Court Rejects Privilege for Attorney’s Due-Diligence Investigation

In litigation over an alleged breach of an exclusive-rights acquisition agreement, the SDNY ruled that the attorney–client privilege did not protect portions of the acquiring company’s lawyer’s due diligence investigation.  Vector Capital Corp. v. Ness Technologies, Inc., 2014 WL 171160 (S.D.N.Y. Jan. 9, 2014).   I"m afraid it's bad news....You may access the opinion here.

Vector entered into an exclusive agreement to negotiate the acquisition of Ness Technologies, Inc., but later sued claiming that Ness failed to provide relevant information during Vector’s due diligence investigation.  Ness sought production of documents that Vector’s attorneys obtained during the due diligence phase, but Vector objected on grounds that the attorney–client privileged protected this information from discovery.

In this diversity action, the SDNY correctly applied New York state law governing application of the attorney–client privilege in this situation.  See my article for a detailed review of rules and issues pertaining to conflict-of-privilege-laws.

The documents at issue were communications between Vector and its outside counsel made during the due diligence investigation.  The communications contained factual information that Vector’s outside counsel obtained from Ness and third parties.  But the communications also contained outside counsel’s analysis of the factual information and legal advice based on that information.

Upon in camera review of the communications, the court ruled that, in obtaining due diligence information, Vector’s outside counsel was acting “principally for the business purpose of determining whether the acquisition was a sound investment.”  And the court offered this cautionary proclamation regarding an attorney’s due diligence work:

This fact-acquisition process in the course of a business transaction is no more protected by privilege when conducted by an attorney than if conducted by an accountant, engineer or head of a business unit. The factual information presented is not privileged merely by the use of an attorney as a conduit for the information.

The court ordered production of the communications, but allowed Vector to redact the communications’ legal-analysis portions because the attorney–client privilege protected that information.

PoP Analysis.  The permitted redaction is hardly a victory in this situation.  Had the court determined that outside counsel’s communications were “predominantly legal,” then it likely would have ruled that the privilege protected from disclosure all portions of the communications.

Counsel involved in due diligence investigations should relay the information in one of two ways: (1) with a short transmittal letter or email that contains little, if any, commentary; or (2) communications that are marked “privileged and confidential,” with an opening statement that the communication is confidential and for the purpose of rendering legal advice to the company. Statements such as these should help persuade courts reviewing communications in camera that the privilege applies. For more information on establishing and protecting the corporate attorney–client privilege, see this article.

10 FAQs about the In-House Attorney-Client Privilege

As discussed in several posts,FAQ, question blackboard including this one and this one, courts apply a heightened scrutiny when in-house lawyers assert the attorney-client privilege.  And because of this heightened scrutiny, in-house lawyers often have several questions about the privilege’s application to their daily routines.  In my latest article, FAQs about the In-House Attorney-Client Privilege, In-House Defense Quarterly, at 7 (Winter 2014), I address 10 privilege-related questions often raised by in-house counsel.

The questions presented are:

  1. When are employee-in-house communications privileged?
  2. Will a boilerplate contractual choice-of-law provision ensure the company receives its preferred privilege law?
  3. Will the privilege cover in-house counsel’s communications with employees of corporate owners, subsidiaries, or affiliates?
  4. Are employees’ communications with a foreign-based in-house lawyer privileged?
  5. Does the privilege apply if the in-house lawyer is not licensed in the state where he or she works?
  6. Who in the company has authority to waive the privilege?
  7. Does the privilege protect communications to the company’s lawyer-lobbyist?
  8. Does the privilege cover conversations between two non-lawyer employees?
  9. May in-house lawyers communicate with outside consultants under the privilege umbrella?
  10. Is an email discussing business and legal issues privileged?

You may access the article here.  My thanks to DRI, the publisher of the fine In-House Defense Quarterly journal, for allowing the republication of my article on this blog.

Upjohn Warnings and External Consultants: What You Need to Know

Corporate counsel’s internal investigations often reveal that a third-party consultant maintains relevant information.  Yet, in-house and outside counsel have relatively little instruction on whether to interview these consultants and, if so, whether an Upjohn warning is necessary.  Courts have recently addressed two related concepts, however, that provide excellent guidance on this front.

Courts, notably the 9th Circuit, have reiterated the importance of providing Upjohn warnings to corporate employees prior to conducting an interview.  In United States v. Ruehle, 583 F.3d 600 (9th Cir. Cal. 2009), consultantfor example, the Ninth Circuit noted the “treacherous path” that counsel take when conducting internal investigations and called counsel’s lack of Upjohn warnings “troubling.”  And relatedly, courts have increasingly held that the corporate attorney-client privilege covers consultants considered the “functional equivalent” of corporate employees.  Together, these concepts provide corporate counsel informed guidance when interviewing consultants as part of an internal investigation.

In my recent article, Upjohn Warnings and External Consultants, published by InsideCounsel, I explore these concepts in greater detail. The article, accessible here, discusses the importance and preferred content of Upjohn warnings.  It also discusses the “functional equivalent of employee” test, including how Model Rule 1.3 and its official comments dictate that corporate counsel provide Upjohn warnings to consultants meeting the test.

For further elaboration on the functional equivalent employee test, see my post discussing a recent ruling that a Google consultant was a “functional equivalent of an employee” for purposes of the attorney-client privilege coverage.  You may also find helpful my recent post regarding the discoverability of witness statements, as these issues will apply to external consultants.

My thanks to InsideCounsel for permission to reprint my article in this post.