A North Carolina court held that the attorney–client privilege extends to legal-advice communications between a company and one of its minority corporate owners. And importantly, the court included a good discussion of the interplay between the “joint client” doctrine and the common interest doctrine. SCR–Tech LLC v. Evonik Energy Servs., LLC, 2013 WL 4134602 (N.C.Super. Ct. Aug. 13, 2013). You may access the court’s opinion here.
The underlying issue is whether the attorney–client privilege protects communications (involving legal counsel) shared between a company and an affiliated company, such as in a parent–subsidiary relationship. And if so, at what degree of relationship does the privilege apply. Does the privilege extend to a wholly owned subsidiary? A minority corporate owner? Two companies with common ownership?
The SCR–Tech case sheds some light on the matter. Ebinger, a corporation, owned 37% of SCR–Tech GmbH which, in turn, owned 100% of SCR–Tech LLC. Ebinger, SCR–Tech LLC, and legal counsel engaged in several communications pertaining to negotiations that ultimately led to the sale of SCR–Tech LLC to an unrelated third entity. In subsequent litigation, the defendant moved to compel these communications, claiming that Ebinger was not SCR–Tech LLC’s parent for purposes of extending the attorney–client privilege. The court disagreed and invoked concepts of “joint client” and the common interest doctrine to support its decision.
Joint Client Doctrine and Common Interest Doctrine
The court noted that many lawyers and courts improperly interchange the “joint client” doctrine and the common interest doctrine (or joint defense doctrine). These concepts are distinct and contain “analytical differences.” The joint client doctrine focuses on client identity and the relationship between two entities.
The common interest doctrine, however, focuses on the common legal interests between two entities regardless of their relationship. The doctrine is not an independent privilege, but rather a doctrine of non-waiver that allows parties with aligned legal interests to share privileged information without waiving the privilege.
Rather than drawing a bright-line rule that a corporation must own a certain percentage of an affiliated corporate entity before the joint client doctrine applies, the court looked at the totality of circumstances to determine whether the entities “are sufficiently united such they may properly be considered joint clients.” If the degree of common ownership is sufficient to evidence control of the subject matter of the putatively privileged communications, then the court will apply the joint client doctrine and consider both entities as one client for privilege purposes.
But if the circumstances reveal that the relationship does not rise to that level, then the court will look more at the common legal interest between the two entities to determine whether the common interest doctrine protects the sharing of privileged information.
The SCR–Tech court followed what is, in effect, a proportional analysis. The privilege’s application will not depend on whether one corporate entity owns or controls a certain percentage of another. Rather, the court will look at the identity of legal interest, including the percentage ownership, to determine whether it should consider both entities as one client for privilege purposes. The greater the ownership interest, the greater likelihood of sustaining the privilege under the joint client doctrine. The lesser the ownership interest, then the less likelihood that the joint client doctrine applies.
Practitioners should note this proportional analysis and consider entering into a common interest (or joint defense) agreement with an affiliated company. Even if a court later rules that the joint client doctrine does not apply, then the corporate entities can rely upon the common interest doctrine to protect the sharing of privileged communications. For an excellent discussion of the contents of a common interest agreement, see the DRI article profiled in an earlier post.