Attorney-Client Privilege: Pitfalls and Pointers for Transactional Attorneys

By Raymond L. Sweigart

Attorney-client privilege is not just for litigators. Many clients and their lawyers would like to cloak their transactional deals in confidentiality, and the attorney-client privilege appears to be a ready-made vehicle for doing so. But simply having a lawyer involved in a transaction does not automatically confer the right to suppress all communications about the deal on the grounds of privilege.

The key question in determining whether the privilege will apply in the transactional setting is whether the transactional lawyer later will be deemed by a court to be functioning solely or primarily as a business negotiator rather than a legal advisor. The courts often will look to what they consider the “dominant purpose” of the communication to determine whether the attorney-client privilege applies. If the predominant purpose is to provide nonlegal advice, then the privilege may not apply.

Defining attorney-client privilege. The classic definition of the attorney-client privilege was articulated by John Henry Wigmore: “Where legal advice of any kind is sought from a professional legal advisor in his capacity as such, the communications relating to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser, except the protection may be waived.” While Wigmore’s formulation specifically relates to communications made by the client to the lawyer, the modern approach in most U.S. jurisdictions protects communications from the lawyer as well.

In applying the attorney-client privilege, courts have decided that the privilege does not apply to communications made to or by a lawyer who is transacting business that might have been transacted by another agent who is not a lawyer. The concern is that the privilege is seen as obstructing the search for the truth and depriving the fact finders of relevant evidence. Further, there are obviously clients who may try to cloak non-privileged communications by hiring legal counsel to conduct business negotiations, even though legal advice, strictly speaking, is not actually needed or sought. Courts also have raised the concern that if all communications between lawyers and clients are deemed privileged, regardless of whether legal advice is involved, clients able to hire lawyers to negotiate on their behalf would have an advantage over those who use lay negotiators. Such an outcome could be seen as inherently unfair to clients who cannot afford to hire a lawyer to negotiate on their behalf.

Lawyer serving solely as negotiator. Generally, if a transactional lawyer or in-house counsel serves purely as a negotiator, then the client risks losing the attorney-client privilege. In the seminal case of Georgia-Pacific Corp. v. GAF Roofing Mfg. Corp., in-house counsel for defendant GAF served as the negotiator for various environmental provisions in a contract related to an acquisition. The deal fell apart. Georgia-Pacific filed suit and sought to compel the lawyer’s testimony regarding his recommendations and other communications about the negotiations. The court held that the attorney-client privilege did not apply because the lawyer was not exercising a lawyer’s traditional function, but rather, was acting as a negotiator on behalf of management in a business capacity. Conversations regarding the status and development of the negotiations, the trade-offs that the lawyers perceived Georgia-Pacific was willing to make, and GAF’s options all involved business judgments of environmental risks. Such reporting of developments in negotiations was sufficiently divorced from legal advice and not protected by the attorney-client privilege.

Dual-purpose communications. In today’s legal marketplace, lawyers frequently claim that they can “add value” by bringing both legal knowledge and business acumen to work for the benefit of the client. A transactional lawyer’s communications thus quite often serve a dual purpose, incorporating both legal and business advice. In Note Funding Corp. v. Bobian Investment Co., the court recognized that commercial entities that engage in large and complex financial transactions are inclined to engage the services of lawyers who have the training and experience to handle sophisticated legal and business issues. In Note Funding, there was a demand to Bobian Investment to produce several hundred documents related to business negotiations. The court determined that the majority of the documents were protected by the attorney-client privilege. The fact that Bobian’s attorneys’ advice encompassed business as well as legal considerations did not strip the documents of their privilege. The court stated that in cases where the attorney’s advice rests “predominantly” on an assessment of legal issues, the privilege should be recognized. In contrast, in cases where the lawyer is consulted solely for business advice based on commercial rather than legal expertise, the lawyer’s communications are not protected.

Whether you face a court more persuaded by the Georgia-Pacific or the Note Funding reasoning, there is clearly no blanket protection available simply because an attorney is involved.

Work product protection. A related issue to keep in mind is the possible loss of work product protection. This protection, strictly speaking, is not a privilege and belongs to the lawyer rather than the client. The work product doctrine protects the notes, mental impressions, and legal analyses and conclusions prepared by a lawyer during the course of and in anticipation of litigation, whether or not communicated to the client. A determination that the dominant purpose of the services provided by a lawyer is nonlegal may affect the lawyer’s ability to assert work product protection.

Watts Industries, Inc. v. Superior Court involved a suit for rescission of the sale of a condominium on the grounds that the buyers made fraudulent representations about their intentions to live in the condominium in order to close the deal. During the negotiations prior to the sale, an officer of Watts Industries had a telephone conversation with the buyers’ attorney. Watts later claimed that it agreed to sell on the basis of representations made by the buyers’ attorney during this conversation. In discovery, Watts sought to compel the lawyer’s answers and notes about the contents of the phone conversation. The court held that where the lawyer acts “merely as a business agent” by conveying the client’s bargaining position to a contracting party, the attorney’s notes of the conversation should not be protected. It concluded that the work product protection applies to documents related to legal work performed for a client, “not to notes memorializing acts performed as a mere agent.” The appellate court ordered the trial court to compel production of the attorney’s notes of the telephone conversation.

Conclusion. Lawyers who serve a dual role as both legal advisors and business consultants should carefully consider whether communications with clients may be protected by the attorney-client privilege. The following pointers may be helpful in avoiding an unintended outcome later on: Become familiar with your state’s approach to the attorney-client privilege; watch the choice of law and forum selection provisions in the contract; warn the client of the possibility that the privilege may not apply to some communications if litigation were to ensue; document the purposes of your engagement and representation with a clear emphasis on the legal aspects; consider thoroughly before mixing legal advice with business advice, and consider whether doing so will better serve to protect both or may well expose both; avoid the use of blanket privilege legends on every document because they could not only be ignored but may actually come back to harm you and your client; and consider having a business person present at negotiations to advise the client and report on the business issues.

For More Information About the Section of Business Law

- This article is an abridged and edited version of one that originally appeared on page 43 of Business Law Today, March/April 2008 (17:4).

- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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- Books and Other Recent Publications: Practice under Article 9 of the UCC; SEC Compensation and Disclosure Rules; Hereof, Thereof, and Everywhereof, 2d ed.; Model Business Corporation Act, 2007 ed.; Portable Bankruptcy Code and Rules, 2008 ed.; New Bankruptcy Code, 2d ed.; Intangible Assets Handbook; Intellectual Property Deskbook; In-House Counsel’s Essential Toolkit; Corporate Director’s Guidebook, 5th ed.; Bankruptcy Deadline Checklist, 3d ed.; Reorganizing Failing Businesses, rev. ed.; Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley; Model Asset Purchase Agreement with Commentary; The Practitioner’s Guide to the Sarbanes-Oxley Act; The M&A Process: A Practical Guide for the Business Lawyer.

Raymond L. Sweigart is a partner at Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. He may be reached at .

Copyright 2008

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