Maintaining the Privilege: A Refresher on Important Aspects of the Attorney-Client Privilege

The attorney-client privilege is the backbone of the legal profession. It encourages the client to be open and honest with his or her attorney without fear that others will be able to pry into those conversations. Further, being fully informed by the client enables the attorney to provide the best legal advice.

The privilege is in play on a daily basis, whether litigated in court or serving as a background consideration in how best to advise the client while maintaining confidences. Even in business transactions, it is critical to maintain the privilege as unseen conflicts may result in litigation down the road where attorney-client communications become of interest to an opponent.

Yet the privilege’s many nuances easily result in loss of the privilege when the attorney does not pay close attention to the details of the communication. Because it is easy to overlook these nuances, especially in the daily life of a business lawyer more focused on negotiating the next deal rather than drafting a privilege log, this article first outlines the fundamental requirements of the privilege. The article then answers two questions that may arise in the business context: (1) whether the attorney-client privilege extends to drafts, and (2) whether the privilege applies to communications with former employees of the client corporation.

Before addressing the requirements of the privilege, it is important to distinguish the work product protection. Work product protection, which is provided for in Rule 26(b)(3) of the Federal Rules of Civil Procedure, applies to documents and tangible things as well as intangible work product such as an attorney’s mental impressions created “in anticipation of litigation.” If the work product is prepared because of the prospect of litigation, it will be protected from discovery unless the opposing party can show substantial need. For in-house counsel and business lawyers whose focus is not on litigation, work product protection is not likely to apply. Nonetheless, every lawyer should be aware that it may afford protection not offered by the attorney-client privilege in the event litigation is on the horizon.

The Privilege Only Protects Legal Advice

To invoke the attorney-client privilege, the proponent must establish a communication between attorney and client in which legal advice was sought or rendered, and which was intended to be and was in fact kept confidential. While both communications from client to attorney and from attorney to client are protected, the privilege protects only the fact that information was communicated and does not preclude disclosure of the underlying facts conveyed in those communications.

This means a client can never protect facts simply by incorporating them into a communication with the attorney. For instance, a client might provide the attorney with details of its transactions with another business over the past 10 years, including dates and costs, to help the attorney draft a new contract with the business. In future litigation, the client would not have to answer any questions about what was said to the attorney or what language the attorney recommended, but the client could not refuse to give the date of a prior transaction simply because that fact was discussed with the attorney. Likewise, raw data from internal investigations or financial analyses cannot be withheld, though the substance of the communications regarding those topics could not be compelled.

Communications will only be privileged if the party sought, and the attorney rendered, legal advice. Because the privilege is contrary to the judicial goal of bringing relevant evidence to light, it is construed narrowly and protects only those disclosures necessary to obtain informed legal advice which might not have been made absent the privilege.

For attorneys who may counsel their clients on business matters as well as legal matters, this requirement is not always easy to meet. If the work could have been performed by an individual with no legal training, the attorney has not been consulted in a professional capacity. Thus, the privilege does not protect communications where the attorney serves the client solely as a business advisor. Under the totality of the circumstances, the attorney’s guidance must have been sought because of a need for legal advice.

For instance, in Visa U.S.A., Inc. v. First Data Corp., attorneys for Visa were involved in reviewing and editing an analysis of the risks and concerns of entering a new private arrangement for transactions, which was transmitted to the board to assist in its decision whether to agree to the arrangement. Although attorneys gave input on the draft materials, the court found that the documents were initially created by Visa’s consultants because of business purposes to aid Visa in making a business decision as to the arrangements, and the analysis would have been undertaken even if no attorneys were involved. 2004 WL 1878209 (N.D. Cal. Aug. 23, 2004). Similarly, in Craig v. Rite Aid Corp., after noting that “courts have eschewed broad claims of privilege premised upon the involvement of in-house counsel in multi-participant corporate restructuring processes, in favor of a far more narrowly tailored and fact specific analysis of privilege claims,” the court held documents seeking feedback from in-house counsel and senior management on a draft proposal relating to business restructuring not privileged as no clear legal advice was sought. 2012 WL 426275 (M.D. Pa. Feb. 9, 2012).

The privilege will not apply where information is shared between attorney and client without any request for legal counsel. Technical drawings forwarded to an attorney have been found to retain their non-privileged status in patent litigation, as have e-mails between a company’s executives related to business decisions which copy but do not solicit advice from in-house counsel. Discussions between an attorney and client in furtherance of the client’s lobbying goals, which might summarize legislative meetings or report on lobbying activities, are also generally unprotected, though advice that requires legal analysis of legislation, such as interpretation or application of the legislation to fact scenarios, would still be protected.

However, where the client seeks legal advice which by its nature relates to business concerns, the privilege still applies. This was the case when the communications at issue concerned tax consequences of a possible reorganization and whether those consequences should affect the structure of corporate realignment, advice as to legality of the sale of the corporation, and tax advice with respect to alternative forms of employee compensation. In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1037 (2d Cir. 1984).

These principles highlight the need for the attorney to be aware of the role he or she is playing – the privilege may exist as to one conversation when donning the hat of legal advisor and disappear in the next, where business advice is sought. To ensure privilege is maintained, the attorney should try to keep the roles from overlapping by offering legal advice and business advice separately when possible, be clear when legal advice is being rendered, and make sure the client understands that simply forwarding confidential information to the attorney does not make it privileged. If the client needs a contract to be reviewed for business concerns (e.g., financial analysis) as well as legal implications, advise the client to send separate e-mails to the finance team and the legal team rather than sending a general request for review to everyone in a single e-mail. The more explicit the request and rendering of legal advice, the easier it will be to assert the privilege.

The Communication Must Be Confidential

To be privileged, the communications must also reasonably be intended as confidential. This means that the communication must not be shared with any third party. However, with a corporate client, the attorney’s discussions with an employee may generally be shared with other non-attorney employees where information is sought at the attorney’s direction or the attorney’s legal advice is relayed. A party’s assertions that the communications were intended to be confidential will not satisfy the burden; the court will look to the circumstances to determine the intent.

One important exception to this strict confidentiality requirement is the “common interest” doctrine. The doctrine, an extension of the attorney-client privilege, applies where (1) a communication is made to a third party who shares a common legal interest, (2) the communications are made in furtherance of that legal interest, and (3) the privilege is not otherwise waived. This rule applies to the work product privilege as well, so work product shared with a third party who has a common interest does not necessarily lose its protection.

While there must be some shared interest, courts disagree as to the commonality required to assert the privilege. Some courts require that the parties have identical interests in order for the doctrine to apply. For instance, a bank and the insurer to whom the bank extended letters of credit were held not to have sufficiently common interests in a lawsuit brought by the bank against the re-insurer who allegedly failed in providing the bank with security on the letters of credit. In structuring the credit agreement, the bank and the insurer were involved in a “collaborative effort” but ultimately each party was interested in making the terms of the transaction favorable to itself. The interests were not identical at the time of the negotiations, so the bank could not invoke the privilege as to communications related to the letter of credit agreements. Bank of America, N.A. v. Terra Nova Ins. Co. Ltd., 211 F. Supp. 2d 493, 496 (S.D.N.Y. 2002).

Other courts apply the common interest doctrine even after acknowledging the parties may have adverse interests in substantial respects. In Chapter 11 bankruptcy, a debtor in possession and the committee of creditors may have different interests, but they share a duty to maximize the debtor’s estate. Based on this shared duty, communications between the debtor, the debtor’s counsel, and the committee related to legal strategies for a potential adversary proceeding to set aside a transfer of the debtor’s property remained privileged. In re Mortgage & Realty Trust, 212 B.R. 649 (Bankr. C.D. Cal. 1997).

In any event, the shared interest must be a legal interest, not simply a commercial interest, and the parties must cooperate to further a joint legal strategy. In In re FTC, in-house counsel for Rexall reviewed materials prepared by its advertising agency and discussed potential legal objections to the materials with the ad agency to assist in creating lawful ads that would not be rejected. 2001 WL 396522 (S.D.N.Y. April 19, 2001). The FTC thereafter sued Rexall for alleged false claims for one of its products and sought discovery of the draft advertising materials from the ad agency. Though legal advice was clearly given, the court found that the shared commercial interest in the success and legality of the ad campaign did not equate to a coordinated legal strategy sufficient to invoke the common interest doctrine. The in-house counsel and ad agency had not worked together to respond to the FTC’s investigation; their joint efforts were limited to ensuring the ads were compliant.

Communications shared with financial advisors or made during arms’-length business negotiations have also been found not privileged, even when concerns about potential litigation are voiced, where the parties’ ultimate goal is to develop and further a business strategy.

Finally, because the common interest doctrine is merely an extension of the attorney-client privilege rather than an independent privilege, and the attorney-client privilege logically requires a communication between the attorney and client, some courts hold that the common interest doctrine does not apply to communications between two parties when an attorney is not also involved.

Privileged information should be disseminated as little as possible, even by employees within the same company. Clients who seek to share information with consultants, advisors or other businesses should be informed that doing so will likely waive any privilege as to that information unless it enables them to pursue a joint legal strategy. Further, the client should be warned against disclosing privileged information to third parties when no attorney is present.

Does the Privilege Apply to Drafts?

An important consideration when working toward a final product with the client is whether the drafts and underlying documents could be unearthed by adversaries somewhere down the road. This issue often arises in the context of business documents, tax returns or regulatory filings.

As explained above, the privilege will not apply to a draft where legal assistance is not provided. The court will look at whether the primary motivation for the attorney’s involvement was the need for legal advice or because of business concerns. Thus, while documents related to tax returns are not privileged when the attorney provides accounting services in simply preparing the returns, those same documents may be privileged if an attorney uses them to provide legal advice as to whether the client should file an amended return. In the corporate context, draft proposals and draft reports created for the board which do not clearly provide legal advice have been held not privileged.

Even where the communications at issue relate to legal advice, the party asserting the privilege has the burden of establishing that they were intended to remain confidential. This can be an uphill battle when the client intended the final product to be shared with a third party.

Indeed, some courts take the view that if any version of the document is intended to be shared with a third party, that communication as well as all underlying documents (including preliminary drafts and any attorney’s notes containing material necessary to the preparation of the document) become discoverable. The theory is that because the client ultimately intended to publish some version of the content in the draft, the client could not have intended it to be confidential.

Alternatively, denial of the privilege as to drafts may be based on the “subject matter” waiver. By voluntarily disclosing the final version, the client waives the privilege as to the substance of the communication, including the underlying details of the information ultimately published. Drafts and documents relied on in preparation of an estate tax return, a draft bankruptcy form, and drafts of proposed SEC filings have been held not privileged based on this reasoning.

On the other hand, the argument can be made that the client must have intended the underlying documents and drafts to remain confidential and that is the precise reason the drafts themselves were not shared with a third party. Otherwise the draft would have been the final shared product. In Iowa Pac. Holdings, LLC v. Nat'l R.R. Passenger Corp., business negotiations between the parties broke down, resulting in a suit for breach of an oral contract and promissory estoppel. In rejecting Iowa Pacific’s demand for National Railroad’s drafts of the contract at issue, the court held that a draft contract prepared by the attorney contains information shared between attorney and client which entitles it to protection. 2011 WL 1527599, *4 (D. Colo. Apr. 21, 2011). Ultimately, these courts believe that the purpose of the privilege will be hindered if clients and attorneys cannot freely exchange information via preliminary drafts.

Under this approach, there is a further split as to how far the privilege extends. The more protective stance calls for the privilege to be applied to all drafts and underlying documents, even as to information eventually disclosed to third parties in the final version (as long as the draft itself is not shared). Others courts extend the attorney-client privilege to cover only those portions of the draft not actually published to third parties, requiring redaction where the draft and final version are not identical.

Of course, drafts and underlying documents created because of impending litigation, such as draft complaints and draft affidavits, could constitute work product even if not covered by the attorney-client privilege. Such drafts have been afforded protection even when the final version is filed because they reflect the mental processes and opinions of the attorney.

The split in authority as to when drafts are privileged is disconcerting considering the vast amount of documents lawyers are asked to review before they are published to third parties. The moral here is to be aware that any documents prepared or notes made on the way to the final version may end up in the hands of a future adversary, and consider the potential impact on the client during the drafting process.

Are Communications with Former Employees Protected?

Another question addressed by courts with increasing frequency is whether privilege attaches to communications between the attorney and the corporate client’s former employees which take place either during or after employment.

The starting point here is Upjohn v. United States, in which the Supreme Court analyzed the scope of the privilege when the client is a corporation. 449 U.S. 383 (1981). The Court rejected the “control group” theory, which limits privilege to communications between the attorney and senior management with the authority to bind the corporation, in favor of the “subject matter test.” Under that test, the privilege extends to any employee regardless of position as long as the communication is made to the attorney at the direction of corporate superiors, the information concerns matters within the scope of the employee’s corporate duties, and the employee is aware the communication serves the purpose of enabling the attorney to provide the corporation with legal advice.

While providing a framework for analyzing privilege as to current employees, the Court explicitly refused to consider whether the privilege could extend to former employees. However, Justice Burger, in his concurring opinion, said that he would extend the privilege to include communications where “an employee or former employee speaks at the direction of management with an attorney regarding conduct or proposed conduct within the scope of employment.”

Courts have had no trouble reaching a consensus on the view that the attorney-client privilege continues to protect privileged communications occurring during the period of employment, even after the employment relationship ends.

But the existence of privilege as to communications between a corporation’s attorney and a former employee taking place after employment terminates is not so clear. The situation often arises when the client corporation becomes involved in litigation concerning matters that took place during the former employee’s employment and the corporation’s attorney wants to prepare the former employee for deposition. Most courts appear to agree that communications post-employment may be privileged if they relate to the employee’s conduct and knowledge obtained during employment and are limited to the facts of the current litigation.

The issue was covered in depth in Peralta v. Cendant Corp., 190 F.R.D. 38 (D. Conn. 1999). There, a former employee brought an employment discrimination suit upon his termination. Cendant Corporation’s counsel discussed the underlying facts of the case and Cendant’s position with Peralta’s former supervisor, who was no longer employed by the corporation, prior to the former supervisor’s deposition. Peralta sought to uncover the details of that communication, but the court held the communication privileged, recognizing that “the attorney-client privilege is served by the certainty that conversations between the attorney and client will remain privileged after the employee leaves.”

Importantly, the court held that the privilege applied only insofar as the nature and purpose of the communications were to learn facts related to Peralta’s termination while the former supervisor was still employed. Conversation related to facts developed during the litigation, such as testimony of other witnesses which the former supervisor would not have known during employment or matters that could change the former supervisor’s testimony, would not be privileged.

The vast majority of federal courts considering this issue follow Peralta’s reasoning. Still, a few courts have rejected the extension of the privilege to former employees. They argue that former employees are not the client and share no identity of interest in the outcome of the litigation with the corporation. Therefore such communications should be treated no differently from communications with any other third-party fact witness. These courts criticize the Peralta line of cases for failing to consider the requirement from Upjohn (including Justice Burger’s concurring opinion) that the employee or former employee speak with the attorney at the direction of management – something a former employee rarely satisfies. The principle underlying the attorney-client privilege (i.e., encouraging the client’s honesty by ensuring privacy) is not served if the former employee is no longer a representative of the client, for instance where the former employee has independent counsel and interests adverse to the company.

While the communications could potentially be protected work product to the extent the attorney’s mental impressions and legal theories are involved, courts are also split on whether this doctrine applies to communications with former employees.

For example, in Domingo v. Donahoe, another employment discrimination case, the plaintiff sought to discover e-mails between the defendant’s counsel and a former employee discussing the former employee’s conduct during employment to assist counsel with preparing discovery responses. 2013 WL 4040091, *6 (N.D. Cal. Aug. 7, 2013). Although the court made no decision on whether attorney-client privilege applied, it held that work product protection applied because the e-mails containing questions from counsel and the employee’s responses could potentially reveal counsel’s thought processes.

However, the same courts that refuse to consider the former employee as part of the attorney-client relationship between the corporation and counsel find that sharing the attorney’s mental impressions with the former employee, a third party who is not a client, waives work product protection.

While counsel should be confident that confidential communications with a current employee will remain protected if the employee leaves the company, they must also pay attention to Peralta’s limits on the privilege for post-employment conversations. Only those communications whose “nature and purpose” were for counsel to learn facts related to a legal action that the former employee was aware of as a result of his or her employment are privileged. Post-employment discussions should not go into any details regarding strategy or status of the ongoing litigation, which would open the door to attacks on privilege and invite the court’s scrutiny.

Conclusion

Because the privilege is in derogation of the search for truth, courts will only apply it when the requirements are clearly met. The burden then falls on attorneys to stay up-to-date on the intricacies of the privilege and pass on their knowledge to clients who all too often make incorrect assumptions regarding the privilege’s scope.

Clearly labeling written communications seeking or rendering legal advice, separating legal advice from responses to business concerns or other matters, and limiting dissemination of privileged information to only those who need it will go a long way to maintaining the privilege. It may also help to remind the client that communications do not become privileged simply because it is shared with an attorney, but privileged status may be lost when shared with third parties, even inside the company or with business partners. While these may seem like common sense tips, the amount of litigation on the attorney-client privilege suggests that the guidelines are not so easy to follow on a daily basis. The bottom line is that the attorney-client privilege requires diligence by both the attorney and client to ensure its protection.