Judge Facciola Rules that Privilege Protects Lawyer–Consultant Communications in Limited Circumstances

In an opinion by noted e-discovery expert Magistrate Judge Facciola, the USDC for the District of Columbia held that, under the Kovel doctrine, the attorney–client privilege extends to communications between a lawyer and a consultant when the consultant is “providing assistance in developing litigation and legal strategies.”  But the court refused to preclude the consultant’s entire testimony, requiring instead that the lawyer assert privilege objections on a question-by-question basis.  Goldstein v. FDIC, 494 B.R. 82 (D.D.C. 2013) (Facciola, M.J.).

Magistrate Judge Facciola

Magistrate Judge Facciola

In Goldstein, the trustee of a bank placed in receivership retained Protiviti, Inc. to provide financial and tax assistance to the Trustee’s management of the bank’s estate.  The Trustee sued later the FDIC asserting that it improperly rejected the trustee’s claim to certain loan proceeds,, and the FDIC issued a subpoena seeking testimony from Protiviti.  The Trustee, citing the Kovel doctrine, moved to quash the entire deposition on the grounds that Protiviti’s participation was necessary for the effective consultation between client and attorney.  Judge Facciola, citing D.C. Circuit precedent, ruled—

if a consultant is so intertwined with the attorney in a case, such that he is providing assistance in developing litigation and legal strategies in a manner similar to multiple attorneys working on a case in a law firm, the attorney–client privilege extends to those consultants.

Here, the Trustee submitted a fairly straightforward declaration stating that he retained Protiviti to “assess potential litigation against the FDIC-R and other parties and to provide assistance and advice to counsel and the estate with respect to certain potential claims.”  You may access the Declaration here.  Judge Facciola found these statements sufficient to cause the Trustee concern about Protiviti disclosing privileged communications at a deposition.

But Judge Facciola also noted that the attorney–client privilege does not apply to every communication; rather, the fundamental question is whether the communication was made for the purpose of securing either an opinion on law, legal services, or assistance in some legal proceeding.  And because of this limitation, the judge refused to quash the entire deposition, but ruled instead that Protiviti witnesses should answer questions at a deposition and Trustee’s counsel should object “to certain questions on a case by case basis, as questions implicating privileged conversations arise.”

Privilege Protections for Inter–Company Communications

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 degrSlide1ee 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.

Sufficient Relationship?

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.

PoP Analysis.

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.

Lack of Privilege Log Waives Accountant–Client Privilege 1

A Tennessee federal court ruled that a defendant’s failure to provide a privilege log waived its state-law accountant–client privilege.  In this diversity case, the court ruled that the procedural privilege-log rule governs waiver even though the defendant asserted a substantive state-law privilege.  Etheredge v. Etheredge, 2013 WL 4084642 (M.D. Tenn. Aug. 12, 2013).

The Etheredge case involved a minority shareholder asserting various state-law claims pertaining to the corporation’s financial mismanagement.  The minority shareholder subpoenaed Slide1records from the corporation’s accountants, but the corporate defendant filed a motion to quash, claiming that Tennessee’s accountant–client privilege, Tenn. Code Ann. § 62-1-116, barred production.

But the corporate defendant did not complete and serve a privilege log with the motion to quash.  The court held that FRCP 26(b)(5)(A)(ii) requires a party objecting to discovery to provide a privilege log to permit the opposing party—and the court—to determine the appropriateness of the privilege claim.  And, here, the corporate defendant did not provide a privilege log.

The Court ruled that the corporation’s failure to provide a privilege log with its motion to quash equaled a failure to comply with Rule 26(b)(5)(A)(ii).  And the failure to provide a privilege log constituted a waiver of its privilege objections, including the state-law accountant–client privilege.  The Court denied the motion to quash and ordered the accountant’s documents produced.

PoP Analysis.  The Etheredge decision represents another situation where the failure to provide a privilege log—or an adequate privilege log—resulted in privilege waiver.  The case raises a few interesting points.  First, the court ruled that failure to comply with Rule 26(b)(5)(A)(ii) results in automatic waiver rather than providing the corporate defendant with an opportunity to cure the deficiency.  Some courts provide parties with a second chance, particularly when a privilege log is simply inadequate rather than non-existent; the Etheredge case provided no second chance.  Second, this case involved a subpoena to a third party rather than a party-to-party document request, which shows that courts will impose the privilege log requirement to parties asserting privilege objections to a subpoena.  See FRCP 45(d)(2)(A)(ii).  And third, the case shows that federal procedure rules will control privilege waiver even where state substantive privilege law provides the rule of decision.

For an analysis of properly meeting the privilege log requirements, see my article, Ignoring Privilege Log Obligations May Prove Costly, accessible here.