When it comes to the successful assertion of the attorney-client privilege, any litigator currently active can tell you that the task is a whole lot easier if the lawyer involved is outside, rather than inside, counsel. While the legal principles are generally the same in both situations, practical experience and some recent court decisions suggest the emergence of a double standard, arguably resulting in a weakening of the privilege for inside lawyers.
Consider the scene at a deposition of a corporate executive in a commercial litigation. Having testified that one of his managers reported a supplier's displeasure at not being paid for goods which the manager deemed defective (a disagreement which grew into the litigation), the executive proceeds to explain that he placed a call to discuss the matter with Mr. Smith, a lawyer. If Mr. Smith is identified as the corporation's regular outside counsel, who is perhaps the lawyer handling the litigation for the corporation, the questioner will likely shrug when the privilege is asserted and move on to another subject. On the other hand, should Mr. Smith turn out to be a lawyer employed by the corporation, the result may well be a challenge to the assertion of the privilege and perhaps a court ruling upholding the challenge. The reality seems to be that while courts and practicing lawyers generally presume the existence of the privilege for outside counsel, the privilege is often challenged and must be proved when inside counsel is involved.
It is a well-established principle in the United States that a corporation possesses an attorney-client privilege and that in-house counsel are lawyers for this purpose. (1) However, because the client is a corporation, and because of the dual roles of the in-house lawyer as both counsel to and employee of the corporation, unique questions arise when the privilege is asserted for communications with in-house counsel. Moreover, at least recently, these issues have sometimes led to the disallowance of claims of privilege.
Was In-House Counsel Providing Legal Advice?
Most in-house attorneys perform some duties which cannot be described as the traditional performance of legal services. After all, just consider the corporate titles typically given to in-house lawyers: Vice President and General Counsel, Secretary and Assistant General Counsel, Assistant General Counsel and Director of Governmental Affairs. These dual roles lead to an obvious question whenever the attorney-client privilege is asserted for in-house counsel: which hat, business or legal, was the lawyer wearing when he spoke to the corporate executive? Or to put it another way, was the corporate executive seeking and receiving legal advice or business advice in the conversation with the in-house lawyer?
It is often a routine practice of a corporation to have in-house counsel attend departmental meetings. Sometimes a corporate attorney will not be in attendance at such meetings, but a copy of the minutes or some other written record of the meeting will routinely be sent to general counsel's office. The law seems clear that, in such situations, the mere fact that an attorney was involved will not automatically result in the application of the attorney-client privilege. (2) A non-legal business meeting is still a non-legal business meeting, and the courts will examine the subject matter of the meeting before deciding whether the attorney-client privilege applies.
Unfortunately for corporations and other supporters of a broad application of the privilege, courts appear more and more willing to look hard at this issue of business vs. law and find against the proponent of the privilege. For example, one recent case involved an in-house attorney who negotiated the environmental provisions of a contract in which his corporation was purchasing some assets of another company. (3) When litigation ensued over which company was responsible for certain environment problems relating to the assets purchased, discovery was sought from the in-house attorney. Specifically, counsel was asked to disclose the recommendations made to his employer during the negotiations about certain contractual provisions. It came as a surprise to many litigators that the company's assertion of the privilege relating to these conversations was rejected. Even more surprising was the court's rationale. In the view of the court, the negotiation of the contract and the discussion of those negotiations with executives of the company did not constitute "exercising a lawyer's traditional function," but rather was "acting in a business capacity." (4)
While the decision in this case has been criticized, even resulting in an August, 1997 resolution of the House of Delegates of the American Bar Association disagreeing with the court's decision, other cases have since employed the same reasoning. In one such case, the Maryland Court of Appeals denied the applicability of the privilege to in-house counsel's communications with a collection agency hired to collect a company receivable. (5) The collection agency was authorized to hire a law firm to file suit, if necessary, and in-house counsel's communications to the agency were passed on to the law firm eventually retained. When the defendant in the suit sought discovery of these communications and the privilege was asserted, the claim was rejected. The basis for the Court's decision was that in-house counsel was performing a business function, not a traditional legal function, in pursuing collection of this corporate debt.
Would the results in these cases have been different had the attorneys in question been outside counsel? Who knows. What can be said is that these decisions, by focusing on in-house counsel's dual roles as lawyer and businessman, and by taking a narrow view of the lawyer's traditional function, have contributed to a limiting of the scope of the attorney-client privilege for in-house counsel.
Was In-House Counsel Consulting With "His Client"?
Because a corporation can only act through human beings, the question inevitably arises as to which employees of the corporation constitute the client for the purpose of determining the applicability of the attorney-client privilege. It is generally recognized that not all corporate employees are "the client," but courts are not wholly in agreement as to how to make this determination in a particular case.
There are two primary concepts which have been employed by courts to decide which corporate employees inside counsel may communicate with in a privileged context. Under the "control group test," only those conversations between in-house counsel and the corporation's controlling executives and managers are eligible for protection. (6) Application of this test requires a determination of corporate governance without regard to the nature of the matter involved and, quite often, a company's "control group" constitutes a very limited number of corporate employees. In Upjohn Co. v. United States, 449 U.S. 383 (1981), the United States Supreme Court expanded the control group test to include consideration of the subject matter of the communication involved. Under this so-called "subject matter test," employees with pertinent information regarding the subject matter are deemed to be the client irrespective of their standing within the corporation. Not all jurisdictions employ the test articulated in Upjohn, and many continue to rely on the control group test. Some jurisdictions have not expressly adopted either test. (7) The absence of a uniform rule certainly complicates in-house counsel's efforts in planning ahead to preserve the privilege.
Additional issues relating to the question of which corporate employees represent the client should be of concern to in-house counsel. One situation involves former employees and whether communications had with them while employed can be protected by the attorney-client privilege because, at the time of their employment, they were either control group members or were involved in the subject matter which evolved into litigation. This question often arises when opposing counsel in litigation contacts or seeks discovery from former employees. Courts have generally held the attorney-client privilege applicable, and have in some cases sanctioned the attorney contacting the former employees for violation of the ethical obligation to contact represented parties only through counsel. (8)
Another issue bearing consideration involves waiver of the privilege. Some courts, having initially found communications between in-house counsel and certain corporate employees privileged, have gone on to find a waiver of that privilege because the communication was disclosed to other corporate employees not within the scope of the privilege. (9)
How Inside Counsel Can Attempt To Preserve The Privilege.
In order to maximize the possibility of a successful assertion of the attorney-client privilege when, as often happens these days, a corporate problem evolves into litigation, in-house counsel would be well-served to examine their company's routine business practices and make any necessary changes. For example, in-house counsel should use labels on written communications with corporate employees. When writing a memorandum to an employee, a legend should be included such as "REQUEST FOR FACTS SO THAT LEGAL ADVICE CAN BE GIVEN." When an employee sends a memorandum to in-house counsel, it could be helpful for the memorandum to contain prominent language such as "FOR THE PURPOSE OF RECEIVING LEGAL ADVICE."
When in-house counsel are performing what they consider to be legal services, they should always remember to make a record of that fact. In correspondence and memoranda, it will certainly be helpful to describe the legal considerations which are involved in the subject matter. For example, if there is a concern that litigation may develop, the memorandum should say so. In-house counsel should also document the rationale for a memorandum's distribution in order to deflect a waiver argument; in other words, the writing should make clear why each recipient needed to get the memorandum.
There are also a number of "don'ts" which in-house counsel should consider. First, if it doesn't need to be in writing, don't write it. When acting as a lawyer, don't use your non-legal title. Perhaps general counsel could drop the "vice-president" designation altogether. Don't mix law with business in the same writing. If you do, you risk losing an otherwise valid claim of privilege. Lastly, unless you want to risk a waiver, don't send a memorandum dealing with legal matters to anyone who isn't working on or involved with the problem.
Michael A. Lampert and Joseph M. Fairbanks are partners in the Litigation Department of SAUL EWING REMICK & SAUL LLP. Mr. Lampert is resident in the firm's Princeton, New Jersey office, and Mr. Fairbanks is resident in the Baltimore, Maryland office.FOOTNOTES:
- See, e.g., Bruce v. Christian, 113 F.R.D. 554, 560 (S.D.N.Y. 1987); Valente v. Pepsico, Inc., 68 F.R.D. 361, 367 (D. Del. 1975). For a contrary view, see, e.g., AM&S, Ltd. v. Commission of the European Communities , 2 E.C.R. 1575, 1612 (Ct. Comm.) Just. of Eur. (communications by client to lawyer who is "bound to his client by a relationship of employment" not covered by privilege otherwise recognized in European Commission proceedings.)
- See, e.g., Radiant Burners, Inc. v. American Gas Association, 320 F.2d 314, 324 (7th Cir. 1963) ("Certainly the privilege would never be available to allow a corporation to funnel its papers and documents into the hands of its lawyers for custodial purposes and thereby avoid disclosure"); F.C. Cycles International, Inc. v. FILA Sport, 184 F.R.D. 64 (D. Md. 1998) ("What would otherwise be routine, non-privileged communications between corporate officers or employees transacting the general business of the company do not attain privileged status solely because in-house or outside counsel is 'copied in' on correspondence or memoranda.")
- Georgia Pacific v. GAF Roofing Mfg. Corp., 1996 WL 29392 (S.D.N.Y. 1996).
- Georgia Pacific, 1996 WL 29392, at *4.
- E.I. duPont de Nemours & Co. v. Forma-Pak, Inc., 351 Md. 396 (1998).
- Reed v. Baxter, 134 F.3d 351, 359 (6th Cir. 1978).
- See, e.g., E.I. duPont de Nemours & Co. v. Forma-Pak, Inc., 351 Md. 396 (1998).
- See, e.g., Camden v. Maryland, 910 F.Supp. 1115 (D. Md. 1996).
- See discussion In re Horowitz, 482 F.2d 72, 82 n. 10 (2nd Cir. 1973).