New England Biz Law Update
Attorney-client privilege is one of those issues we all think we know about, but we really don’t.
That may be a little harsh. Maybe the more accurate description is that we often know just enough to be dangerous. Let me explain what I mean.
Here is what we do know: An attorney is under a sacred duty to preserve client confidences and secrets, and a court cannot compel an attorney to disclose communications between the attorney and his or her client made for the purpose of obtaining and giving legal advice.
Sounds pretty impressive, pretty all encompassing doesn’t it? The problem for in-house counsel is that how we typically do our jobs, how our businesses operate on a day-to-day basis, often conflicts with what would be best in terms of protecting the privilege. With the help of the Goulston & Storrs Professional Liability Group, I hope to point out to you some real life examples of where your normal business practices may cost you the protection of the attorney-client privilege.
Providing Business Advice – Good For Career, Bad For Privilege
For many of us, one of the best things about working in-house is the fact that we have the opportunity to really learn the business and participate in its strategic and day-to-day decisions. Regardless of whether you appreciate the opportunity, for most in-house counsel, the practical reality is that your client and thus your career at the company require you to be a lawyer and a businessperson.
Here is the problem: The attorney client privilege only protects legal advice, not business advice. The bigger problem is that business and legal advice are typically given as part of one piece of work – the negotiation of a contract for example – and it is impossible with any certainty to say in advance what will be considered legal advice and what will be considered business advice.
Bear with the cynic in me but, as a former litigator, I would go further and suggest that the judge applies the label after he or she decides if the communication should be protected.
Take a look at the following example.
You are in-house environmental counsel. The boss asks you to handle the negotiation of the environmental deal points in connection with the purchase of certain assets from a manufacturing business.
During the course of the negotiation you advise your executives that the proposed agreement fails to cover certain claims that might arise in the event of an environmental audit. You also recommend certain provisions that the company should include in the asset purchase agreement.
The asset purchase agreement gets signed and includes a provision that requires, as a condition to closing, that the parties negotiate and enter into an environmental remediation and indemnification agreement, but the parties cannot agree on the list of environmental problems, let alone the terms of the remediation and indemnification agreement. The buyer backs out of the deal and the seller sues.
The seller takes your deposition, at which you refuse, based on the grounds of attorney-client privilege, to answer questions relating to: (1) your recommendations as to the provisions in the asset purchase agreement your company should seek; (2) your recommendations as to the options your company should consider in negotiating the list of environmental problems the seller will be responsible for; and (3) whether your executives told you to cancel scheduled meetings with the seller prior to pulling out of the deal.
Are your communications with your clients regarding the transaction protected? No, according to a case decided by the U.S. District Court for the Southern District of New York. (Georgia-Pacific Corporation v. GAF Roofing Manufacturing Corp., et al., 1996 WL 29392 (S.D.N.Y. 1996)).
The reason? In acting as a negotiator on behalf of the buyer you were not "exercising a lawyer’s traditional function", but rather were "acting in a business capacity." The court ruled that the seller is entitled to know whether the buyer agreed to assume certain environmental risks in the asset purchase agreement and, as the negotiator, you are the one who can best answer that question.
I would suggest that this case supports my cynical viewpoint of the issue. I am not sure why the fact that you might have the best information is relevant to whether the attorney-client privilege is lost. That’s like having the criminal defense attorney testify because he or she is the only one the defendant confessed to.
The Only Thing Martha Stewart’s Lawyers Got Right – Talking To The PR Firm
Here is another example of how your normal business practices can cost you the protection of the attorney client privilege.
Your company is about to file suit against a competitor, and the suit is sure to generate significant media interest. As with anything that might hit the media about the company, you want to bring in your public relations firm. Given that the issue is a legal one, you are understandably concerned about doing anything that might lose you the attorney-client privilege.
You consult with your outside counsel and decide that, just to be safe, you will have your outside counsel retain the PR firm. Outside counsel will even have a formal engagement letter, which recites that the outside counsel is hiring the PR firm to help it understand the possible reaction of your customers to the lawsuit, to ensure that any media coverage will be handled responsibly, and to assist in providing legal advice to the company.
Off to the courthouse you race, while both senior company executives and outside counsel have ongoing communications with the PR firm.
Then outside counsel calls you and reports that defense counsel has subpoenaed the PR firm to produce all documents relating to its work on the matter. You ask whether the documents are protected by attorney-client privilege.
They are not, according to a judge in the U.S. District Court for the Southern District of New York.
In Calvin Klein Trademark Trust, et al. v. Wachner, 198 F.R.D. 53 (S.D.N.Y. 2000), the court held that under the circumstances of the case disclosure of confidential information to a third party – here, the PR firm – waived the privilege. Since it appeared from the record that the PR firm actually performed ordinary public relations work, neither the fact that outside counsel retained the PR firm nor the reference to "legal advice" in the engagement letter were sufficient to bring communications with the PR firm within the scope of the privilege.
Does that mean that you can’t use a PR firm when litigation is in the picture? No. There may still be some room for privileged communications with a PR firm when it is hired not merely to protect a company’s public image but to actually assist outside counsel in handling the client’s legal problems.
In the Martha Stewart case, for example, the court protected certain communications among Stewart, her lawyers, and a PR firm because it found that those communications were directed at obtaining and receiving legal advice.
Specifically, the court found that the PR firm was hired to influence media coverage in such a way as to reduce the risk that prosecutors and regulators, feeling pressure from the anti-Martha drumbeat in the media, would prosecute her. See In Re: Grand Jury Subpoenas, 265 F. Supp. 2d 321 (S.D.N.Y. 2003).
Be careful though. The Stewart case is a narrow exception to the general rule that public relations work relating to your company’s litigation is not generally protected by the attorney-client privilege.
As If Going Broke Wasn’t Bad Enough
Here are a couple of examples related to financial problems that can have unexpected consequences on the attorney-client privilege. Your company decides to sell all of its assets to a competitor.
The deal is structured as a merger in which your company sells the assets, then merges with the competitor, and ceases its separate existence. In the merger agreement, your company makes representations and warranties concerning environmental matters, and both the company and its former owner agree to indemnify the buyer for any losses incurred by the buyer as a result of any misrepresentation or breach of warranty.
After the merger, two things happen. First, you lose your job. Second, the new buyer discovers that some of the machinery you sold them is not in compliance with environmental regulations and sues the seller and the former owner for misrepresentation.
In the litigation, the buyer claims it now holds the attorney-client privilege for your legal advice on environmental issues and moves to enjoin you from disclosing these confidential communications to the former owner.
Can they do that? Yes, according to the New York Court of Appeals, since the privilege passes to the successor corporation. See Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y. 2d 123 (N.Y. Ct. App. 1996).
The successor corporation then decides to try to add a little insult to injury. It wants you to disclose to it all of your confidential communications with the seller about the merger transaction itself, and enjoin you from disclosing those communications to the former owner.
Can it? No, because the rights of the seller regarding disputes arising out of the merger transaction remain independent from, and indeed adverse to, the rights of the successor corporation as the buyer.
The court held that to grant the successor corporation control over the attorney-client privilege as to communications on the merger transaction would "thwart rather than promote the purposes underlying the privilege."
The court said, "Corporate actors should not have to worry that their privileged communications with counsel concerning the negotiations might be available to the buyer for use against the sold corporation in any ensuing litigation. Such concern would significantly chill attorney-client communication during the transaction." 89 N.Y. 2d at 139.
But if that was the criteria, it is hard to understand the rather fine distinction the court drew as relates to the environmental legal advice that was provided.
What happens when the exit strategy for your company’s financial woes are to the bankruptcy court rather than a fire sale of the company’s assets? What is the risk to the attorney-client privilege under these circumstances?
Put simply, a bankruptcy trustee, if appointed, becomes your new "client" as to who controls the waiver of the privilege.
Why do you as in-house counsel care? Consider the following scenario.
Your company’s CEO comes to you and discloses that the company is in serious financial trouble as a result of some bad deals. In fact, the CEO sees bankruptcy as the only option, and asks you to explore a bankruptcy filing.
You call outside counsel for advice regarding the potential bankruptcy filing and you also investigate the deals in question. The deals suggest that there might be some self-dealing by company insiders.
The company files for bankruptcy and a trustee is appointed. Some of the major creditors want to investigate the deals, and seek to depose you and outside counsel regarding those deals, and ask the trustee to waive the attorney-client privilege, and the trustee agrees.
Are you required to disclose all of the information that you learned about the deals in question? Yes, according to the U.S. Supreme Court in Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 105 S. Ct. 1986 (1985). The court observed that, as an inanimate entity, a corporation must act through its agents and held that vesting in the trustee control of a bankrupt corporation’s attorney-client privilege most closely corresponds to the allocation of the waiver power to company management outside of the bankruptcy context.
Where Did I Put That Document? – Filing Away the Privilege
Here is the last example, and in many respects the one that scares me the most. You are an employment lawyer who also serves as vice-president of employee relations for your company. After you learn that minority employees are planning to complain to the EEOC about the company’s employment practices, you form a task force consisting of yourself, outside counsel, the corporate employee responsible for EEO compliance, and a consulting firm that specializes in the field of equal employment opportunity.
At your request, the consultant prepares a detailed report for use in the anticipated litigation, and the company’s EEO director writes an analysis of the minority employees’ complaints.
Then the EEOC arrives with a subpoena for all documents in the company’s files relating to minority employment. You feel comfortable that the documents produced by the task force need not be produced, but you ask your secretary where they are just in case. She tells you that they are in the personnel department files, filed alphabetically by author among the other records of the department.
When she retrieves the documents for your review, you find that some of them are directed to you as vice-president of employee relations, but none of them are marked "confidential" or "privileged" and none of them indicate that they were prepared in anticipation of litigation. Can you nevertheless withhold the documents on the grounds of privilege? No, according to the U.S. District Court for the Southern District of New York.
The court in Hardy v. New York News, Inc., 114 F.R.D. 633 (S.D.N.Y. 1985), held that failing to mark the documents "privileged" or "confidential" and commingling them with other personnel department files resulted in the loss of any privilege that might have attached to the documents. The fact that some of the documents were addressed to an in-house lawyer did not save the privilege, because the lawyer was also a corporate manager and the documents failed to specify that they were sent to him in his capacity as a legal advisor to the company.
You should consider this issue in the context of the informality of e-mail and the fact that e-mail is stored in numerous places without any action on your part and the problem grows.
Conclusion
What can we as in-house counsel learn from these cases? The lesson might be simply that you try your best while speaking, and drafting for the worst. Do the things you can do to make sure you and your clients preserve the privilege while always keeping in mind that you can’t ever be certain that the advice you give will be kept confidential.
Gabriel Miller is general counsel of Captivate Network, a Gannett company. He can be reached at [email protected]. Captivate Network (www.captivate.com) is the national news and entertainment network that broadcasts programming and advertising to over 1.4 million business professionals each work day via wireless flat-panel television screens in the elevators of premier office towers across North America. He gratefully acknowledges the assistance of the Goulston & Storrs Professional Liability Group in preparing this article. The Goulston & Storrs Professional Liability Group defends law firms and other professionals throughout New England and nationally in malpractice cases and regularly advises both outside and in-house counsel on ethics issues. For more information, please visit www.goulstonstorrs.com.
