Does the Attorney-Client Privilege Protect Information Shared with Investment Bankers?


Imagine yourself in the midst of a major international deal. A European-based corporation and your client, a U.S.-based multinational, are buying a substantial interest in a third corporation with global activities, predominantly owned by Canadian and U.S. nationals. The negotiations have been complex. Each party has retained at least one, and from time to time more than one, major law firm to advise it on legal questions arising under the tax, corporate, securities, antitrust and regulatory laws of a number of jurisdictions. Each of the parties has also retained financial advisors, that is, investment bankers and large accounting firms, to advise it on how to structure the deal to yield the greatest financial benefit and the least financial risk, and in the buyers' case, to conduct due diligence of the target corporation.

The negotiating sessions have been massive. The principals are experts in running their businesses, but not in structuring a multinational investment transaction from a legal, financial and regulatory perspective. Similarly, the legal and financial advisors each are experts in their respective fields, but need to rely on one another's advice, as well as on their clients' input, to insure, for example, that the lawyers don't inadvertently draft away a significant financial coup or that the ownership structure preferred by the bankers doesn't violate some country's foreign ownership restriction. Each party has its team, and each team is a seamless web of specialists who trade drafts, opinions and advice to get the deal done in the best way possible for their clients. Confidentiality is a concern, and there are some pretty thorny legal issues, but because the exchange is limited to members of the respective teams, including counsel, it's all privileged, isn't it?

Maybe not. Even assuming the information exchanged consists of legal advice, requests for legal advice, or information required to procure legal advice, sharing the information with the client's non-legal consultants could easily be deemed a waiver of attorney-client privilege. Further, because the material, even if containing an attorney's work product, was probably not prepared in anticipation of litigation, no work product privilege attaches under federal law.

In its U.S. law incarnation, the attorney-client privilege, as a general matter, protects communications between attorneys and their clients intended by the client to be confidential that transmits a request for legal advice or that responds to a request for legal advice. WEINSTEIN'S FEDERAL EVIDENCE (2nd Ed. 1997) ("WEINSTEIN'S EVIDENCE"), § 503.03[1] at 503-9-10. The communication is privileged, but if the communication contains information that may be discovered from non-privileged communications or testimony, that information will not remain privileged. See Diversified Industries Inc. v. Meredith, 572 F.2d 596 (8th Cir.), aff'd on rehearing, 572 F.2d 606 (8th Cir. 1977). The privilege is to be construed restrictively because it impedes the investigation of truth. But its modern purpose -- to "encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice" -- has not lost weight over time. Upjohn Co. v. United States, 449 U.S. 389 (1981).

The Modern Background

Until 1981, the majority of the circuit courts used the "control group" test in analyzing claims of attorney-client privilege. That rule protects communications between counsel and persons "in a position to control or even to take a substantial part in a decision about any action which the corporation may take upon the advice of an attorney." 449 U.S. at 395. See Philadelphia v. Westinghouse Electric Corp., 210 F. Supp. 483, 485 (E.D. Pa.), petition for mandamus denied sub nom. General Electric v. Kirkpatrick, 312 F.2d 742 (3rd Cir. 1962), cert. denied, 372 U.S. 943 (1963). The control group test was developed as a tool for applying the attorney-client privilege to corporations. It operated on the assumption that only the corporate decision-makers are in fact the "client," and the privilege protects only communications between an attorney and client.

An alternative test, used by a minority of the circuits, focused the examination on "subject matter" -- that is, whether the communication was one that an employee made in the course of performing his/her duties at the direction of his/her superior. See Diversified Industries, Inc. 572 F.2d at 609. Both of these tests were criticized. The control group test was attacked because it failed to reflect the realities of life in a corporation. The test protected only communications of senior management, but frequently, information needed by counsel to prepare legal advice and the persons in the corporation who implemented the advice were lower level employees, not senior managers. Rather than promote the free flow of information between counsel and its corporate clients, the control group test tended to impede confidential communications for fear of waiver. The subject matter test also was criticized as being too loose. Corporate employees could protect otherwise discoverable information simply by funneling it through corporate counsel.

The last time the Supreme Court examined the scope of the attorney-client privilege, it took a functional approach. See Upjohn Co. v. United States, 449 U.S. 387 (1981). The Upjohn case involved the IRS' attempt to enforce a summons which requested production of certain questionnaires and interview notes of company employees (who were not decision-making members of the company's "control group"); the documents had been compiled by Upjohn counsel in the course of an internal investigation into questionable payments to foreign government officials. The Court ruled that the information was protected from disclosure by the attorney-client privilege because the non-control group employees were the ones with the information necessary to the provision of legal advice, and because, as a general matter, non-control group employees are frequently the individuals who need to know the legal advice in order to implement it effectively. Id. at 392.

In Upjohn, the Supreme Court acknowledged the need for certainty, but subordinated certainty to a case-specific examination most akin to the tests used by the subject matter courts: Why was the information communicated? Were the employees who were communicating in the best position to know the information required by the lawyer? What rule in a particular case would best promote the purposes of the attorney-client privilege? Did the company intend to keep the information confidential and did the company in fact keep it confidential? The answers to these questions, the Court concluded, compelled the application of the attorney-client privilege to the questionnaires and interview notes reflecting communications between counsel and Upjohn employees, upper echelon or not. Id. at 396-97.

Upjohn sought to protect other notes and memoranda of its general counsel from disclosure under the work product doctrine, codified as Rule 26 (b)(3) of the Federal Rules of Civil Procedure. See Hickman v. Taylor, 329 U.S. 495 (1947). The rule affords qualified protection to work product prepared in anticipation of litigation, and requires a heightened degree of protection (but still not absolute protection) for the "mental impressions, conclusions, opinions or legal theories of an attorney or other representative of a party concerning the litigation." The Court concluded that the doctrine applied to IRS summons enforcement proceedings like the one at issue in Upjohn, and that the Magistrate who had ordered disclosure had applied too lenient a standard of protection.

Accordingly, after analysis of the claims, the specification must be reviewed to determine if the inventor has used any words in the claims that differ from their ordinary and customary meaning. If the inventor does not define an uncommon or new definition for a claim term, it will be given the common meaning of the term to one of ordinary skill in the art.

Should the Privilege Extend to Information Shared with Independent Contractors?

Upjohn clarified a few issues. Most importantly, the decision made clear that hard and fast rules won't work in this area of the law, regardless of the benefits of certainty. As the codifiers of the Federal Rules of Evidence said, "the privilege of a witness . . . shall be governed by the principles of the common law as they may be interpreted in light of reason and experience." Fed. R. Evid. 501. What Upjohn left us with, then, is some additional reason and experience to work with when applying the attorney-client privilege to corporations.

Perhaps the most interesting question left open by Upjohn is whether privileged communications shared with independent contractors retained by the client for specific business purposes lose their privileged status. We know from well-established case law that a consultant retained by a lawyer, or maybe even by a client, for the purpose of assisting the lawyer to provide legal advice is within the ambit of persons with whom privileged information may be shared without waiver. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) (communications to an accountant retained by lawyer protected); Dabney v. Investment Corp. of America, 82 F.R.D. 464 (E.D. Pa. 1979) (communications with a law student who was not an agent or associated with a licensed attorney not protected). The rationale here is that the accountant (for example), is retained by the attorney almost as a translator would be -- to analyze and process the client's information using accounting expertise so that the attorney may render effective legal assistance to his client. This fits into the functional approach set forth in Upjohn: there is no waiver when the information is shared among persons who need to know it in order to make the privilege work.

The courts have had far more trouble when considering whether the privilege has been waived by disclosure of otherwise privileged information to an independent contractor retained by the client. Most courts, in fact, have concluded that the privilege is waived under such circumstances, using a number of rationales. First is the dogma that the privilege must be construed strictly lest it impede the search for truth, and it is waived if communications are shared beyond the traditional attorney-client relationship. See, e.g., Diversified Industries, Inc., 572 F.2d at 602. Second is the notion that in order for the privilege to apply, the client must intend to keep the information confidential. See, e.g., Upjohn, 449 U.S. at 395. If the information is disclosed to an independent contractor, it was not intended to be kept confidential. See, e.g., Liggett Group v. Brown and Williamson Tobacco Corp., 116 F.R.D. 205, 209-10 (M.D.N.C. 1986). Third is the notion that if an independent contractor is hired by the client, his function must be to advise the client on business matters, not to facilitate the communication of legal advice. Because only legal advice and requests for legal advice are attorney-client privileged communications, sharing such communications with business consultants means it is not legal advice to the client, or that if it was legal advice, the business consultant is not the client and the privilege has been waived.

At least since Upjohn, none of these theories is persuasive. The traditional attorney-client relationship in the corporate context is quite different from the individual client/attorney relationship that predominated when the Supreme Court recognized that legal assistance may be effective only "when free from the consequences or the apprehension of disclosure." Hunt v. Blackburn, 128 U.S. 464, 470 (1888). Upjohn expanded the notion of who is the client beyond the corporate decision-makers to encompass, at the very least, all employees of the corporation who need to provide information to obtain legal advice or who were in a position to implement the legal advice once it was given: "The control group test thus frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys seeking to render legal advice to the client corporation. The attorney's advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation's policy." Upjohn, 449 U.S. at 392.

Similarly, sharing privileged information with those who need to know the information in order to facilitate the provision of legal advice, or sharing legal advice with those who are in the best position to implement the advice does not detract from the client's interest in keeping the communication confidential. The communication is not being shared with the outside world, with one's adversaries or with one's competitors. Sharing a privileged communication on a "needs to know" basis promotes the transmission of useful information to counsel and the communication of legal advice to the client and its representatives -- exactly the interests the attorney-client privilege was meant to serve.

The thorniest rationale for not protecting legal advice shared with independent contractors or consultants is the theory that these entities (individuals or organizations) were not retained to facilitate legal communications but only to provide business advice. This concern should not automatically bar a claim of privilege simply because information was shared with an investment banker or other non-attorney advisor. Instead, it should prompt the following inquiries: was it intended that the information would be kept confidential among members of a "team," for example, in an acquisition? Was it necessary for the investment banker to have the legal advice prepared for the client in order for the investment banker to perform its work in structuring the transaction? Was it necessary for the investment bankers and lawyers to communicate concerning both financial and legal matters to insure that the legal documentation of the deal did not interfere with the client's business goals, and to insure that the structure envisioned by the financial advisors did not run afoul of the tax, corporate or regulatory regimes of the jurisdictions in which the merged company would operate? Could the client make effective use of its specialized legal and financial advisors absent the ability of these advisors to communicate with one another so that they may provide effective assistance to their clients?

There is no logical reason to differentiate between the non-control group employees eligible to share privileged communications without waiver under Upjohn, and independent consultants who need to know or need to transmit information in order to do their jobs effectively. The issue is not the nature of the employment contract, but the nature of the communication and the purpose for which it was shared.

Post-Upjohn Applications

Two post-Upjohn cases are particularly instructive on the issue of the applicability of the attorney-client privilege to information disclosed to independent contractor consultants retained by the client. In In re Bieter, 16 F.3d 929 (8th Cir. 1994), a leading opinion by the Court of Appeals for the Eighth Circuit, the client, Bieter, was a developer of real estate in Minnesota. Klohs was an independent contractor retained by the client to provide advice and guidance regarding commercial and retail development in Minnesota. The evidence showed that Klohs had a close relationship with Bieter, and that he and one of the Bieter partners worked out of the same office. Klohs nevertheless was not an agent, employee or partner of Bieter, although he subsequently became an employee of Bieter.

Klohs also had extensive contact with Bieter's attorneys, the law firm of Dorsey and Whitney. He received many communications from the attorneys, both as copyee and as addressee. The Court also found that the law firm perceived Klohs to be a representative of Bieter.

The Court framed the question before it as whether communications between the client and consultant (or between the client, its attorney and its consultant) "necessarily fall outside the scope of the attorney-client privilege because the consultant was neither the client or an employee of a client." Id. at 934. Proposed Federal Rule of Evidence 503 ("Standard 503"), never adopted by Congress but relied upon by many courts as providing guidance on the federal common law of attorney-client privilege, was the starting point for the Court's legal analysis. Standard 503 outlines the circle within which a privileged communication may be disseminated without waiver of the privilege:

A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client:

  • between himself or his representative and his lawyer or his lawyer's representative, or
  • between his lawyer and his lawyer's representative, or
  • by him or his lawyer to a lawyer representing another in a matter of common interest, or
  • between representatives of the client or between the client and a representative of the client, or
  • between lawyers representing the client. Supreme Court Standard 503(b).

The word representative was left undefined, leaving the determination to be made on a case-by-case basis. The Advisory Committee Note to the Definitions section of Standard 503 also recognized that as a practical matter, a confidential communication may be disclosed beyond the immediate circle of the client, its representative, its lawyer and the lawyer's representative without losing its confidential status. Thus Standard 503 provided that a confidential communication could be disclosed to persons "to whom disclosure is in furtherance of the rendition of professional legal services to the client" and to those persons "reasonably necessary for the transmission of the communication." "WEINSTEIN'S EVIDENCE" § 503App.01[2] at 503App.-3-5. Standard 503 was never adopted. But it is considered an excellent summary of the federal common law of privilege, and is part of the reason and experience analysis mandated by Federal Rule of Evidence 501.

The Eighth Circuit in Bieter determined that Klohs was a "representative" of the client on several occasions, but the Court's analysis did not stop there. The Court concluded that finding the privilege applicable to a communication between counsel and an employee, but inapplicable to a communication between an independent contractor and counsel, would frustrate the goal of fostering communications between counsel and persons whose information was necessary to the provision or implementation of legal advice. Both the Supreme Court's reasoning in Upjohn and the Eighth Circuit's own decision in Diversified were inconsistent with drawing such distinctions.

In McCaugherty v. Sifferman, 132 F.R.D. 234 (N.D. Cal. 1990), a federal trial court used a similar analysis in a case where the plaintiff had alleged fraud in connection with the sale of a bank to the plaintiff by the Federal Asset Disposition Association (FADA) and the FSLIC. At issue were communications between counsel for the defendants and consultants to those agencies retained to assist in the disposition of the property. The question that the court posed -- whether the consultants should be treated as the functional equivalents of employees -- was answered in the affirmative, but the privilege was inapplicable for other reasons. See also, Sexton, A Post-Upjohn Consideration of the Corporate Attorney-Client Privilege, 57 N.Y.U.L. Rev. 443, 498 (1982); In re Allen, 106 F.3d 582, 605 (4th Cir. 1997) (quoting In re Coordinated Pretrial Proceedings in Petroleum Product Antitrust Litigation, 658 F.2d 1355, 1361 n.7 (9th Cir. 1981), cert. denied, 455 U.S. 990 (1982) (recognizing that a communication between counsel and a former employee of the client should be protected because "former employees, as well as current employees, may possess the relevant information needed by corporate counsel to advise the client."))

The courts in Bieter and McCaugherty, applying and extending the Upjohn analysis, held that there was no principled reason for distinguishing between lower level employees of a corporation and representatives of a corporation. The same analysis should be applicable to the sharing of confidential information with investment bankers in appropriate circumstances. Investment bankers often require a legal analysis in order to fully analyze the potential prospects of a proposed transaction. Pursuant to the principles enunciated in Upjohn, relevant legal information should be able to be communicated to the investment bankers, as consultants to the clients, without sacrificing the privilege. Holding that information shared with investment bankers waives the privilege because they are not employees of the client would exalt form over substance, much like the control group test that was explicitly disavowed in Upjohn.

The case law interpreting whether the sharing of confidential information with investment bankers waives any attorney-client privilege is thus far sketchy. In CSC Recovery Corp. v. Daido Steel Co., Ltd., 1995 WL 338294 (S.D.N.Y.), a Magistrate Judge ruled, without further elaboration, that advice from outside counsel to the client was not waived when disclosed to the investment bank "since [the investment bank] was clearly acting as [the client's] financial consultant and agent in the transaction in issue and the documents reflect legal advice requested of, or rendered by [the client's] outside counsel." CSC Recovery, at *1. See also, Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426, **2 (Del. Ch. 1986) ("[W]here a client seeks legal advice as to the proper structuring of a corporate transaction and it is also prudent to seek professional guidance from an investment banker, it would hardly waive the lawyer-client privilege for a client to disclose facts at a meeting concerning such transaction at which both his lawyer and his investment banker were present." (applying Delaware law)).

However, in In re Intern. Harvester's Disp. of Wisc. Steel Lit., 666 F. Supp. 1148, 1155-57 (N.D. Ill. 1987), the court held that the attorney-client privilege was waived when the client shared the legal advice with its investment banking firm. According to the court, sharing the confidential information with the investment banker evidenced "an intention to waive the privilege, to abandon confidentiality, [and] to use the communications for purposes other than seeking legal advice." Id. at 1157. As Upjohn advises, however, sharing pertinent information with those who are in the best position to utilize that information is no evidence of an intent to waive the privilege. Legal advice is meant to be acted upon by non-lawyers; otherwise, it serves no purpose.

So What Do We Do?

It is wise to think ahead about how your requests for legal advice and your lawyer's responses will look in the hands of a government or private adversary several years after your transaction is consummated. The same issues that concerned you at the time will be of interest to your opposition. In many cases, they will be more interested in the concerns that you had than the proper solutions you found.

The safest way to protect your privileged communications is to make clear at the outset that a document containing any legal advice or requests for such advice is circulated solely between lawyer and client, even if it might be useful for a consultant to have. This is the safest way to proceed, but it's not foolproof and probably not workable. If the client or lawyer shares the information orally with a non-lawyer, that could be a waiver, resulting in access to related documents. (Oral communications often are revealed during depositions). More importantly, it's not practical. As the Upjohn Court recognized, legal advice should be shared with the people who may implement it -- otherwise, what's the point?

A risk-reducing alternative is to insure (contractually and in practice) that all privileged communications shared with non-lawyer consultants be returned to the client after the transaction is consummated. This will limit the risk of disclosure, and put the documents back into the hands of the client who has both the standing and the continuing incentive to assert the privilege.

Another risk-reducer is to consider whether every communication needs to be routinely circulated to everyone on the deal list. Maybe there is some legal advice that is meant only for in-house counsel or the CEO of the client. Maybe the bankers and accountants don't really need to know the lawyers' candid legal assessment of a sex discrimination claim in pending litigation. Again, this is a solution that may be harder to implement than it sounds. Sometimes the "send it to everyone on the list" instruction is the easiest and least costly instruction to give.

Summary

The attorney-client privilege, like other evidentiary privileges, is in derogation of the search for truth. The courts and Congress (as reflected in the Supreme Court Standards) have attempted to limit the assertion of the privilege to situations where disclosure would truly interfere with the goal of fostering the attorney client relationship. It is not clear whether the maintenance of the attorney-client privilege necessarily or successfully promotes that goal, or whether its costs outweigh its benefits. Nevertheless, neither courts nor Congress have seen fit to eliminate the privilege from the evidentiary radar and are not likely to do so in the foreseeable future. As long as the privilege exists, it should make functional and practical sense.