A defendant company involved in a zoning dispute did not waive the attorney-client privilege when it shared confidential information with a real estate advisor who was consulted in the company’s acquisition of the disputed property, a Massachusetts Land Court judge has decided.

The plaintiff, One Ledgemont LLC, argued that the defendant waived the privilege by including someone who was not an actual employee of its affiliate on a distribution list of emails containing confidential communications between the defendant and its counsel.

But in a first for Massachusetts state courts, Judge Gordon H. Piper ruled that the privilege could not be pierced on that basis because the consultant was the “functional equivalent” of an employee.

“Given [the consultant’s] central and important role as the real estate counselor guiding [the defendant’s affiliate] in much of its land dealings, his presence on the distribution list of transaction emails to and from the company’s law firm ought not, by itself, strip away any otherwise applicable privilege,” Piper wrote.

The five-page decision is One Ledgemont LLC v. Town of Lexington Zoning Board of Appeals, et al.

‘Practical’ decision

Robert E. McDonnell, a partner at Bingham McCutchen in Boston, represented defendant 95 Hayden LLC. He declined to comment while the case is pending. The plaintiff’s attorney, Stephen J. Brake of Boston’s Nutter, McClennen & Fish, also declined to be interviewed.

But Brendan Malvey, a civil litigator at Barton Gilman in Boston, said the decision makes much practical sense given current business realities.

“So many companies are outsourcing important services, some even going to the extent of outsourcing CFOs,” Malvey said. “[These consultants] may not be employees, but they’re so intricately involved in the business affairs of the company that they ought to be included in the legal decision-making process.”

Professional liability attorney Richard M. Zielinski agreed that Judge Piper made a common-sense decision that recognizes modern business practices. In fact, Zielinski said he knew of a client in a similar situation, with a technical employee who left after 20 years to become an independent contractor.

“That person’s de facto role never changed. He’s still intimately involved in the client’s business; he acts as project manager for many of the client’s projects; and he interfaces with counsel on a regular basis,” said Zielinski, a partner at Boston’s Goulston & Storrs. “It would never occur to anyone in that relationship that the change in employment status would affect the privilege.”

The functional equivalent test adopted by the court should not be seen as an expansion of the well-known Kovel doctrine, under which the zone of privilege is extended to include communications with non-legal professionals such as accountants who provide technical advice to attorneys, Malvey said.

Instead, he said, the functional equivalent test should be seen as a separate but parallel path for extending the privilege to non-employees.

“The circumstances under which you apply Kovel are rather narrow,” he said. “On the other hand, the functional equivalent cases say that if a non-employee is so intricately involved that they’re essentially an employee, they are going to be treated as such for the purposes of applying the privilege.”

Zielinski recommended that lawyers be proactive in addressing the issue, ensuring that there is a clause in the engagement letter with the client identifying the consultant or independent contractor by name and title, acknowledging the fact that the person is not directly employed by the client, but explaining that the individual will be serving as the client’s representative when interacting with counsel.

“That doesn’t make it a slam-dunk winner, but at least there’s a document that shows that people thought about the issue and took measures to protect the privilege,” Zielinski said.

He added that the functional equivalent test adopted by Piper likely would withstand an appeal.

“We have a very open-minded and practical Supreme Judicial Court, which is certainly cognizant of these modern realities of how business is conducted,” Zielinski said. “I believe they would embrace this concept, perhaps with a little fine-tuning.”

Zoning dispute

One Ledgemont is the owner of a building in an office park in Lexington, Massachusetts. In July 2012, defendant 95 Hayden purchased another parcel in the development, with plans to construct a new office building.

The Lexington Zoning Board of Appeals subsequently issued a special permit for 95 Hayden’s construction project. Opposed to the new construction, One Ledgemont sued the zoning board and 95 Hayden, challenging the issuance of the special permit.

Hobbs Brook Management is an affiliate of 95 Hayden that was instrumental in 95 Hayden’s acquisition of the disputed property. Hobbs Brook regularly used Charles Batchelder as an independent real estate advisor for its business dealings, including its key role in 95 Hayden’s purchase of the office park property.

Counsel for 95 Hayden generated a number of emails regarding the acquisition of the property. Batchelder was included on the distribution list for those emails.

One Ledgemont claimed that 95 Hayden had waived the privilege with respect to the emails by distributing them to someone who was not an officer or employee of the company or its affiliate, Hobbs Brook.

In reply, 95 Hayden argued that it had not waived its privilege with respect to the emails because Batchelder’s relationship with Hobbs Brook made him the “functional equivalent” of an employee.

Functional equivalent test

While some federal courts have recognized the functional equivalent exception to the waiver rule, the Supreme Judicial Court has gone only so far as to adopt the “facilitator” test enunciated by the 2nd U.S. Circuit Court of Appeals in the landmark U.S. v. Kovel case.

Generally, under the Kovel exception to the waiver rule, the dissemination of confidential communications to a non-employee does not waive the privilege if the non-employee is a professional who provides technical advice needed by the attorney in advising the client.

Piper viewed the functional equivalent test as consistent with Kovel and predicted that the SJC would follow the federal courts and apply functional equivalent analysis based on the high value society places on the attorney-client relationship.

Moreover, Piper found Batchelder to be the functional equivalent of an employee of defendant 95 Hayden’s affiliate, Hobbs Brook.

“The court views Mr. Batchelder’s position and role in the business life of the Hobbs Brook companies as functional equivalents to those which would be held by someone getting a paycheck from the entity directly,” the judge wrote.

Piper reached his conclusion based on testimony that Batchelder enjoyed exclusive leasing and advisory opportunities and responsibilities with Hobbs Brook “that were of long duration, highly deferential, and made him a key decision leader for the most senior management.”

In that regard, the judge observed that Batchelder advised the management of Hobbs Brook exclusively on nearly all the company’s regional real estate portfolio acquisition and development opportunities.

“No other broker or adviser had any real role in how Hobbs Brook acquired, ran, leased, improved, developed, and disposed of its real estate assets,” Piper wrote.

Batchelder’s key role in Hobbs Brook’s real estate dealings removed any justification for stripping away the attorney-client privilege solely based on his receipt of emails to and from 95 Hayden’s law firm, he added.

Harkening back to the Kovel standard, the judge also found that Batchelder’s participation in the legal decision-making process was necessary for 95 Hayden to receive effective representation from its lawyers.

“The court concludes that the Supreme Judicial Court, if it were to consider this question, would decide that Mr. Batchelder’s unique role made him a necessary partner in the provision of legal advice to Hobbs Brook about how the transaction, which the lawyers were helping shape with that advice, ought have been structured,” Piper wrote.

Without Batchelder’s involvement, he said, “the lawyers’ advice may have been deficient, and based on less than the best input from the client.”

Significantly, Piper found that was true even though all the disputed emails appeared to be from the lawyers to Batchelder, without any in response from the real estate consultant.

“That Mr. Batchelder well would (and could) have extracted, from the communications the attorneys sent him, the facts and concerns the lawyers needed the client to address and respond to, and then could have participated in making that happen, by conferring with the senior management of the company, seems more than plausible,” he said.

“Mr. Batchelder in this way, as the functional equivalent of an employee, would have facilitated the ‘effective consultation’ between client and attorney, with no loss of the privilege.”

Fact-intensive inquiry?

The judge cautioned that it would not often be the case that a person who is not a principal or employee can participate in a company’s dialogue with its attorneys without undoing the privilege.

“Where the relationship with the company is one the non-employee has with many other clients or customers; is single-purpose and limited in scope, duration, and responsibility; or does not put the non-employee in a high-level, trusted decision-making or guiding role, equivalent to that of an employee, the non-employee does not hold the status necessary to keep communications involving him or her privileged,” Piper said.

However, the judge was convinced that the matter before him was one of those rare cases in which the privilege was not waived by the participation of a non-employee in legal decision-making.

“[Batchelder’s] receipt of the emails back and forth among the company and its lawyers does not, without more, strip away any privilege that otherwise would shield the emails from production and use at trial,” he said.

Piper went on to instruct the parties to consider whether the disputed emails met the remaining elements for the application of the attorney-client privilege.

However, the parties subsequently filed a joint submission with the court indicating that there was no longer a dispute regarding 95 Hayden’s assertion of privilege and that the case was ready for closing argument.