emphasis on the legal aspects.

  • Consider thoroughly before mixing legal advice with business advice, and whether doing so will better serve to protect both or may well expose both.

  • Avoid the use of blanket privilege legends on every document. These could not only be ignored but may actually come back to harm you and your client.

  • Consider having a business person present at negotiations to advise the client and report on the business issues. This will also help to more clearly define and distinguish your separate legal advice.

  • Be careful out there.
Sweigart is a partner at Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. His e-mail is raymond.sweigart@ pillsburylaw.com. The author would like to thank Ellen Connelly Cohen and Dania Figueredo for their research assistance with this article.

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