Major Decision on Subject Matter Waiver Doctrine 3

In a major decision concerning privilege waiver, the Illinois Supreme Court, in Center Partners, LTD v. Growth Head GP, LLC, ruled that the subject matter waiver doctrine does not apply to privileged communications disclosed in an extrajudicial context.  The Court’s decision, which can be accessed here, answered a question of first impression in Illinois and will serve as influential authority when other states consider the scope of subject matter waiver.

Question at Issue

The precise question before the Court was whether, as a matter of law, the subject matter waiver doctrine applies to the disclosure of privileged information made outside of a litigation or judicial setting (an extrajudicial setting).

Illinois Supreme Court

Illinois Supreme Court

Where a privileged communication is voluntarily disclosed, the subject matter waiver doctrine extends this waiver to all other communications pertaining to the same subject matter.  The purpose of the doctrine is to prevent a party from selectively disclosing favorable information while simultaneously withholding unfavorable information under the cloak of privilege. The question in Center Partners was whether the subject matter doctrine, and its underlying purpose, should apply in non-litigation contexts.

Facts of Case

The Center Partners case involved a complicated business transaction.  In short, three companies negotiated the purchase of  Rodamco North America, N.V., including the General Partner of one of Rodamco’s holdings.  During the purchase negotiations, the purchasing entities and their lawyers exchanged privileged information concerning the legal implications of the transaction, rights and obligations of the parties to the transaction, and legal concerns and conclusions about the structure of a new partnership agreement.  A couple of years after the transaction was complete, a group of minority limited partners sued for breach of contractual and fiduciary duties, and sought all communications actually disclosed between the purchasing entities and all privileged, non-disclosed communications concerning the same subject matter.

Court’s Ruling

In an issue of first impression in Illinois, the Court ruled that the subject matter waiver doctrine does not apply where privileged communications are disclosed in an extrajudicial setting. The Court based its decision in large part on the doctrine’s underlying purpose.  The purpose is to prevent a party from using an evidentiary privilege offensively (sword) to disclose favorable information and later defensively (shield) to withold unfavorable information pertaining to the same subject matter.

The Court reasonsed that, outside the litigation context, parties generally do not decide to disclose privileged information for sword and shield purposes.  In many non-litigation settings, such as business transactions, parties disclose privileged information before litigation is initiated or even contemplated.  And expanding the subject matter waiver doctrine to non-litigation contexts would produce a perverse result: parties may “leave attorneys out of commercial negotiations for fear that their inclusion would later force wholesale disclosure of confidential information.” Consequently, the Court found that the purpose of the subject matter waiver doctrine is simply not served by expanding it to non-litigation contexts.

The Court placed one limitation on its ruling.  It stated that, if a disclosure is made during a business negotiation to gain a later tactical advantage in anticipated litigation, then the subject matter waiver doctrine would still apply if such a disclosure is later used by the disclosing party at any point during the litigation to gain a tactical advantage.

PoP Analysis

Most states have not addressed the issue whether the subject matter waiver doctrine applies in extrajudicial contexts, and this area of evidentiary privileges needs more development.  The Illinois Supreme Court’s decision in Center Partners is based on sound reasoning and will likely serve as persuasive authority when the issue arises in other states.  And while the decision was made in the non-litigation context of business transactions, it will likely serve as persuasive authority for disclosures made in other non-litigation contexts such as disclosures made during settlement negotiations, government investigations, regulatory compliance filings, or for public relations/media purposes.  For a more detailed analysis of these issues, see an earlier PoP post recommending an IADC article by Andrew Kopon and M.C. Sungaila.

Court Issues Tough Decision on In-House Counsel and the Attorney-Client Privilege 1

Many in-house counsel and legal commentators posit that courts are increasingly eroding the corporate attorney-client privilege, particularly as it applies to in-house counsel.  A relatively recent decision from a Wisconsin federal court may buttress that sentiment.

In Solis v. Milk Specialties Co., 854 F. Supp. 2d 629 (E.D. Wis. 2012), the Labor Department filed a petition to enforce an administrative subpoena requiring Milk Specialties Company (MSC) to produce two reports: (1) MSC’s Five Year Strat Plan and (2) Dust Review Report.  The genesis of these documents is important.  On April 12, 2010, MSC and OSHA settled an OSHA citation against MSC for allegedly violating a general duty clause through existence of combustible dust hazards without proper ventilation. In January 2011, MSC’s in-house counsel asked MSC’s VP for Enviromental Health & Safety to begin a review process that resulted in the Strat Plan and Dust Review Report.  MSC argued that OSHA took the position that MSC must comply with NFPA standards in order to meet OSHA standards under the general duty clause.

In July 2011, OSHA issued a new citation based on an employee complaint, and in August 2011, OSHA initiated another investigation following a fire incident resulting from a dust explosion in a machine.  The adminstrative subpoena was issued in the fire investigation and covered the Strat Plan and Dust Review Report.  The Dust Review Report contained cost estimates for equipment in order to become NFPA compliant, and the Stat Plan provided the Environmental VP’s opinion on additional steps MSC could take to become NFPA compliant.

The Court rejected MSC’s claim that these two reports were protected from subpoena by the attorney-client privilege.  The Court correctly stated that, to gain protection under the privilege, MSC had the burden of showing that the documents were prepared for purposes of rendering legal advice, but noted that “carrying that burden is more difficult for in-house counsel because counsel is often involved in business matters as well as legal.”

Even though the two reports were prepared at the request of MSC’s attorney, the Court ruled they were neither legal advice nor prepared to secure legal advice. MSC argued that the two reports provide a basis for in-house counsel to render advice as to mitigating the risks of additional litigation and financial exposure if OSHA’s NFPA standards were required.  Rejecting this argument, the Court stated:

Without further explanation, it appears the only advice [the in-house lawyer] could provide to MSC, as a result of [the VP’s] opinions, is how to come into compliance with OSHA’s understanding of regulatory requirements.  This is, at bottom, business advice. . . . [I]t would not constitute legal advice if [the VP] had independently informed MSC’s management of how to comply with regulations; coming from the mouth of an attorney does not change that.

PoP Analysis.  This decision shows the difficulty in convincing a court that communications from executives to in-house lawyers are protected by the attorney-client privilege.  Here, the in-house counsel asked a VP to prepare reports about complying with certain regulatory standards so the company could respond to OSHA arguments; yet, the Court found the reports to be business advice.  While the opinion is silent on this issue, one wonders whether the Court would have reached a different result if the reports (1) began with an introduction that they were produced at the request of counsel; (2) that the reports are confidential; and (3) that they were prepared so that in-house counsel could provide legal advice to the company.  Because of the overwhelming amount of cost-related data, perhaps the Court would have reached the same decision; but implementing these type of explanatory statements on the reports and transmittal emails, will go a long way in convincing a judge reviewing reports in camera that the attorney-client privilege applies.

Attention Law Firm In-House Counsel: New Decision on the Attorney-Client Privilege 1

It is commonplace for law firms to maintain their own in-house counsel, but application of the attorney-client privilege in this setting presents a dynamic situation between law firm members and the firm’s internal counsel.  Some large law firms ask a firm lawyer to forego his or her practice and serve as a full-time in-house counsel, but most simply tag a firm lawyer to serve as the firm’s in-house lawyer while maintaining a full-time practice.  In either situation, law firm members do not hesitate to pop in the firm counsel’s office for a discussion as soon as an adverse client situation arises, even while the client remains a firm client; and when they do, conflicts of interest and the attorney-client privilege become prominent issues.

The Georgia Court  of Appeals, in Hunter, Maclean, Exley & Dunn v. St. Simons Waterfront, LLC, 730 S.E.2d 608 (Ga. Ct. App. 2012), entered the “unchartered jurisprudential waters” of attorney-client privilege for law firm in-house counsel, and produced a thorough and guiding opinion on the subject.   The opinion is lengthy and worth a thorough read, but this post briefly summarizes the factual situation, the question presented, and the court’s ruling.

Facts

The firm represented  a developer selling condos on St. Simons Island, but many buyers began to rescind their condo purchases. The developer became displeased with the firm’s handling of the buyers’ rescission efforts and threatened a malpractice action.  Firm lawyers, while still representing the developer in closing new condo sales and other buyers’ rescission efforts, discussed facts surrounding a potential malpractice claim with the firm’s in-house counsel.  During discovery after the malpractice action was filed, the developer sought production of communications between firm lawyers and the firm’s in-house counsel.

Question Presented

The question for the Georgia appellate court involved Georgia’s conflict of interest rules–whether the firm had a nonwaivable conflict of interest in continuing its representation after the client asserted a claim–and the attorney-client privilege.  The court had to determine the privilege’s scope in the conflict of interest situation.

Ruling

The court noted but rejected two different rules adopted by other courts. Some courts hold that the attorney-client  privilege does not protect otherwise privileged communications in which the firm’s representation of itself created a conflict of interest between the firm and the client seeking the communications, automatically imputing a conflict of interest to in-house counsel.  And other courts hold that such communications are protected and discoverable only if the client can show good cause to overcome the privilege.

The court determined both approaches were inconsistent with Georgia law.  And relying heavily on a law review article authored by Professor Elizabeth Chambliss, the court held that whether a law firm may claim privilege to legal advice  regarding duties to a current client from in-house counsel depends on whether there is a conflict of interest between firm counsel’s duty to the law firm and firm counsel’s duty to the outside client.  And this rule necessarily implicates the imputed disqualification doctrine–if a firm lawyer has a conflict of interest, then that conflict is imputed to all firm lawyers, including the firm’s in-house counsel.

The court rejected the “Draconian rule” adopted in other jurisdictions that automatically imputes conflicts of interest to in-house counsel. Instead, the court held that imputation depends on the structure of the in-house position. Thus, if the firm’s in-house counsel holds a full-time in-house position, then the conflict of interest of other firm lawyers should not be imputed to the in-house counsel, and communications with her are privileged.

Imputation also will not occur when the firm’s in-house counsel serves in a part-time capacity, so long as he does so on a formal, ongoing basis such that the firm is clearly established as the client before the communications occur.  In the part-time situation, there will be no imputation and the privilege will apply so long as the in-house lawyer had no involvement in the outside representation at issue.

But for firm lawyers who serve as in-house counsel on an ad hoc basis, these lawyers are subject to imputation unless the firm can show that an attorney-client relationship was established before the in-firm communication occurred. The burden is on the law firm to show the relationship was established; and if the firm does then the attorney-client privilege will apply.