Tennessee Court Adopts Functional-Equivalent Doctrine Reply

Can a non-employee, third-party consultant have a privileged communication with a company’s in-house counsel?  In a matter of first impression, the Tennessee Court of Appeals said yes, adopting the functional-equivalent doctrine to apply the privilege to consultants whose conduct and behavior comport with company employees.

The court issued the ruling over the consultant’s employer’s objection and even though the governing contract stated that the consultant is not “an agent, legal representative, or partner … for any purpose.”  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 attorney–client privilege’s scope in the corporate counsel–employee context, a developing corollary is whether the privilege covers communications between a company’s 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 consultant’s communications with corporate counsel when that consultant is acting as the “functional equivalent” of an employee.  Courts reason that, in today’s 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 Contracts—But 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 “an agent, legal representative, or partner [of Krystal] for any purpose.”

The SOW did not expressly cover waste management, but generally covered procurement projects “submitted via email.”  Krystal’s CEO emailed Denali employee David Jungling asking him on “take the lead” on assessing Krystal’s relationship with WASI.  A question arose whether and how Krystal could terminate its WASI contract, and Jungling emailed Krystal’s CLO about the matter. More…

Engineer’s Investigative Report—Sent to Outside Counsel—Not Privileged 1

The Nevada Supreme Court ruled that the attorney–client privilege did not protect from disclosure a post-accident investigative report by a manufacturer’s engineer.  The Court issued the ruling even though the investigator sent the report to the manufactureconfidential document flush awayr’s outside counsel.  Mega Manufacturing, Inc. v. Eighth Judicial District Court, 2014 WL 2527226 (Nev. May 30, 2014).  You may read the decision here.


Accident Investigation

Following an injury involving a press brake machine, the press brake manufacturer’s chief engineer conducted an investigation and sent his investigation report to the manufacturer’s outside counsel.  The engineer discussed the investigation with outside counsel before conducting the investigation.

The injured plaintiff sued and sought production of the investigation report.  The manufacturer objected, asserting the work-product doctrine and the attorney–client privilege.  The trial court rejected both objections.

Attorney–Client Privilege

One may question the court’s rejection of the attorney–client privilege.  The court applied Nevada’s privilege, which protects confidential communications between the “client’s representative and the client’s lawyer.”  While there was a factual issue whether the manufacturer or an affiliate company actually employed the engineer, there was no dispute that the engineer was the manufacturer’s representative while conducting the investigation.

Yet, the court relied upon federal common law in making its decision and noted that the Supreme Court’s Upjohn decision “largely turns on the issue of employment.”  The Nevada court therefore held the privilege inapplicable because there was some dispute whether the press brake manufacturer employed the engineer.

The court did not address several decisions finding that the privilege applied to consultants and others considered functional equivalent of employees.  See my post regarding a Google case applying the functional equivalent of employee test.

Work-Product Doctrine

The court similarly rejected the work-product doctrine because there was a factual issue whether the engineer prepared the report in anticipation of litigation.  The engineer testified that he spoke with the manufacturer’s outside counsel before conducting the investigation and sent the final report to him. But the court found this factual evidence insufficient to prove the anticipation-of-litigation element.

Other Privileges

The manufacturer also asserted the self-critical analysis privilege, but the court gave this privilege virtually no attention, stating simply that it “considered [the manufacturer’s] other arguments and conclude they lack merit.”

PoP Analysis

The court’s decision lacks a thorough analysis, but, fortunately, the court decided not to publish the opinion, meaning it has no precedential value.  Yet, the case is constructive for lawyers and corporations conducting post-accident investigations.  The evidence in this case appeared equivocal—but what if the manufacturer’s counsel had directed, in writing, that the engineer conduct the investigation because the company anticipated litigation?  And what if the engineer began his investigative report with a statement that he prepared it at the direction of counsel, on behalf of the manufacturer, and for purposes of the manufacturer’s counsel providing legal advice.  I suspect the court would have reached a different outcome.

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.