Can a non-employee, third-party consultant have a privileged communication with a companyâs in-house counsel? In a matter of first
The court issued the ruling over the consultantâs employerâs objection and even though the governing contract stated that the consultant is not âan agent, legal representative, or partner ⌠for any purpose.â Waste Admin. Servs., Inc. v. The Krystal Co., 2018 WL 4673616 (Tenn. Ct. App. Sept. 27, 2018) (Swiney, J.). You may read the opinion here.
Functional-Equivalent Doctrine
Although many states, including Tennessee, have not fully defined the attorneyâclient privilegeâs scope in the corporate counselâemployee context, a developing corollary is whether the privilege covers communications between a companyâs lawyer, including in-house counsel, and its non-employee consultants.
Various courts apply the so-called functional-equivalent doctrine to uphold the privilege over a consultantâs communications with corporate counsel when that consultant is acting as the âfunctional equivalentâ of an employee. Courts reason that, in todayâs corporate world, there is no good reason to deny the privilege when a company outsources employee functions to third-party specialists. I previously discussed cases where courts applied the doctrine in C-Suite situations (see this post) and refused to apply the doctrine to public-relations firms (see this post).
Two ContractsâBut Does it Matter?
So, what about Tennessee? Krystal contracted with Waste Administrative Services (WASI) to provide (you guessed it) waste-management services. A few years later, Krystal contracted with Denali Sourcing Services to examine and ultimately reduce its expenses. Krystal and Denali memorialized their consulting relationship with a Statement of Work which noted that Denali was not âan agent, legal representative, or partner [of Krystal] for any purpose.â
The SOW did not expressly cover waste management, but generally covered procurement projects âsubmitted via email.â Krystalâs CEO emailed Denali employee David Jungling asking him on âtake the leadâ on assessing Krystalâs relationship with WASI. A question arose whether and how Krystal could terminate its WASI contract, and Jungling emailed Krystalâs CLO about the matter.
Krystal and Denali later entered into a Master Services Agreement that, unlike the SOW, expressly stated that Denali would provide sourcing services to all of Krystalâs services.
Ruling
After Krystal terminated its WASI contract, WASI sued Krystal and Denali for breach, and inducing the breach, of the contract. Denali was ready to produce Junglingâs (its employee) emails with Krystalâs CLO, but Krystal sought a protective order claiming that the privilege precluded the emailsâ production.
The trial court applied the functional-equivalent doctrine, but only to communications after Krystal and Denali entered into the MSA. The trial court rejected the privilege for Junglingâs communications with Krystalâs CLO because those occurred during the SOW period and prior to the MSA.
The appellate court, in an opinion authored by Judge Mike Swiney, noted that its research âdid not yield any on-point controlling Tennessee law on the subject.â After reviewing the Upjohn decision and conflicting federal district court decisions, Judge Swiney adopted the functional-equivalent doctrine because it âacknowledges the reality of corporate activityâ and upholds âa corporationâs legitimate interest in relying on frank exchanges between its legal counsel and non-employee individuals or organizations who behave as the functional equivalent of an employee.â (emphasis added).
The SOWâs declaration that Denali and Jungling were not âagents or representativesâ of Krystal was no impediment. The appellate court was âinterested in how the parties actually conducted themselves,â and Krystalâs CEOâs instruction for Jungling to âtake the leadâ on dealing with WASI was enough to establish the functional-equivalent doctrine.
What about the Consultantâs Employer?
In an interesting twist, the consultantâDenaliâargued against the privilege, presumably because the privileged emails helped its defense of WASIâs claim against it. Judge Swiney understood that Denali was âchagrined at being unable to disclose its own records,â but allowing Denali to produce emails that Krystalâthe privilegeâs ownerâclaimed as privileged âwould vitiate the protection afforded by the privilege in the corporate context.â
So, in sum, Tennessee now follows the functional-equivalent doctrine to apply the privilege to communications between a companyâs third-party consultant and its attorneys, with the focus on how the consultant behaved rather than a strict reading of a governing contract.
Will WASI or Denali seek the Tennessee Supreme Courtâs input? Stay tuned.
Epilogue
The Tennessee Supreme Court, citing Judge Swineyâs opinion, adopted the functional equivalent doctrine in Dialysis Clinic, Inc. v. Medley, 567 S.W.3d 314 (Tenn. 2019). You may read the opinion here.