Originally appeared in the February issue of Product Liability Law & Strategy
The modern business landscape is replete with examples of privileged legal communications occurring outside traditional corporate silos. For years, it has been appreciated by litigants (and courts) that bankers, experts and consultants could sufficiently implicate legal issues and strategies and, as a result, some communications with them may be protected under the attorney-client privilege. More recently, faced with pressure to increase efficiency, companies have increased their dependence on outside entities to complete tasks that were once reserved for in-house employees.
In a similar vein, companies are turning more and more to joint ventures as they attempt to exploit synergies with other companies — sometimes even competitors — to accomplish tasks that companies traditionally completed on their own. For example, in the pharmaceutical industry, companies that develop a compound routinely enter into co-promotion agreements with other pharmaceutical companies to promote and market the approved product. Typically, the companies in the co-promotion agreement create one or more joint committees consisting of employees from each company to handle tasks ranging from overall strategic oversight to the review and approval of promotional materials. In the highly regulated pharmaceutical industry, these committees are continually seeking and obtaining legal advice, and companies and their counsel should be diligent in considering whether such communications are privileged and, in turn, protected.
When viewed in hindsight (during litigation), these complex corporate relationships necessitate a careful evaluation of potential applicable assertions of privilege. This article looks at two of the more recent trends to assert and maintain a privilege over communications with non-corporate employee: 1) third parties being considered functional equivalents of company personnel or working as agents for company attorneys in order to maintain an attorney-client relationship; and 2) joint ventures maintaining sufficient common interest with a company to protect communications under a claim of the work-product privilege.
The Use of Third-Party Agents and the Functional Equivalent Doctrine
As with any assertion of privilege, it is important to understand that properly asserting and maintaining the privilege with third parties has two components: 1) ensuring that communications involving third parties and company attorneys (whether company counsel or outside counsel) are covered by the attorney-client and/or work-product privilege; and 2) maintaining that privilege by avoiding any claim of waiver.
Traditional black-letter law teaches that the presence of an outside, or third, party on an otherwise privileged communication will waive privilege. However, courts have found two exceptions to this rule: 1) where the third party is participating to assist an attorney in understanding and interpreting complex principles, and 2) where the third party is so thoroughly integrated into the company that he or she should be treated as functionally equivalent to an employee.
Third Parties Who Assist in Understanding and Interpreting Complex Principles
Courts have long recognized that few lawyers can practice without the assistance of messengers, clerks and secretaries who are not themselves attorneys, and thus these third parties will not break privilege. Use of these quasi-legal third parties does not significantly differ from an attorney’s use of a language interpreter to translate documents. Courts have made the jump from the need to interpret foreign languages to the need to interpret concepts that may be just as foreign to many lawyers, such as complex financial terms or accounting concepts. See United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961). Applying a mix of agency concepts and the interpretive concept, courts have routinely held that third parties who are assisting an attorney in providing adequate legal advice to a client do not break privilege. For example, in Stafford Trading, Inc. v. Lovely, No. 05-C-4868, 2007 WL 611252 (N.D. Ill. Feb. 22, 2007), the court recognized that, “in today’s market place, attorneys need to be able to have confidential communications with investment bankers to render adequate legal advice.”
The determination that the third party does not break privilege rests, in part, on whether or not the third party was acting in an interpretive function for the attorney by rendering expert advice to assist the attorney in delivering legal advice to the company. In another example, in Calvin Klein Trademark Trust v. Wachner, 124 F. Supp. 2d 207 (S.D.N.Y. 2000), Calvin Klein and its attorneys communicated with bankers from Lazard to assist in drafting documents disclosing material information to a potential purchaser. The court reasoned that because the question of what information is material is a mixed question of fact and law, and a law firm would benefit from an investment banker’s business advice, Lazard was serving an interpretive function and did not break privilege. Consistent with this approach, courts have routinely found that, in situations where company lawyers communicate with third-party bankers for the purpose of obtaining or providing legal advice, those communications are privileged.
Similarly, courts have also routinely maintained privilege claims in cases involving consultants, accountants, investigators, public relations firms and non-testifying experts. See NXIVM Corp. v. O’Hara, 241 F.R.D. 109, 138 (N.D.N.Y. 2007) (investigators and accountants); H.W. Carter & Sons, Inc. v. William Carter Co., No. 95 CIV. 1274, 1995 WL 301351, at *3 (S.D.N.Y. May 16, 1995) (public relations consultants); U.S. Postal Serv. v. Phelps Dodge Ref. Corp., 852 F. Supp. 156, 161 (E.D.N.Y. 1994) (accountants, and non-testifying experts); see alsoIn re Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 217 (S.D.N.Y. 2001).
The Functional Equivalent Doctrine
Another factual predicate supporting claims of privilege is when a third party is so integrated in the company that he or she becomes a functional equivalent of an employee. Under the functional equivalent doctrine, communications between a company’s lawyers and its independent contractor merit protection if, “by virtue of assuming the functions and duties of [a] full-time employee, the contractor is a de facto employee of the company.” Exp.-Imp. Bank of the U.S. v. Asia Pulp & Paper Co., 232 F.R.D. 103, 113 (S.D.N.Y. 2005). Thus where a consultant has a close working relationship with a company and performs a similar role to that of an employee, confidential communications that are made for the purpose of obtaining or providing legal advice should be subject to the attorney-client privilege.
In a recent case out of the Eastern District of Pennsylvania, the plaintiffs sought to compel the production of privileged communications between a company and a consulting firm that was hired to assist in a marketing campaign. The court determined that the consulting firm was a functional equivalent of an employee because: 1) it was an integrated member of the company’s marketing team; 2) it played a significant role on that team; 3) the consulting firm’s employees were intimately involved in the creation, development and implementation of the project; and 4) the documents and communications exchanged between the consulting firm and the company remained confidential throughout their collaborative process. In re Flonase Antitrust Litig., 879 F. Supp. 2d 454, 454 (E.D. Pa. 2012).
The functional equivalent doctrine is different from privilege based on the interpreter concept, as discussed above. The Southern District of New York has explained that the functional equivalent doctrine will apply where the third party was retained by a company and functions like an employee; whereas in the situation where a third party is hired to assist an attorney to represent a company and there is no suggestion that the third party performed any business functions for the client or entered into communications with counsel for that purpose, the analysis will focus on the third party acting as an interpreter for the attorney. In re Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 220 n4 (S.D.N.Y. 2001).
Joint Venture and Co-Promotion Agreements
The common-interest privilege doctrine is another exception to the black-letter rule that the presence of a third party waives the attorney-client or work-product privilege. The common-interest privilege is typically invoked when privileged communications are exchanged among parties involved in such joint ventures. It is important to understand the basic elements of the common-interest privilege so that counsel can appropriately structure communication channels to protect the privilege.
As a preliminary matter, the common-interest privilege is not an independent basis for protection, and therefore, all communications must meet the basic requirements of the attorney-client and/or work-product privilege in order to qualify for protection. Although the law varies by jurisdiction, courts typically require — in addition to the basic attorney-client or work-product privilege requirements — that a party establish that the parties shared a common legal interest for the privilege to attach.
Traditionally, courts only recognized a common legal interest for parties involved in an ongoing litigation. This is, in part, because the common-interest privilege originated from the joint-defense privilege, which protects communications among co-defendants involved in a criminal case. The majority of jurisdictions have since expanded the scope of the doctrine to include communications among co-parties involved in civil litigations, and between parties with a common interest related to pending or anticipated litigation. For example, in Johnson Elec. N. Am., Inc. v. Mabuchi N. Am. Corp., No. 88 CIV. 7377 (JES), 1996 WL 191590, at *3 (S.D.N.Y. Apr. 19, 1996), the court found that privileged communications between a vendor that was involved in a patent infringement litigation and its customer concerning the customer’s potential liability for the patent infringement claims were protected communications under the common-interest privilege.
A recent shift in the law has begun to expand the common-interest work-product privilege beyond the artificial restraints of the “ongoing litigation” requirement. In In re Teleglobe Commc’ns Corp., 493 F.3d 345, 364 (3d Cir. 2007), the U.S. Court of Appeals for the Third Circuit found that the common interest “applies in civil and criminal litigation and even in purely transactional contexts.” While the Third Circuit was clear to point out that simply working together to achieve a commercial goal cannot, by itself, result in a common interest between the parties, there was a recognition that legal advice, and resulting work-product, is not limited to pending or anticipated litigation.
Most recently, in Ambac Assurance Corp., v. Countrywide Home Loans, Inc., 2014 WL 6803006, No. 651612/10 (1st Dep’t 2014), a New York appellate court, guided by recent Federal decisions and Delaware law, abandoned the litigation requirement altogether. Specifically, the court noted that “[t]he ‘attorney client privilege is not tied to the contemplation of litigation,’ because ‘advice is often sought, and rendered, precisely to avoid litigation, or facilitate compliance with the law, or simply to guide a client’s course of conduct.’” Further, the court held that encouraging parties with common legal interests to seek legal advice “‘to meet legal requirements and to plan their conduct accordingly’ ... ‘serves the public interest by advancing compliance with the law, facilitating the administration of justice and averting litigation.’”
The Ambac decision and the recent functional equivalent cases are the tip of the spear in the effort to assert and protect your company or client’s privileged communications. As market pressures continue to force companies to find efficiencies through outsourcing typical in-house functions or engaging in joint ventures to promote or develop a product, counsel should be careful to properly structure the communication channels among vendors, third parties and joint venture partners so as not to waive any privilege. Taking a proactive approach to understanding the privilege rules of the relevant jurisdiction — which will most likely be the rules of the state in which the communications were made — before sharing privileged communications with a vendor or joint venture partner will save a great deal of stress in the future. Likewise, litigation counsel must be diligent in asserting these privileges during discovery, in order to educate opposing counsel and the courts on the recent shifts in the law.