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In a divided ruling, the Texas Supreme Court granted privilege protection for the University of Texas’s internal investigation conducted by a non-lawyer third party. The privilege covered communications and memos even though the university–third party engagement letter mentioned nothing about a legal-advice purpose or the privilege, drawing criticism from two dissenting justices.  The majority opinion provides significant privilege authority to corporate and governmental entities subcontracting their internal investigations, but should they nevertheless follow the dissent’s guidance?  Let’s discuss it.  Univ. of Tex. Sys. v. Franklin Ctr. for Gov’t & Public Integrity, 2023 WL 4278243 (Tex. June 30, 2023).  You may read the majority opinion here.

An “Internal” Investigation?

Following concern whether undue influence infiltrated the University of Texas’s admissions process, the University’s chancellor tasked its General Counsel, Dan Sharphorn, to conduct an internal investigation.  He did so and, in a report accessible here, found none.

A former admissions official contradicted this finding and the Chancellor asked Sharphorn to conduct a more thorough and comprehensive investigation.  The Chancellor described this investigation as an external one:

We are responsible to the public. If the public has concerns or questions, then we will do an investigation. So in fact, we are going to do a more formal external investigation of this, basically to put the matter to rest.

The University issued a Request for Proposal for external firms to conduct the investigation and ultimately inked an agreement with Kroll Associates Inc.  Kroll’s written agreement with the University described the investigation’s purpose as ascertaining whether UT Austin’s admission decisions were “made for any reason other than an applicant’s individual merit” and determining whether “the conduct of U.T. officials is beyond reproach.”  Remember that phrase—“beyond reproach.” As you can see in its final report, Kroll described its “Scope of Work” with similar language.

The agreement and Scope of Work contained many confidentiality provisions but mentioned nothing about legal advice or the attorney–client privilege.  Importantly, though, these documents stated that Kroll would conduct the investigation under UT System General Counsel’s direction and submit its report to the GC.

I Don’t Believe You

Kroll produced its report, available here, which contained findings, recommendations, and best practices for future implementation, but overall found a “relatively small” number of improprieties.  A reporter for the Frankling Center for Government and Public Integrity made a public-records request to determine whether Kroll omitted any significant information from its report—and thus was inaccurate in its assessment.  The Center asked for internal emails of UT’s lawyers shared with Kroll, Kroll’s interviews with UT’s employees and officials, and draft communications between UT’s General Counsel and interviewees shared with Kroll.

Citing Texas’s attorney–client privilege, found at Tex. R. Evid. 503, the University refused to produce the information and sought the Attorney General’s opinion on the matter.  The Texas AG, in a ten-page letter ruling, agreed, concluding that the University proved the privilege’s applicability to the requested documents.

The Legal Standard

The Center filed suit, which meandered its way to the Texas Supreme Court with a January 2023 oral argument, which you may watch here.  The Court recited Rule 503’s direction that the privilege protects communications between a lawyer and her client—and their representatives.  While the privilege’s extension to representatives was important, the Court noted that “the core of the privilege is the notion that the communications are ‘made for the purpose of facilitating the rendition of professional legal services.’”

The questions, therefore, were (1) whether Kroll was the lawyer or client’s representative and, if so, (2) whether the communications were made for legal-advice purposes.  These two questions ultimately merged, with the legal-advice component becoming the singular issue for the University to hurdle.

Majority Decision

Rule 503 defines “lawyer’s representative” as “one employed by the lawyer to assist in the rendition of professional legal services.”  While the lawyer need not formally employ a third party for him to qualify as a representative, the lawyer must prove that a “significant purpose” for retaining a third party was to assist in the rendition of legal services.

The majority looked to the University’s engagement letter with Kroll, but nothing in the agreement mentioned assisting any lawyer in the “rendition of legal services.”  Undeterred, the majority ruled that “no such magic words are required” and looked “beyond the surface language used in the contract.”  Yet, these justices latched onto the “beyond reproach” phrase—surface language in the contract—and found that it “embodies the notion of legal compliance as a necessary component.”  Kroll’s report buttressed this conclusion, the majority explained in a footnote, because it “analyzed applicable rules of conduct based in state law.”

The affidavits of the University’s General Counsel and Assistant General Counsel bolstered the majority’s conclusion. The GC stated that he hired Kroll to investigate admissions practices and that he instructed Kroll to notify him of any irregularities.  The Assistant GC stated that Kroll’s communications during its investigation were for legal-advice purposes.  And it helped that Kroll was to work under the GC’s direction and send its report to him.

And rebutting the Dissent’s claim that these affidavits were conclusory, the majority made this important statement—

Expecting the affidavits to provide a comprehensive account of privileged communications would undermine the very essence of the privilege.  Affidavits supporting a privilege claim must strike a delicate balance between providing enough information to establish the existence of a privileged communication while preserving confidentiality.

The Dissent

Two justices dissented, stating they would have held that “the attorney–client privilege did not attach to Kroll’s investigation.”  In an opinion available here, the dissent observed that privilege concerns are “at an apex” when a client retains a nonlawyer to provide services.  And while they recognized that nonlawyer consultants can play a critical role in a lawyer’s provision of legal services, “the potential for misusing the privilege exists absent a clear nexus between the consultant’s services and a lawyer’s provision of legal services.”

Notably, the dissent agreed with the majority’s “significant purpose” standard, meaning that a privilege proponent must prove that a significant purpose for entering a contract with third-party consultant was to help the lawyer provide legal advice to her client.  This standard requires proof that the consultant’s work was more than incidental or merely helpful in the lawyer’s rendition of legal services.

The Evidence

The problem, as the dissent saw it, was the majority’s application of the standard.  These justices would require a contract between a client and a third-party consultant to clearly and with certainty explain the legal-advice component.  Here, the Kroll contract did not “mention legal services, let alone require Kroll to provide or assist with the rendition of such services.”  And while the Kroll contract contained various confidentiality provisions, the dissent critically observed:

But not a single word in these provisions speaks to the performance of legal services, attorney–client confidences, or privileges as one might expect if assisting in the rendition of legal services was a significant purpose of the engagement.

Undeterred by the majority’s rebuttal, the dissent found the GC’s affidavit as a conclusory paraphrasing of Kroll’s Statement of Work.  And these justices noted that the Assistant GC’s affidavit did not mention the purpose of Kroll’s retention.

POP Analysis

The University of Texas decision contains many important take-aways.  All the justices agreed that the privilege proponent must show that a “significant purpose” for retaining a third-party consult was to assist a lawyer in providing legal services to the client.  The majority opinion provides privilege proponents with good authority for not requiring magic “legal advice” words in the agreement and for looking beyond the agreement’s surface language to find the engagement’s significant purpose.

But the dissent’s commentary should make us consider foregoing the need for that authority. Securing privilege protection is an important objective of most internal investigations, and the dissent remarked that “such important objectives are rarely accomplished through vague terms and subtle devices.”

So, perhaps the greatest take-away is that, while parties seeking privilege protection for internal investigations may use the majority’s opinion as good authority, they should nevertheless follow the dissent’s direction to have the lawyer retain the consultant and “clearly and with certainty” memorialize that one of the engagement’s significant purposes is to assist the lawyer in supplying the client with legal advice.  As the dissent concluded: “It’s not that hard.  But to guard against abuse of the privilege, it is that important.”

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Potential benefits arise when multiple clients retain one lawyer or one law firm to represent their common legal interests. But disadvantages exist, too, including the potential for privilege waiver—or privilege non-application—when joint clients later become adverse.  Throw in a joint representation that includes a corporate entity and its individual owners and you have the recipe for a legal quagmire.

The North Carolina Supreme Court disentangled this quagmire in an opinion, complete with practice pointers, in Howard v. IOMAXIS, LLC, 887 S.E.2d 853 (N.C. 2023). The high court, in an opinion available here, held that the privilege did not protect a recorded conference call between a lawyer and an LLC’s individual members when one of the members later became adverse to the others.  And the lawyer’s “corporate engagement letter” with the LLC did not save the day.  Let’s discuss.

Lawyer—LLC Engagement

IOMAXIS, LLC retained a law firm to provide it with general corporate representation to the legal entity.  The firm’s engagement letter, which may read in full here, identified the client and scope of legal services as follows:

Note that the sole client was IOMAXIS and the representation included “general corporate matters.”  The company’s CEO signed the letter.

Death, Disputes, and a Second Engagement Letter

IOMAXIS’s founder and majority owner died in 2017 and his ownership interests transferred to a trust.  In June 2018, the trustees sued IOMAXIS—the entity—and its remaining individual members asserting a host of corporate-governance claims, such as whether a valid operating agreement existed and the applicability of its buy-sell provision.  IOMAXIS returned to the law firm and asked it to represent the company and the individual-member defendants.

In a second engagement letter, which you may read in full here, the firm warned the multiple clients that “the best way to proceed in this matter would be for each of you to retain separate counsel.”  And it cautioned them that “there will be no way in this joint representation for you to pursue your individual interests through your common attorney.”  All true.

The firm’s second engagement letter also counselled the joint clients that it would share confidential information among them and that the attorney–client privilege would not shield that information if the members became adverse:

Opting out of the “best way to proceed,” the company and its individual clients instead became the firm’s joint clients.  After all, the divergence of interests was an “unlikely event.”

A Secret (Privileged) Recording

The “unlikely event” occurred two years later when one of the firm’s lawyers participated in a video call with the LLC’s CEO and the individual members—all clients.  One member, Hurysh, audio-recorded the meeting and, several months later, retained new counsel and filed cross-claims against the other individual members.

While the attorney–client privilege covered the discussions on the recording, Hurysh asserted that he held—and elected to waive—the privilege.  IOMAXIS countered that it exclusively owned the privilege disgorging Hurysh of any right to waive it.  The Business Court, in an opinion available here, held that Hurysh held the privilege—and could waive it—because the legal advice provided in the recorded video call fell under the second engagement letter—the one where the law firm represented the company and individual members as joint clients.

Joint Client Doctrine or the Bevill Test?

As we know, the joint-client doctrine permits multiple parties to retain a single lawyer or law firm to represent them.  The attorney–client privilege protects the joint clients’ communications with their common attorney from disclosure to third parties but does not protect the disclosure of otherwise confidential information if the joint clients later become adverse.  At the Supreme Court, IOMAXIS attempted to circumvent this well-known doctrine by arguing that the LLC held the privilege under the first, corporate engagement letter and the court should decide whether Hurysh nonetheless held a personal privilege under the test outlined in In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 122 (CA8 1986).

As explained in this post, the Bevill test typically comes into play when a corporate officer claims privilege protection for communications with the company’s lawyers regarding personal legal advice.  The five-factor test places the burden on the individual to show that he had an attorney–client relationship with the company’s lawyer separate from the company’s attorney–client relationship with that lawyer.  Often these decisions turn on verbal communications between the two and their respective understandings.

But here, Hurysh pointed to an actual engagement agreement where the law firm represented him along with the company.  In the court’s view, the question was whether the privileged discussion on the recorded video call arose under the corporate engagement agreement—where only IOMAXIS had the relationship and held the privilege—or under the second, litigation-related engagement agreement where Hurysh, his fellow owners, and IOMAXIS had a joint relationship with the firm.

Ruling

The court followed the Business Court’s factual finding that, while the lawyer stated during the call that “our client is the company,” he also provided Hurysh with legal advice about defending the claims against him in the lawsuit.  The lawyer also provided legal advice to each member regarding whether to sign a proposed amended operating agreement in light of the pending litigation.

Based on this factual finding, the court saw no need to apply the Bevill test.  This was not a situation where an individual tried to wrangle a personal attorney–client privilege from a corporation–attorney relationship.  It was, rather, a lawyer providing advice to multiple joint clients.  The joint-client doctrine, therefore, permitted Hurysh to waive the privilege and use the recorded conversation in the prosecution of his cross-claims.

Court’s Practice Pointers

The court emphasized that its ruling was based on the facts before it and did not otherwise “diminish the ability of corporate counsel to preserve the corporation’s attorney–client privilege when communicating with corporate directors, officers, and employees.”  And in a somewhat unusual but helpful move, the court provided lawyers with three practice tips for avoiding this privilege-waiver situation.

First, the clients and lawyer can choose not to enter a joint-client situation.  If, as the law firm expressly recommended, the clients had retained separate counsel, this issue would never had surfaced.

Second, if clients choose a joint-client relationship, and the same firm also represents the corporation, then perhaps separate lawyers within the firm should handle separate and discreet tasks to avoid confusion and conflation of the issues about which those lawyers provide legal advice.

Third, lawyers solely representing the corporate entity should provide individuals, such as owners, officers, and directors, with a clear disclaimer that they represent the corporate entity and the individuals should retain separate counsel.

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Lawyers have returned to the road.  We are traveling for court hearings, depositions, client meetings, mediations, and conferences.  And that travel necessarily includes hotel stays. But, as we know, the work never goes away. While we are in those hotels, we are still working—taking a video deposition while attending a conference, sending numerous emails, drafting that contract, and revising that brief.

We often go to that so-called hotel “business center”—that two computer, one printer closet—to print that contract or brief or print emails and documents to take to the next day’s meeting, deposition, or court appearance. 

The attorney–client privilege and work-product doctrine travel, too.  They go where lawyers go.  And despite using hotels for a workspace, we sometimes forget that hotels are not our office.  That business closet is not our private office.  The hotel staff are not our staff.  And when we forget this, the chance for privilege waiver increases dramatically.  And if you think the risk is small, think again.

True Story

Years ago, I was in the office of counsel for my adversary, a governmental agency, waiting to defend my client’s deposition.  While waiting in a public space in this government building, my law partner called and we discussed the case, including information about the upcoming deposition.  I intentionally left the public area and took the call in a more secluded and private area.

Opposing counsel later filed a motion to compel my law partner and me to reveal the substance of that conversation.  Her argument? That she could hear our conversation, including the comments of my partner on the other end of the line.  We actually briefed and argued that motion.  While I was a bit nervous—I suppose I could have taken the call in a more secluded area, I was able to prove up the steps I took to preserve confidentiality and the judge denied the motion.

It was the classic eavesdropping situation by my opposing counsel, and courts typically don’t allow eavesdroppers to breach a lawyer or client’s privileged communications.  New York and California, for instance, have statutes prohibiting exactly that type of conduct.

The eavesdropping exception, however, only goes so far.   When lawyers intentionally or carelessly—even if innocently—allow third parties, including staff and others in that hotel “business center,” to see their privileged communications, that privilege may evaporate.

Two hotel stories illustrate the point.

A New York Hotel Story

In the 1980s, a wealthy businessman, Fred Weisman, had a long-term business—and personal—relationship with Sachiko Bower.  On a business trip, they stayed together in a hotel suite because, as Bower put it, they were “sleeping together.”  Bower remained at the hotel when Weisman left for a business meeting and began straightening the businessman’s papers.  When doing so, she saw a letter from Weisman’s attorney to Weisman that mentioned her name, so she surreptitiously made a copy.

FUN FACT: The plaintiff, Sachiko T. Bower, was the subject of an Andy Warhol piece completed in 1977 and sold in 2021 for over $400,000.

When the relationship ended, hotly contested litigation erupted, with Bower claiming that Weisman agreed to give Bower an interest in his business affairs and other financial-security perks so long as she did not remarry or leave the United States. Bower’s attorneys sought to depose Weisman about his attorney’s letter that she took from the hotel suite.

Weisman claimed privilege and countered any waiver argument by arguing the “eavesdropper exception.”  The court, however, stated that “the eavesdropper rules does not … in any way reduce the client’s need to take all possible precautions to ensure confidentiality.”  For example, if “the communication takes place in a crowded elevator the client should expect that there will be persons listening and he will be taken not to have intended the statements to be in confidence.”

Here, the court found that Weisman’s leaving the “letter spread out on a table in a room in a suite in which Bower” was staying did not “reach the level of taking all possible precautions to ensure confidentiality.”  Had Weisman placed the letter in a briefcase or a drawer, the court said, then he would have had a better argument for the eavesdropping exception.  But he left the letter on a table and waived the privilege by doing so.  Bower v. Weisman, 669 F. Supp. 602 (SDNY 1987).

A Berlin Hotel Story

More recently, the CEO of Fourth Dimension Software (FDS) was staying at the Berlin Hilton as he prepared for a next-day meeting with another company to discuss licensing of FDS’s software.  FDS’s General Counsel had sent the CEO a privileged email about the potential business relationship.  Needing a copy for the upcoming meeting, the CEO forwarded the privileged email to the Berlin Hilton’s front desk personnel at the general email box, info.berlin@hilton.com, with this subject line:

Please print one copy. I’m waiting at the front desk. Thanks.

If the CEO needed the email printed, isn’t it “reasonably necessary” to ask the front-desk staff to do that for you? Apparently not. The court said that the CEO did not need it printed because he was “already in possession” of it. Nor did the CEO seem to worry, the court noted, about maintaining confidentiality by sending the email to a general inbox:

On the contrary, the forwarded email contains no confidentiality warnings or other language alerting the hotel desk recipient(s) not to read or share its contents and to delete it after printing.

So, the court ruled that the CEO disclosed a privileged communication to a third party and waived the privilege.  Think about that—the hotel front-desk personnel almost certainly did not read the email, care about the email, or disclose it further; rather, they were performing a service.  Yet, the court found waiver. Fourth Dimension Software v. Der Touristik Deutschland GMBH, 2021 WL 4170693 (N.D. Cal. Sept. 14, 2021).

Take-Aways

It may seem silly. It may seem overkill. It may seem form-over-substance and a bit illogical.  But it’s real.  Lawyers working in hotels, other offices, or any non-private space risk privilege waiver when they lack diligence in protecting their confidential communications and work product from the eyes and ears of any third party.

In other words, lawyers must “take all possible precautions to ensure confidentiality” or face an anxiety-inducing motion to compel.  I went through it.  Hope you can avoid it.