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March 05, 2013 Articles

No Waiver of Attorney-Client Privilege for Extrajudicial Disclosures

The Illinois Supreme Court rules on subject-matter waivers

By Michael R. Lied

In Center Partners, Ltd. v. Growth Head GP, LLC, 2012 IL 113107 (Ill. Nov. 29, 2012), the defendants appealed from a circuit court order that granted the plaintiffs’ motion to compel the production of certain documents containing privileged attorney-client communications. The defendants refused to comply and were found in contempt. The appellate court affirmed the order compelling production, but the Illinois Supreme Court reversed.

The defendants own and operate retail shopping malls in the United States. They negotiated to purchase the assets of Rodamco North America, N.V., which owned Urban Shopping Centers, L.P. The defendants acquired a majority interest in Urban, including full ownership of Head Acquisitions, L.P., Urban’s general partner.

In the negotiations, the defendants discussed legal issues related to the transactions. They also disclosed some of their attorneys’ views about the legal implications of the transaction, the importance of the documents, and the rights and obligations of the parties to the transaction. The defendants also shared some documents about the legal and financial terms of the transaction. Their attorneys also discussed a new partnership, referred to in the litigation as the “synthetic partnership.”

The plaintiffs later sued, alleging that the defendants breached fiduciary and contractual duties they owed to Urban and the plaintiffs as limited partners of Urban. The plaintiffs alleged that the defendants received legal advice on how to structure the “synthetic partnership” to evade the contractual terms and avoid the legal and fiduciary obligations they owed as Urban’s general partner. The plaintiffs filed several motions to compel the production of privileged communications.

Of particular interest, the plaintiffs filed a third motion to compel seeking more than 1,500 documents identified in the defendants’ privilege logs. The plaintiffs alleged that, in depositions, the defendants’ witnesses confirmed that during the business negotiations in 2001–2002, each defendant’s individual counsel attended negotiating sessions and discussed with nonclients legal advice regarding the acquisition structure and use of a “synthetic partnership” to avoid certain partnership obligations and liability and obligations as Urban’s general partner, including continuing obligations to acquire and develop additional properties through Urban.

The plaintiffs argued that because the defendants disclosed legal advice on these subjects outside any confidential relationship, they could not object that the advice given on those same subjects was privileged. The plaintiffs also accused the defendants of disclosing information that acted as a “sword” while claiming privilege as a “shield” as to other materials on these same subjects.

As noted, the circuit court granted the motion to compel, finding that because the defendants had shared privileged communications, the subject of those communications was susceptible to discovery. Defendant Westfield’s attorneys asked to be held in “friendly contempt.” The court entered a contempt order against Westfield, and the appellate court affirmed.

In the Illinois Supreme Court, the defendants asserted that the doctrine of subject-matter waiver applies only when privileged attorney-client communications are disclosed during litigation for the purpose of achieving an advantage in that litigation. Here, in contrast, the privileged communications were disclosed only during business negotiations.

According to the Illinois Supreme Court, the first question was whether the subject-matter-waiver doctrine applies to the disclosure of privileged statements made outside a litigation or judicial setting.

In this regard, Illinois Supreme Court Rule 201(b)(2) states:

All matters that are privileged against disclosure on the trial, including privileged communications between a party or his agent and the attorney for the party, are privileged against disclosure through any discovery procedure. Material prepared by or for a party in preparation for trial is subject to discovery only if it does not contain or disclose the theories, mental impressions, or litigation plans of the party’s attorney. The court may apportion the cost involved in originally securing the discoverable material, including when appropriate a reasonable attorney’s fee, in such manner as is just.

The privilege is to be strictly confined and limited to communications that the claimant either expressly made confidential or that the claimant could reasonably believe would be understood by the attorney to be confidential. When a client discloses privileged communication to a third party, that communication is no longer privileged and is discoverable or admissible in litigation.

The waiver at issue is called a “subject-matter waiver.” The purpose of the doctrine of subject-matter waiver is to prevent partial or selective disclosure of favorable material while withholding unfavorable information.

The Illinois Supreme Court noted there was no Illinois case that applied the doctrine to a disclosure made in an extrajudicial setting.

Even so, two federal appellate courts, in In re Von Bulow, 828 F.2d 94 (2d Cir. 1987) and In re Keeper of the Records (Grand Jury Subpoena Addressed to XYZ Corp.), 348 F.3d 16 (1st Cir. 2003), examined the issue and determined that subject-matter waiver should not extend to extrajudicial disclosures. The Illinois Supreme Court found these cases more persuasive than the cases cited by the plaintiffs. It observed that limiting the application of subject-matter waiver to disclosures made in litigation better prevents a party from selectively disclosing attorney-client communications with his or her attorney to use as a sword and then invoking the privilege as a shield to other communications so as to gain a tactical advantage in litigation.

The Illinois Supreme Court also believed limiting subject-matter waiver to judicial disclosures constituted sound policy. A contrary rule would provide perverse incentives: Parties would not involve attorneys in commercial negotiations for fear that involving them would later force disclosure of confidential information. This would deprive clients of legal counsel at times when counsel is most valuable.

Although the Illinois Supreme Court did not limit its holding to advice given in business transactions, it noted that business negotiations would be “uniquely burdened” by extending subject-matter waiver.

According to the Illinois Supreme Court, if a disclosure is made during a business negotiation, anticipating tactical advantage in anticipated litigation, subject-matter waiver would still apply if such a disclosure is later used by the disclosing party during the litigation to gain a tactical advantage.

The Illinois Supreme Court held that subject-matter waiver does not apply to disclosures made in an extrajudicial context when those disclosures are not later used by the client to gain a tactical advantage in litigation.

Keywords: litigation, trial practice, subject-matter waiver, business negotiation, business transactions, legal counsel, tactical advantage

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