On July 17, 2007, the United States Court of Appeals for the Third Circuit (Court of Appeals) handed down a critically important ruling for in-house counsel regarding solicitor-client privilege. The decision, Teleglobe USA Inc. v. BCE Inc. (In re Teleglobe Communications Corp.), F.3d (3d Cir. 2007), clarifies the often-confused forms of solicitor-client privilege and provides in-house counsel with guidance on how to structure their companies’ affairs to preserve privilege, particularly when transactions cross the Canada-US border.

Background:

When BCE Inc. (BCE) purchased Teleglobe Inc. (Teleglobe) in 2000, it agreed to finance Teleglobe’s creation of a global data network connecting 160 cities around the world. When the technology bubble burst, BCE withdrew its funds. Teleglobe and several of its American subsidiaries (Teleglobe et al) filed for bankruptcy and sued BCE. In the context of this litigation, BCE and Teleglobe et al became embroiled in a dispute about whether Teleglobe et al had the right to view all documents produced for or by BCE regarding BCE’s decision to discontinue funding Teleglobe, including opinions of outside counsel.

At the federal District Court level in Delaware, Judge Sue L. Robinson upheld the order of a Special Master compelling BCE to produce all communications regarding BCE’s decision to discontinue funding Teleglobe, including those produced by outside counsel for BCE’s exclusive benefit. Consequently, in-house lawyers across North America became concerned that parent companies would no longer have the benefit of solicitor-client privilege with outside counsel.

Court of Appeals:

In its decision of July 17, 2007, however, the Court of Appeals made several rulings that should ease the minds of in-house counsel. The Court of Appeals remanded the case back to the District Court – on the grounds that the District Court had not made a factual finding that would allow it to set aside BCE’s privilege. Ultimately, the Court of Appeals clarified the law of solicitor-client privilege as it applies to the modern corporate office, and provided in-house counsel with clear guidance on conducting their companies’ affairs in order to protect privilege.

Clarification of the Law on Solicitor-Client Privilege:

The Court of Appeals found that the District Court had misconstrued the type of solicitor-client privilege at issue when the District Court found that the communications between BCE and Teleglobe regarding the discontinuation of Teleglobe’s funding were subject to community-of-interest privilege.

The Court of Appeals held that community-of-interest privilege applies only where several parties are represented by different lawyers on matters of common interest to the parties. It further held that co-client – or joint client – privilege applies if the same lawyer is representing both a parent and subsidiary company on matters of common interest, as is typically the case in a modern corporate office. This means communications among parties to the joint representation are protected from compelled disclosure to parties outside the joint representation.

Application of Co-Client Privilege to BCE v. Teleglobe et al: The Court of Appeals held that if BCE and Teleglobe had been jointly represented on matters of common interest, then the communications made during the course of the joint representation were discoverable. The Court of Appeals expressly rejected BCE’s position that the discoverability rule should not apply when the parties are related entities (i.e., a parent and subsidiary company). Further, the Court of Appeals held that the communications arising from the joint representation between BCE and Teleglobe remained discoverable in litigation even after their interests became adverse.

On remanding the case back to the District Court, the Court of Appeals held that it is up to the District Court to determine whether BCE and Teleglobe et al were jointly represented regarding the discontinuation of Teleglobe’s funding. Depending upon the true extent of the joint representation by in-house counsel, the District Court’s earlier ruling compelling BCE to produce all communications regarding the discontinuation of Teleglobe’s funding, including those documents produced by outside counsel for BCE’s exclusive benefit, may or may not stand.

Lessons for In-House Counsel:

The Court of Appeals provided clear and readable guidelines to assist in-house counsel in structuring their companies’ affairs to avoid the type of order issued by the District Court and upheld by Judge Robinson. These include: i) avoid joint representations except when necessary; ii) limit the scale of joint representations; and iii) use separate counsel when the interests of the parent and subsidiary company diverge.

The Court of Appeals also specifically advised against the use of joint representations in spin-off transactions as the parent company could risk giving up its privilege to a former subsidiary should litigation subsequently occur. Recognizing that spin-off transactions may take months and or years to complete, the Court of Appeals suggested that the parent company retain outside counsel for the subsidiary company for spin-off transactions, while continuing to use joint representations on matters of mutual interest.

Tips for In-House Counsel:

  • Consider devising a strategy to determine when the interests of the parent and subsidiary companies should be jointly represented, and when the interests of the companies require separate representation.
  • Document the strictly limited nature of any such joint representation, thereby limiting any future unanticipated loss of privilege over key opinions.
  • Consider retaining outside counsel to represent the interests of subsidiary companies if the interests of the parent company and subsidiary company diverge.
  • Consider whether to retain outside counsel for the parent company for any matters for which the parent company would not want to turn over documents to a former subsidiary company.