Tag: attorney client privilege

The Scope of Attorney-Client Privilege Over Dual-Purpose Communications

The Supreme Court will evaluate the scope of attorney-client privilege when applied to communications shared between counsel and client that involve both legal and non-legal advice (“dual-purpose communications”). The decision of the highest court will have long-lasting implications for both business organizations and their retained counsels. The potential outcome of this case cannot be understated.

In this matter, the grand jury issued subpoenas to an anonymous law firm seeking documents related to the government’s investigation of the firm’s client. The law firm had provided both legal and business services to the client by advising on tax-related legal issues and preparing the client’s annual tax returns. When the law firm and client (“Petitioners”) withheld certain correspondence on the grounds that they were protected by attorney-client privilege and the work-product doctrine, the government moved to compel the production of those documents. The district court held that, while the correspondence contained a “dual-purpose,” they were not protected by attorney-client privilege because the primary purpose of the correspondence was to obtain business tax advice and not legal advice.

On appeal, Petitioners argued that the appellate court should apply the “because of” test rather than the “primary purpose” test. The “because of” test asks whether the dual-purpose correspondence was made because of a need for legal advice. The application of this test would expand the scope of attorney-client privilege and protect the correspondence at issue. The Ninth Circuit Court of Appeals, however, rejected Petitioners’ argument and affirmed the district court’s decision. Petitioners appealed the Ninth Circuit’s decision, and the Supreme Court granted certiorari on October 3, 2022.

The Supreme Court’s decision in In re Grand Jury 21-1397 will be of particular significance for in-house counsels who regularly provide both business and legal advice to their employers. For outside counsels, the outcome of this case will shed light on the standard to be applied for asserting privilege over dual-purpose communications. Oral argument occurred on January 9, 2023 at the Supreme Court.

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© Polsinelli PC, Polsinelli LLP in California

SEC Commissioner Signals Need to Fulfill Mandate of Sarbanes-Oxley Act and Develop “Minimum Standards” for Lawyers Practicing Before the Commission

In remarks on March 5, 2022, on PLI’s Corporate Governance webcast, Commissioner Allison Herren Lee of the Securities and Exchange Commission stated that 20 years after its enactment, it is time to revisit the “unfulfilled mandate” of Section 307 of the Sarbanes-Oxley Act of 2002 and establish minimum standards for lawyers practicing before the Commission.1  Commissioner Lee, who announced that she will not seek a second term when her current one ends this month, took issue with what she called the “goal-directed reasoning” of some securities lawyers—that is, focusing primarily on the outcome sought by executives, rather than the impact on investors and the market as a whole.  Such lawyering, Commissioner Lee observed, has a host of negative consequences, including encouraging non-disclosure of material information, harming investors and market integrity, and stymying deterrence.  The solution, Commissioner Lee opined, is to fulfill the mandate of Section 307, which empowered the Commission to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.”2

Over the last 20 years, the Commission has declined to adopt enhanced rules of professional conduct for lawyers appearing before the Commission.  There are good reasons for the Commission’s inaction, including the attorney-client privilege, the goal of zealous advocacy, the fact-specific nature of materiality determinations, and the traditionally state-law basis for the regulation of attorney conduct.  Commissioner Lee, moreover, did not propose specific new rules and recognized that the task was difficult and should be informed by the views of the securities bar and other stakeholders.  Nor did she say that action by the Commission was imminent; it is unclear whether the Commission has authority to promulgate new rules under Section 307 given a 180-day sunset under the statute that occurred in 2003.  Indeed, neither Commissioner Lee nor any of the other SEC commissioners have issued statements on this topic since the PLI webcast.  SEC Enforcement Director Gurbir Grewal has, however, indicated an increased emphasis on gatekeeper accountability in order to restore public trust in the market.3  Nonetheless, given the Commission’s existing authority to impose discipline under its Rules of Practice, practitioners should be mindful of the potential for increased scrutiny moving forward.

Background

In the wake of corporate accounting scandals involving Enron, Worldcom, and other companies, Congress enacted the Sarbanes-Oxley Act in 2002 “[t]o safeguard investors in public companies and restore trust in the financial markets.”4  The Act was aimed at “combating fraud, improving the reliability of financial reporting, and restoring investor confidence,”5 including by empowering the SEC with increased regulatory authority and enforcement power.6  To that end, the Act includes provisions to fortify auditor independence, promote corporate responsibility, enhance financial disclosures, and enhance corporate fraud accountability.7

The Sarbanes-Oxley Act was passed just six months after the collapse of Enron in December 2001, and neither the House nor Senate bills originally contained professional responsibility language.8  Hours before the Senate passed its version of the Act, however, the Senate amended the bill to include language that would eventually become Section 307.9  Around the same time, 40 law professors sent a letter to the SEC requesting the inclusion of a professional conduct rule governing corporate lawyers practicing before the Commission.10  The letter picked up on a 1996 article by Professor Richard Painter, then of the University of Illinois College of Law, which recommended corporate fraud disclosure obligations for attorneys similar to those imposed on accountants by the Private Securities Litigation Reform Act of 1995.11  Senator John Edwards, one of the sponsors of the Senate floor amendment of the bill, emphasized the importance of including professional conduct rules for attorneys in such a significant piece of legislation, stating that “[o]ne of the problems we have seen occurring with this sort of crisis in corporate misconduct is that some lawyers have forgotten their responsibility” is to the companies and shareholders they represent, not corporate executives.12

In its final form, Section 307 imposed a professional responsibility requirement for attorneys that represent issuers appearing before the Commission.  Specifically, Section 307 directed the Commission, within 180 days of enactment of the law, to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers,”13 and, at minimum, promulgate “a rule requiring an attorney to report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the issuer or any agent thereof to appropriate officers within the issuer and, thereafter, to the highest authority within the issuer, if the initial report does not result in an appropriate response.”14

Since the enactment of Section 307, however, the Commission has promulgated only one rule pursuant to its authority, commonly known as the “up-the-ladder” rule.15  The up-the-ladder rule imposes a duty on attorneys representing an issuer before the Commission to report evidence of material violations of the securities laws.  When an attorney learns of evidence of a material violation, the attorney has a duty to report it to the issuer’s chief legal officer (“CLO”) and/or the CEO.16  If the attorney believes the CLO or CEO did not take appropriate action within a reasonable time to address the violation, the attorney has a duty to report the evidence to the audit committee, another committee of independent directors, or the full board of directors until the attorney receives “an appropriate response.”17  Alternatively, attorneys can satisfy their duty by reporting the violation to a qualified legal compliance committee.18  To date, the SEC has never brought a case alleging a violation of the up-the-ladder rule.

Commissioner Lee’s Remarks

In her remarks, Commissioner Lee stated that it is time to revisit the “unfulfilled mandate” of Section 307 and consider whether the Commission should adopt and enforce minimum standards for lawyers who practice before the Commission.  Commissioner Lee criticized “goal-directed reasoning” employed by sophisticated counsel in securities matters, and cited as an example Bandera Master Fund v. Boardwalk Pipeline,19 a recent decision in which the Delaware Court of Chancery rebuked the attorneys involved for their efforts to satisfy the aims of a general partner instead of their duty to the partnership-client as a whole.  The Court, specifically, stated that counsel “knowingly made unrealistic and counterfactual assumptions, knowingly relied on an artificial factual predicate, and consistently engaged in goal-directed reasoning to get to the result that [the general partner] wanted.”20  Bandera and cases like it, according to Commissioner Lee, are emblematic of a “race to the bottom” caused by pressure on securities lawyers to compete with each other for clients, while failing to give due consideration to the potential impact on investors, market integrity, and the public interest.

In Commissioner Lee’s view, “goal-directed” lawyering not only falls short of ethical standards but causes harm to the market and reduces deterrence.  Commissioner Lee expressed concern that, in an effort to give management the answer it wants, lawyers may downplay or obscure material information.21  Although recognizing that materiality determinations are fact-intensive, Commissioner Lee said that should not provide blanket cover for legal advice aimed at concealing material information from the public.  Non-disclosure has a host of negative consequences, including distorting market-moving information, interfering with price discovery, misallocating capital, impairing investor decision-making, and eroding confidence in the financial markets and regulatory system.  Further, such lawyering diminishes deterrence by creating a legal cover for inadequate disclosure, making it more difficult for regulators to hold responsible individuals accountable.  This type of legal counsel, in Commissioner Lee’s view, “is merely rent-seeking masquerading as legal advice, while providing a shield against liability.”

Commissioner Lee stated that the existing framework governing professional conduct is not adequate to hold lawyers accountable for such “reckless” advice.  According to Commissioner Lee, state bars—the principal source for lawyer discipline nationwide—are not up to the task because they lack resources, expertise in securities matters, and the ability to impose adequate monetary sanctions.  Additionally, Commissioner Lee noted that state law standards focused mostly on the behavior of individual lawyers, assigning few responsibilities to the firm for quality assurance.  Indeed, state law standards are mostly drafted in a “one-size-fits-all fashion” according to Commissioner Lee, and do not take into account the different issues faced at large firms that represent public companies, which are quite different from a solo practitioner handling personal injury or estate law matters.  Likewise, although the SEC has the power under Rule 102(e) of its Rules of Practice to suspend or bar attorneys whose conduct falls below “generally recognized norms of professional conduct,” there has been little effort to define or enforce that standard.22  Nor has the SEC rigorously enforced standards of attorney conduct under the one rule it has issued under Section 307, the “up-the-ladder” rule.

Commissioner Lee stated that it was time for the Commission to fulfill its mandate under Section 307.  Although not proposing any specific rules, Commissioner Lee offered the following concepts as a starting point:

  • Greater detail on lawyers’ obligations to a corporate client, including how advice must reflect “the interests of the corporation and its shareholders rather than the executives who hire them”;
  • Requirements of “competence and expertise” (as an example, disclosure lawyers should not opine on materiality “without sufficient focus or understanding of the views of ‘reasonable’ investors”);
  • Continuing education for securities lawyers advising public companies (similar to requirements set by the Public Company Accounting Oversight Board for minimum hours of qualifying continuing professional education for audit firm personnel);
  • Oversight at the firm level (similar to quality-control measures implemented at audit firms);
  • Emphasis on the need for independence in rendering advice (similar to substantive and disclosure requirements implemented in Rule 2-01 of Regulation S-X for auditors);
  • Obligations to investigate red flags and ensure accurate predicates for legal opinions (similar to the obligations that an auditor must perform to certify to the accuracy of their client’s financial statements); and
  • Retention of contemporaneous records to support the reasonableness of legal advice.

Commissioner Lee noted that the content of any specific rules or standards will require “careful thought,” as well as assistance from the securities bar, experts on professional responsibility, and other interested parties and market participants.  She invited input from the legal community and other stakeholders and noted that she appreciated the complexity of the task and concerns of the American Bar Association and others regarding protection of the attorney-client privilege.  Indeed, outside auditors are generally regarded as “public watchdogs” and such communications between the corporation and an auditor are not entitled to the affirmative attorney-client privilege afforded to legal counsel.  Accordingly, regulating the legal profession using a similar framework to that applied to the accounting profession has sparked more controversy.  Nonetheless, in Commissioner Lee’s view, those concerns should be weighed against “the costs of there being few, if any, consequences for contrived or tortured advice.”

Implications

The Commission has declined to adopt enhanced rules of professional conduct for lawyers appearing before it in the 20 years since the enactment of the Sarbanes-Oxley Act.  Commissioner Lee’s call for minimum standards, however, potentially signals increased scrutiny by the SEC with respect to lawyers who “practice before the Commission.”  As Commissioner Lee noted, that means “counsel involved in the formulation and review of issuers’ public disclosure, including those who address the many legal questions that often arise in that context.”23  Nonetheless, Commissioner Lee cautioned that she did “not intend with these comments to address the conduct of attorneys serving as litigators or otherwise representing their client(s) in an advocacy role in an adversarial proceeding or other similar context, such as in an enforcement investigation.”24

Although framing her call for standards in terms of Section 307 of the Sarbanes-Oxley Act, it is not clear that the Commission will—or even can—promulgate any further rules under that authority.  Commissioner Lee did not state that she was speaking on behalf of the Commission or indicate that the Commission would be taking concrete, imminent steps to adopt such standards.  The Commission has not put its imprimatur on the remarks by incorporating them into a formal release or statement of policy.  Moreover, the text of Section 307 appears to foreclose the possibility of further rulemaking, as it provides that the Commission shall issue any such rules “[n]ot later than 180 days after the date of enactment of this act,” i.e., January 27, 2003.  Consistent with that constraint, the SEC proposed the up-the-ladder requirements on November 21, 2002, in Release No. 33-8150, and the rule became final on January 29, 2003.25  But the SEC has not issued any other rule under Section 307 to date.

Even if official action under Section 307 may not be forthcoming, Commissioner Lee’s call for action should not be discounted.  Setting aside the up-the-ladder requirements, the SEC has authority under Rule 102(e) of the SEC’s Rules of Practice to censure or bar a lawyer from appearing or practicing before the Commission if found, among other things, “[t]o be lacking in character or integrity or to have engaged and unethical or improper professional conduct.”26  Commissioner Lee cited prior SEC guidance to indicate that Rule 102(e) may apply to attorney conduct that falls below “generally recognized norms of professional conduct,”27 a standard that has been left undefined to date.28  In practice, the SEC “will hold attorneys who practice before it to the standards to which they are already subject, including state bar rules.”29  At a minimum, then, Commissioner Lee’s objective of greater accountability may be achieved through a more aggressive application of Rule 102(e), which, as she noted, has generally only been applied as a follow-on penalty for primary violations of the securities laws by lawyers.

Commissioner Lee’s term expires on June 5, and she has announced that she intends to step down from the Commission once a successor has been confirmed.30  Should the Commission nonetheless take up her call to action in the future, it will be no easy task to adopt clear standards that can be implemented in a predictable manner.  In particular, Commissioner Lee’s focus on the role of lawyers in advising issuers on determinations of materiality and disclosure does not lend itself well to oversight or enforcement.  The well-established standard for materiality—whether “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote”—is far from clear-cut.31  The Supreme Court, moreover, long has recognized that materiality “depends on the facts and thus is to be determined on a case-by-case basis.”32  As such, and as evidenced by the sundry cases concerning disclosure issues reversed on appeal, disagreement between litigants—as well as jurists—on matters of materiality and disclosure are par for the course.  If that is so, how can a lawyer’s advice on such matters (which will inevitably turn on the facts and the lawyer’s judgment and experience) be subject to oversight in any objective sense?

Even if lawyers’ materiality advice could be evaluated under objective standards, there are other difficulties.  First and foremost is that oversight of legal advice implicates the attorney-client privilege and the underlying benefit of candid advice from securities disclosure and corporate counsel.  As the Supreme Court has observed, the attorney-client privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”33  Aside from situations in which the client has voluntarily waived privilege (as sometimes occurs in SEC investigations) or where another exception to the privilege applies, it is unclear how the SEC could evaluate legal advice without invading privilege.  Such attempts could have led to an increase in corporate wrongdoing as corporate executives could be more reluctant to seek expert legal advice.  In addition, it is unclear how regulators assessing materiality advice would—or could—balance an assessment of whether a lawyer has given the “correct” advice with a lawyer’s ethical obligations of zealous representation of the client.34  The divide between overreaching “goal-directed” reasoning and permissible zealous advocacy for the client is often murky, and reasonable minds can differ depending on the circumstances.  Moreover, it is already well-accepted that a corporate lawyer’s obligation is to the corporation as its client, not to any individual officer or director.35  That obligation carries with it ethical duties to “proceed as is reasonably necessary for the best interest” of the corporation, including when the lawyer is aware of violations of the law or other misconduct by senior management.36  In that sense, Commissioner Lee’s proposal could be viewed as a call for the SEC to take on enforcement of existing ethical rules, rather than for the development of novel “minimum standards.”

Ultimately, there are good reasons for the Commission’s reluctance to date to formally adopt minimum standards of professional conduct for lawyers appearing before it, including the attorney-client privilege, the goal of zealous advocacy, and the fact-specific nature of materiality inquiries.  The manipulation of facts and bad reasoning targeted by Commissioner Lee are not only the exception, and difficult if not impossible to eliminate completely, but are largely covered by existing rules and practices.  Nonetheless, Commissioner Lee’s call for lawyers to strive for higher legal and ethical standards in their counsel should be welcomed.  Sound legal advice is not only important for issuer clients, but also for the financial well-being of investors, the integrity of the markets, and public confidence in the regulatory system and capital markets.  Enhancements in ethical standards for the legal profession could also lead to reputational benefits and greater integrity in the profession.  It remains to be seen whether Commissioner Lee’s remarks will serve as an aspirational goal for securities lawyers, or translate into concrete action by the Commission.

1 Commissioner Allison Herren Lee, Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers Remarks at PLI’s Corporate Governance – A Master Class 2022 (Mar. 4, 2022), [hereinafter “Commissioner Lee Remarks”].

2 See Sarbanes‑Oxley Act, § 307, 15 U.S.C. § 7245 (2002).

3 Gurbir Grewal, Director, Division of Enforcement, Remarks at SEC Speaks 2021 (Oct. 13, 2021).

4 Lawson v. FMR LLC, 571 U.S. 429, 432 (2014).

5 Stephen Wagner and Lee Dittmar, The Unexpected Benefits of Sarbanes-Oxley, Harvard Bus. Rev. (Apr. 2006).

6 See Sarbanes–Oxley Act, § 3, 15 U.S.C. § 7202 (2002).

7 See Sarbanes–Oxley Act, § 1, 15 U.S.C. § 7201 (2002).

8 Jennifer Wheeler, Securities Law: Section 307 of the Sarbanes-Oxley Act: Irreconcilable Conflict with the ABA’s Model Rules and the Oklahoma Rules of Professional Conduct?, 56 Okla. L. Rev. 461, 464 (2003).

9 Id.

10 Id. at 468-69.

11 See generally Richard W. Painter & Jennifer E. Duggan, Lawyer Disclosure of Corporate Fraud: Establishing a Firm Foundation, 50 SMU L. Rev. 225 (1996).

12 Wheeler, supra note 8, at 465 (quoting 148 Cong. Rec. S6551 (daily ed. July 10, 2002) (statement of Sen. Edwards)).

13 See Sarbanes‑Oxley Act, § 307, 15 U.S.C. § 7245 (2002).

14 Final Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8185 (Sept. 26, 2003).

15 17 C.F.R. §§ 205.1-205.7.

16 17 C.F.R. § 205.3(b)(1).

17 17 C.F.R. §§ 205.3(b)(3), (b)(4).

18 17 C.F.R. § 205.3(c).

19 Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, No. CV 2018-0372-JTL, 2021 WL 5267734, at *1 (Del. Ch. Nov. 12, 2021).  In Bandera, plaintiffs brought suit against a general partner for breach of a partnership agreement stemming from the general partner’s exercise of a call right without satisfying two requisite preconditions.  The court held for the plaintiffs and found the general partner had engaged in willful misconduct.  Id. at *51.  Contributing to the misconduct was the general partner’s outside counsel, who drafted an opinion letter justifying the general partner’s exercise of the call right.  Id.  Throughout the drafting process, the court found, that the outside counsel manipulated the facts in order to achieve the general partner’s desired conclusion.  Id. at *18-*47.

20 Id. at *51.

21 Commissioner Lee specifically cited, among other matters, environmental, social, and governance (“ESG”) disclosures.  The Commission is currently considering additional climate change-related disclosures to Regulation S-K and Regulation S-X.  See Jason Halper et al., SEC Proposes Climate-Related Changes to Regulation S-K and Regulation S-X, Cadwalader, Wickersham & Taft LLP (Mar. 23, 2022); see also Paul Kiernan, SEC Proposes More Disclosure Requirements for ESG Funds, The Wall Street Journal (May 25, 2022, 6:26 pm ET).

22 Rule 102(e) states, in relevant part:

(1) Generally. The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter:

(i) not to possess the requisite qualifications to represent others; or

(ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or

(iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.

17 C.F.R. § 201.102(e)(1).

23 Commissioner Lee Remarks, supra note 1.

24 Id.

25 Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8150 (Nov. 21, 2002); Final Rule: Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8185 (Sept. 26, 2003); see also 2 Legal Malpractice § 14:114 (2022 ed.).

26 17 C.F.R. § 201.102(e).  The Rules of Practice generally “govern proceedings before the Commission under the statutes that it administers.” 17 C.F.R. § 201.100.  The SEC has the authority to administer and enforce such rules pursuant to the Administrative Procedures Act, 5 U.S.C. § 551 et. seq. See Comment to Rule 100, SEC Rules of Practice (July 2003).

27 In the Matter of William R. Carter Charles J. Johnson, 47 S.E.C. 471 (Feb. 28, 1981) (“elemental notions of fairness dictate that the Commission should not establish new rules of conduct and impose them retroactively upon professionals who acted at the time without reason to believe that their conduct was unethical or improper.  At the same time, however, we perceive no unfairness whatsoever in holding those professionals who practice before us to generally recognized norms of professional conduct, whether or not such norms had previously been explicitly adopted or endorsed by the Commission.  To do so upsets no justifiable expectations, since the professional is already subject to those norms.”).

28 In the past, the Commission has sought to discipline lawyers for violating securities laws with scienter, rendering misleading opinions used in disclosures and engaged in otherwise liable conduct, but not for giving negligent legal advice to issuers. See In the Matter of Scott G. Monson, Release No. 28323 (June 30, 2008) (collecting cases).

29 In the Matter of Steven Altman, Esq., Release No. 63306 (Nov. 10, 2010).

30 Statement of Planned Departure from the Commission (Mar. 15, 2022).

31 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

32 Basic Inc. v. Levinson, 485 U.S. 224, 250 (1988).

33 Upjohn Co. v. United States, 449 U.S. 383, 389 (1981) (quoting Hunt v. Blackburn, 128 U.S. 464, 470 (1888)).

34 Rule 1.3: Diligence, American Bar Association, (last visited Mar. 18, 2022) (“A lawyer shall act with reasonable diligence and promptness in representing a client.”); Rule 1.3 Diligence – Comment 1, American Bar Association,  (last visited Mar. 18, 2022) (“A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf.”).

35 See, e.g., Upjohn, 449 U.S. at 389.

36 Rule 1.13: Organization As Client, American Bar Association, cmt. 2  (last visited April 19, 2022).

Article By Jason M. Halper, William P. Mills, Erica Hogan, Adam Magid, James Orth, and Jayshree Balakrishnan of Cadwalader, Wickersham & Taft LLP

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Recent Attorney-Client Privilege Cases Show The Risks Of Insurance Counsel Authoring Denial Letters

Claims of bad faith present unique challenges for insurers (and their counsel) with respect to attorney-client privilege: if the insurer’s state of mind is at issue, is the legal advice on which the insurer relied also at issue, thereby waiving the privilege? And if so, under what circumstances? The following addresses this issue in the context of a common practice for insurance counsel—authoring denial letters—and two recent holdings that should serve as warnings in this practice.

I.  Waiving Attorney-Client Privilege: Legal Advice vs. Insurer’s Coverage Decision

In cases involving claims of bad faith, courts are relatively clear that an insurer waives its attorney-client privilege when it expressly invokes the “advice of counsel” defense, which generally provides that “when an insurer’s actions are in conformity with advice given to it by counsel, the insurer’s actions are taken in good faith, and thus the essential element that an aggrieved insured must demonstrate in establishing insurer bad faith is nullified.”[1] However, courts are less united on whether a waiver occurs when the insurer receives advice from its attorney when making its coverage decision, but does not expressly assert the “advice of counsel” defense.

Most courts reject claims of waiver under these circumstances, recognizing the difference between (a) the attorney’s advice on the law and (b) the insurer’s ultimate decision to provide coverage or not. The latter is relevant to a claim of bad faith, but the former is not.[2] By contrast, some courts have held that under certain circumstances, the insurer waives its attorney-client privilege by relying on legal advice—even without actually invoking the “advice of counsel” defense. The Supreme Court of Arizona summarized the underlying rationale as follows:

When a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question. Thus, the advice received from counsel as part of its investigation and evaluation is not only relevant but, on an issue such as this, inextricably intertwined with the court’s truth-seeking functions.[3]

II.  Insurance Counsel Authoring Denial Letters

This attorney-client privilege issue has recently spread to a new battleground, and one which is common practice for insurance counsel: authoring denial letters. To address waiver under these circumstances, some courts have continued the majority rationale by reinforcing the distinction between the attorney’s legal advice and the insurer’s ultimate decision whether to grant coverage.[4] However, two recent decisions should serve as warnings to insurers and their attorneys moving forward.

The first is Canyon Estates Condo. Ass’n v. Atain Specialty Ins. Co., in which the Western District of Washington held that the insurer’s outside counsel did not perform “a privileged task” when it authored and sent denial letters directly to the insured.[5] The court explained that Washington law enforces a presumption that “there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process,” which the insurer may overcome “by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability,” such as “whether or not coverage exists under the law.”[6]

Concluding that the insurer had not overcome this presumption with respect to the denial letters, the court explained that the attorney “clearly—and arguably, knowingly—engaged in at least some quasi-fiduciary activities, including the authoring of draft letters signed by [the insurer] and sent to [the insured] related to coverage and claims processing.”[7] Although drafting the denial letter surely involved legal questions regarding coverage, the court reasoned that “where the insurer’s attorney is involved in both quasi-fiduciary and coverage or liability capacities,” waiving privilege is likely to occur because “counsel’s legal analysis and recommendations to the insurer regarding liability generally or coverage in particular will very likely implicate the work performed and information obtained in his or her quasi-fiduciary capacity.”[8] Importantly, although Canyon Estates did involve claims of bad faith, the court’s reasoning offers no indication that the presence of such claims was essential to its decision. Indeed, the district court did not mention “bad faith” at all, which suggests that insurers and their attorneys could face privilege challenges even when the insured does not assert claims of bad faith.

The second warning is Travelers Prop. Cas. Co. of Am. v. 100 Renaissance, LLC, in which the Supreme Court of Mississippi held that an insurer waived its attorney-client privilege when its in-house counsel ghostwrote denial letters, which were then sent from the adjuster to the insured.[9] Initially, the insurer had denied the insured’s claim because it did not involve a covered “auto” under the policy.[10] The insured’s attorney then sent a lengthy legal analysis to the insurer’s adjuster, arguing that a particular Mississippi statute mandated coverage.[11] The adjuster was not an attorney, and therefore sought advice from the insurer’s in-house counsel, who then penned a letter (in the adjuster’s name) that reaffirmed why—under the policy and Mississippi statutes—coverage was not required.[12] Ultimately, the insured asserted claims against the insurer for bad faith, and sought a deposition of the insurer’s in-house counsel, along with emails between counsel and the adjuster.[13]

The Supreme Court of Mississippi concluded that the insurer waived its attorney-client privilege, explaining that “if the claims handler relied substantially, if not wholly, on in-house counsel to prepare her denial letter, the reasoning of in-house counsel should be discoverable.”[14] The court reasoned that although the insurer sent the letter “in an effort to explain its arguable and legitimate basis to deny the claim,” the adjuster’s testimony made clear that she did not actually understand the legal basis for the denial, and therefore the letter merely represented the attorney’s reasons for denying the claim—not the insurer’s.[15] According to the court, this meant that the attorney did more than just “act as legal counsel and give advice to [the adjuster] to include in the denial letter.”[16] Citing with approval the Supreme Court of Arizona’s decision in Lee, the court explained:

[A] litigant cannot with one hand wield the sword—asserting as a defense that, as the law requires, it made a reasonable investigation into the state of the law and in good faith drew conclusions from that investigation—and with the other hand raise the shield—using the privilege to keep the jury from finding out what its employees actually did, learned in, and gained from that investigation.[17]

Like in Lee, the heart of this decision is the rejection of any distinction between (a) the attorney’s advice on the law and (b) the insurer’s ultimate decision to provide coverage or not. Yet, whether the insurer can articulate that advice as well as its attorney should be immaterial to whether the coverage decision itself had sound legal basis—an issue which the dissent in 100 Renaissance underscored.[18] Without this distinction, privilege would seemingly be at risk in every case involving claims of bad faith (and perhaps even those without such claims) where legal analysis is at least a partial basis for the denial. And given the vast array of statutory, common law, and interpretive issues that inform each decision, this will be a frequent occurrence.

This leaves an insurer (and the adjuster in particular) with two choices: (a) try to interpret the law itself without help from legal counsel, or (b) ask the insurer’s attorney for legal advice, in which case their communications will be subject to discovery unless the insurer can sufficiently re-articulate the legal analysis. Thus, in either case, the insurer must be able to explain often-complex legal issues. The dissent in 100 Renaissance described this exact dilemma: “The majority thus appears to impose a requirement that in order to preserve the privilege, a claims handler must be able to explain legal arguments at her deposition—the same legal issues for which she sought advice in the first place.”[19] Not only that, these are also the same legal issues that the insured had to have its attorney explain, with which the insurer’s counsel then disagreed. As a result, not only must the insurer be able to articulate legal analyses, it must do so for issues on which legal professionals diverge. Indeed, both the majority and dissent in 100 Renaissance actually appear to acknowledge this, yet arrive at starkly different conclusions.[20]

[1] James M. Fischer, Should Advice of Counsel Constitute a Defense for Insurer Bad Faith, 72 Tex. L. Rev. 1447, 1461–62 (1994)

[2] See Aetna Casualty & Sur. Co. v. Superior Court, 153 Cal. App. 3d 467, 475 (Cal. Ct. App. 1984) (insurer did not waive privilege because it did not invoke “advice of counsel” defense, but instead “claim[ed] it acted as it did not because it was advised to do so, but because the advice was, in its view, correct; and it is prepared to defend itself on the basis of that asserted correctness rather than the mere fact of the advice. Such a defense does not waive the attorney-client privilege”); Botkin v. Donegal Mut. Ins. Co., 2011 U.S. Dist. LEXIS 63871, *19 (W.D. Va. 2011) (“There would be little point in retaining coverage counsel to issue an opinion if a party did not intend to rely on it. Likewise, if reliance always gave rise to waiver in this circumstance, no one would seek coverage counsel’s advice.”); Palmer by Diacon v. Farmers Ins. Exch., 261 Mont. 91, 110 (Mont. 1993) (“The attorney-client privilege applies unless the insurer directly relies on advice of counsel as a defense to the bad faith charge.”) (emphasis in original) (citations omitted)

[3] State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 60 (Ariz. 2000); see Tackett v. State Farm Fire & Casualty Ins. Co., 653 A.2d 254, 260 (Del. 1995) (when “an insurer makes factual representations which implicitly rely upon legal advice as justification for non-payment of claims, the insurer cannot shield itself from disclosure of the complete advice of counsel relevant to the handling of the claim”); but see Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 703 (S.D. 2011) (finding that the Supreme Court of Arizona’s decision in Lee went “too far.”).

[4] See Liberty Corp. Capital Ltd. v. Palmetto Bluff Shooting Club, LLC, 2020 U.S. Dist. LEXIS 220654, *11 (D. S.C. 2020) (drafting denial letter does not waive privilege because “[b]ased on counsel’s advice, the client will always have subjective evaluations of its claims and defenses,” and therefore “insurer must take one step further and assert that its denial of the claim is objectively reasonable because it relied on the advice of counsel”) (citations omitted); Barnard Pipeline, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 53778, *9 (D. Mont. 2014) (insurer’s attorney drafted denial letter, but “insurer has not asserted the defense of advice of counsel, and therefore has not waived the attorney-client privilege, simply because the insurer’s representative admits in response to a question on cross-examination that he/she listened to advice of counsel in deciding to deny an insured’s claim.”).

[5] 2020 U.S. Dist. LEXIS 10915, *4 (W.D. Wash. 2020).

[6] Id. at *2–3 (citations omitted).

[7] Id. at *4.

[8] Id. at *3–4 (citations omitted).

[9] 2020 Miss. LEXIS 409, *16–17 (Miss. 2020).

[10] Id. at *2

[11] Id

[12] Id. at *4–5

[13] Id. at *13–14.

[14] Id. at *22 (emphasis in original).

[15] See id. at *12 (“I don’t know. I’m not an attorney. I don’t know anything about statutes. That’s what we have General Counsel for. I deal with policy language, what’s in the policy.”).

[16] Id. at *18.

[17] Id. at *21.

[18] Id. at *27 (regardless of whether it can articulate legal analysis, “Travelers has already given its reasons for denying the claim. And the relevant question is whether Travelers had an ‘arguable or legitimate basis for denying the claim.’”) (citations omitted).

[19] Id. at *25.

[20] See id. at *16–17 (Majority explaining that adjuster’s “testimony also demonstrated a lack of knowledge of Mississippi UM law. She could not explain the origin or intended purpose of her citation of a nonexistent Mississippi statute in the denial letter.”).

© 2020 Dinsmore & Shohl LLP. All rights reserved.
For more, visit the NLR Litigation / Trial Practice section.

The Ever Thinning Right of Privacy at the Border—A Warning for Attorney Travelers

Immigration Commentary

It was March 2, 2020, at around five in the afternoon, right before the COVID-19 pandemic went out of control, and cities and states started to issue stay-at-home orders.

I had just gotten married to my wife on February 28 in Mexico. On our flight back we traveled with our family, around ten people in total. As we went through the automated customs system, my wife got an X in the receipt that the customs’ machine sometimes gives you. Mine did not have an X but, since hers did, I accompanied her to the agent’s kiosk that reviews receipts marked with Xs. When we got there, the agent reviewed her passport quickly, and told her that she would have to go through a secondary screening in what they call the “little room” or “el cuartico” in Spanish. As her husband, they let me go in with her.

We were in the “little room” for a few minutes, not too long. They reviewed her passport and then we were told to go to another place, following a long pathway full of orange plastic cones that took us to another agent, in a zone where there were scanning machines. The agent opened both of our bags, looked at them carefully, item by item, and then told us to sit and wait.

As we sat and waited for around twenty minutes, two agents came in and introduced themselves as being from the Investigative Unit at the Department of Justice. They showed us their badges. Without giving any details, they told us that they had orders from the agent-supervisor in charge to take our phones and laptops. My wife and I are both lawyers and, as such, reacted quite surprised, and quickly asked why. Both agents–one very polite, the other, not so much–told us that they could not tell us why they needed our phones and laptops, or what the whole thing was about. A back and forth, at times intense, ensued.

Our immediate reaction as lawyers was to say: “You don’t have a right to do that. Please show us a warrant to search our phones or laptops.” We additionally disclosed to them at that point that we were attorneys, and that our phones and laptops contained attorney-client sensitive information, and that such information does not belong to us but to the client. The polite officer did not say much. The not-so-polite officer said, essentially: “I don’t care” and that “at the point of entry we have a right to inspect these things.”

At the time, I did not know the law on this topic. As an immigration lawyer, I knew that non-citizens seeking admissibility do not have a constitutional right to privacy. I thought that a different standard applied to U.S. citizens—which we both are. The agent seemed to disagree. I did not have time to research the law on my phone. The agents made us place our phones on the table, so we could not use them. The back and forth with the not-so-polite agent turned more intense. We managed to persuade him to let us use our phones to call our lawyers.

We called three lawyers. First, a good friend, Juan Carlos Gomez, an immigration law professor. He was of the view that if they were going to search our phones and laptops, they needed a magistrate’s order or a warrant. I then called two good friends and excellent criminal attorneys. Both of them said something similar: “If they want to take it, they are going to take it, and there’s not much you can do about it. You just need to make sure you are making it clear that you don’t consent, and thus, anything inside cannot be used against you.” All three attorneys told us that we did not have to provide the passwords of our phones and laptops; we just had to turn them in physically.

My wife and I were both unconcerned about ourselves. We really had nothing to hide but felt (1) that our right of privacy was being violated, and (2) that our clients’ information was vulnerable. We both run small practices and take our phones and computers everywhere, as most lawyers do.

After some 60 minutes arguing with the agents, we agreed that we were going to wait for their supervisor to come see us before they took any of our laptops or phones. According to the not-so-polite agent, their boss had just been in a car accident and was going to take an additional hour. We said we would wait.

After around three hours since landing, tired, and with our family waiting outside, we said: “Let’s just give it to them, let’s not wait anymore.” As we were about to turn in our phones, the agent-supervisor appeared. He was a nice man. We explained to him the situation, that we were attorneys, that our devices contained confidential attorney-client information, and that if he could give us any details about the topic of their investigation, we could cooperate and provide them with any necessary information. The agent-supervisor was polite, understood our position, and said not to worry about it, that he was going to let us go with our devices. We grabbed them and left.

To this day, we are not sure whether the agent-supervisor let us go because of the hassle of having to deal with two lawyers to obtain information that may not be all that valuable anyway, or if he let us go due to the attorney-client privilege concerns we shared with him.

Can U.S. border agents take an attorney’s device which contains attorney-client privileged information?

The short answer seems to be yes.

The longer answer is laid out in the 2018 U.S Customs and Border Protection Directive No. 3340-049A (the “Directive”).[i] Specifically, section 5.2 of the Directive, titled “Review and Handling of Privileged or Other Sensitive Material,” addresses this issue head-on.

First, the information has to be “identified” or “asserted to be” protected by the attorney-client privilege. This burden is on the attorney. In other words, if you have attorney-client privileged information, it is your duty as a lawyer to make the claim.

Second, after there is a claim of attorney-client privileged information, the “Officer shall seek clarification, if practicable in writing, from the individual asserting [the] privilege as to specific files, folders, categories of files, attorney or client names, email addresses, phone numbers, or other particulars that may assist CBP in identifying privileged information.”

Third, before any search may occur, where there is a claim of privilege, “the Officer will contact the CBP Associate/Assistant Chief Counsel (ACC) office.” Then, in coordination with the ACC, the Officer “will ensure segregation of any privileged material from other information examined during a border search to ensure that any privileged material is handled appropriately.”

Finally, at the completion of segregation and review, “unless any materials are identified that indicate threat to homeland security, copies of materials maintained by CBP and determined to be privileged will be destroyed, except for any copy maintained . . . for purposes of . . . a litigation hold.”

In short, CBP officers may search a lawyer’s phone, but they have to “segregate” the privileged information. How confident can you feel about border agents “segregating” and not looking at privileged material in searches they do out of your sight? I think we don’t need to answer that question.

Can U.S. border agents access information remotely stored in “the cloud”?

The next question is how far they can search. We have not defined what a “device” is. Today, almost all smartphones are connected to “the cloud,” which allows you to access vast amounts of information beyond what is stored in the actual physical device.

The Directive also addresses this. It specifically states that “[t]he border search will include an examination of only the information that is resident upon the device and accessible through the device’s operating system or through other software, tools, or applications.” In fact, “Officers may not intentionally use the device to access information that is solely stored remotely.” The Directive goes on to recommend that “Officers request that the traveler disable connectivity to any network . . . or where warranted . . . Officers will themselves disable network connectivity.”

In other words, Officers can search your phone, but they cannot go into your Dropbox, iCloud, Google Drive or any other information that is stored in “the cloud” and that is accessed through internet connectivity. The question again becomes, how confident can you feel about border agents not accessing readily available information in Gmail, iCloud, Dropbox, and other cloud-based services? You really have no assurances that officers will not look at things you keep in “the cloud” that are so readily accessible. This underscores the importance of always having such applications logged out in your devices, but especially when you travel internationally.

Do you have to give U.S. border agents your password?

The Directive states that “[t]travelers are obligated to present electronic devices and the information contained therein in a condition that allows inspection of the device and its contents.” “Passcodes or other means of access may be requested and retained as needed to facilitate the examination of an electronic device.”

Thus, the Directive clearly says that you have to provide your password. However, it is unclear what remedy border agents have if U.S. citizens refuse to do so. In the case of non-U.S. citizens, it is clear that they could be denied admission into the country. It is highly unlikely, however, that a U.S. citizen attorney, making a claim of privilege, has to voluntarily disclose the password of the device that contains the privileged information. What happens if the attorney refuses to give his password? Will he be arrested? What if he is arrested and still refuses to give his password? Will he be physically forced? It seems to be one of those situations where it will be difficult for U.S. agents to enforce. Of course, U.S. Customs is not completely without remedy, as the refusal to turn in the password will result in the impounding of the device and its opening using other electronic means.

What to do?

We will never know why they wanted our devices. Likely, it was something related to one of the hundreds of clients we have represented. But we do not know exactly which client or what the investigation was about.

What we do know now and learned from this experience is that we live in a world with increasingly fading privacy rights, and that we have to learn, as lawyers, to take necessary precautions to protect our clients’ information. These precautions include traveling with devices that do not have access to cloud-stored information, such as Dropbox, Google Drive, Gmail, iCloud, or some legal software that relies on cloud computing. It is also important to travel with computers or phones that do not have anything in it that can be privileged. As seen above, even if the Directive says that the Officer has to “segregate” and not look at attorney-client privileged material, these searches happen out of your sight, and you have no control whatsoever over what the Officers look at. Until the Directive is challenged in court, Attorneys have to be extremely careful when they travel internationally.

[i] The legal authority or weight that the Directive carries is not the subject of this article; this article merely describes the current policy used by CBP in doing searches of attorneys’ devices.

© 2020 Eduardo Ayala Maura
For more on attorney-client privilege matters, see the National Law Review Law Office Management section.

Protecting Privilege when Communicating with PR Consultants

In high-profile cases in 2001[1] and 2003,[2] federal courts recognized exceptions to the third-party waiver rule for privileged communications shared with public relations (PR) consultants. Since then, courts have repeatedly been tasked with determining the status of PR firms for purposes of asserted waivers of attorney-client privilege and deciding whether Kovel[3]or the third-party waiver exceptions recognized in In re Copper or In re Grand Jury Subpoenas apply. Recently, multiple courts have rendered decisions on whether a third-party PR consultant falls within the scope of the privilege by virtue of one of the exceptions. These decisions have demonstrated that, as of 2020, the standards for these doctrines remain fluid, if not illusive. By contrast, disclosure of attorney work product to third parties does not so readily waive protection. Below we review recent cases and offer best practices to maintain privilege and work-product protection.

Third-Party Waiver Exception Doctrines Applied to PR Firms

The attorney-client privilege protects communications made in confidence with counsel for the purpose of legal advice, but the privilege is waived if the communication is shared with a third party. Starting in 2001, courts applied two developing exceptions to the third-party waiver rule to PR firms. The court in In re Copper Market Antitrust Litigation[4] held that a PR firm was the functional equivalent of an employee such that the privilege was not waived when counsel shared communications with the firm.[5] In doing so, the court recognized that the PR firm was within the scope of privilege as defined by Upjohn Co. v. United States.[6] Two years later, the court in In re Grand Jury Subpoenas Dated March 24, 2003,[7] applied the Kovel[8]third-party waiver exception to retention of a PR firm and held that the communications of a grand jury target with that PR firm did not waive the privilege because counsel needed to engage in frank discussions of the facts and strategies.

Decisions Finding No Waiver

In NECA-IBEW Pension Trust Fund v. Precision Castparts Corp.,[9] the plaintiffs in a securities action moved to compel documents listed on the privilege log drafted by counsel for Precision Castparts Corp. (PCC) and shared with AMG, PCC’s PR firm, for comments. The defendant asserted that the documents were privileged, arguing that AMG was the functional equivalent of an employee such that disclosure did not constitute a waiver.[10] The court agreed:

AMG is the functional equivalent of an employee under Upjohn and Graff. PCC retained AMG in August 2014 to provide “public relations counsel and other strategic communications services.” AMG’s retainer was not a test run, as the relationship was established by the time Berkshire and PCC began talks in March 2015 and was apparently maintained throughout the acquisition. Under the terms of its engagement, AMG was required to “take instructions from [PCC] and . . . consult with other members of [PCC] management and with [PCC’s] legal and financial advisors as necessary, while PCC promised to “provide AMG with the information and resources necessary to carry out [PCC’s] instructions.”[11]

Significantly, in addition to serving as a functional equivalent of an employee, the court found that AMG was clearly receiving “legal advice from corporate counsel to guide its work for the company.”

In Stardock Systems v. Reiche,[12] a federal trademark action, Reiche’s counsel retained PR firm Singer to provide PR counseling. Reiche withheld communications between its counsel and Singer as privileged.[13] Citing In re Grand Subpoenas,[14] Reiche asserted that Singer had been retained to help present a balanced picture and that the withheld communications related to legal advice about the appropriate response to the lawsuit and making related public statements.

The court found that Reiche’s counsel hired Singer for the purposes of litigation strategy and that the communications between Singer and counsel pertained to “giving and receiving legal advice about the appropriate response to the lawsuit and making related public statements.”[15] The court cited specific examples of privilege log entries that all “relate[d] to Defendants’ counsel’s litigation strategy in dealing with the present suit.”[16] The court also held that the attorney work-product doctrine had not been waived because the work product shared was intended to be kept confidential.

Cases Where Courts Found Waiver

Other courts, however, have reached different conclusions. Following the premiere of “Blackfish,” a film critical of SeaWorld, SeaWorld and its counsel retained two “crisis” PR firms to work with counsel in developing a legal strategy, including considering potential litigation. In Anderson v. SeaWorld Parks & Entertainment, Inc.,[17] the PR firms produced documents regarding their work with SeaWorld, but SeaWorld redacted some documents and withheld others based on attorney-client privilege and attorney work product.

The court, relying on Behunin v. Superior Court, the only California decision addressing the issue as applied to PR firms,[18] held the standard of “reasonably necessary” had not been met:

[I]n order for disclosure to a third party to be “reasonably necessary” for an attorney’s purpose, and thus not to effect a waiver of privilege, it is not enough that the third party weighs in on legal strategy. Instead, the third party must facilitate communication between the attorney and client. Here, the evidence submitted and documents lodged for in camera review show at most that SeaWorld and its counsel sought advice from public relations firms to better predict the public reaction to legal activities and other efforts it considered in response to Blackfish, and to determine how best to present such activities to the public and other entities.[19]

The court rejected SeaWorld’s argument that its PR consultants were functionally equivalent to employees, stating that, even assuming that the remaining elements of the test were satisfied, “there is no evidence that any such consultant “possessed information possessed by no one else at the company,’” [20] one of the factors established by In re Bieter Company,[21] which established the functional equivalent doctrine in the Eighth Circuit.

However, the court held that disclosure of the attorneys’ work product to the PR firms had not waived work-product protection because there can be no waiver “unless it has substantially increased the opportunity for the adverse party to obtain the information.”[22]

In Universal Standard Inc. v. Target Corp.,[23] a trademark infringement and unfair competition case, Target sought to compel production of emails sent among Universal Standard, its attorneys and its PR firm, BrandLink, arguing that privilege had been waived. Universal argued that BrandLink was the functional equivalent of an employee, hired to serve as Universal’s “public relations arm” with independent decision-making authority. The court found no evidence of that, however; the only specific evidence was that BrandLink would monitor and respond to inquiries directed to a PR email address, duties unrelated to legal advice. Further, BrandLink had no independent authority to issue a press release — the email in dispute suggested the Universal overruled BrandLink’s recommendation.

Further, BrandLink did not work exclusively for Universal and provided services for more than a dozen other brands:

It is of no great significance that, as Universal Standard argues, BrandLink has “particular and unique expertise in the area of public relations, whereas Universal Standard does not.” Or that BrandLink “works closely with Universal Standard’s owners on a continuous basis regarding PR issues. To the contrary, the evidence presented by the parties “contradict[s] the picture of [BrandLink] as so fully integrated into the [Universal Standard] hierarchy as to be a de facto employee of [Universal Standard]”[24]

The court also rejected the assertion that the In re Grand Jury Subpoenas exception applied because there was no evidence that the purpose of the communications with BrandLink was to assist counsel in providing legal advice.[25]

Finally, the court in Pipeline Productions, Inc. v. Madison Cos.[26]reached a mixed result. In this case arising out of a failed music festival, the plaintiff moved to compel documents listed on the defendants’ privilege log that involved two third-party contractors — Suzanne Land, hired to negotiate related transactions, and Marcee Rondan, a PR consultant. The court found that Land was the functional equivalent of an employee, citing affidavits from the defendant:

Madison submitted a detailed factual record that establishes Ms. Land was an authorized representative for purposes of seeking and receiving the legal advice at issue. Mr. Gordon’s affidavit explains that he brought Ms. Land on board in the winter of 2014-2015 as his “right hand person” to oversee negotiating certain proposed business transactions, including the dealings with Pipeline that are the subject of this litigation. . . . He authorized and asked Ms. Land to communicate with counsel and other Madison representatives in order to obtain information needed or requested by Madison’s attorneys, he authorized Ms. Land to act in this capacity as Madison’s representative, and he relied upon her to do so.[27]

The court rejected the defendants’ argument that the purpose of communications with Rondan was to guide their counsel relating to PR issues with potential litigation:

These descriptions suggest only that the predominant purpose of the communications was to obtain public relations advice from Ms. Rondan and, even further afield, as they sought to set up a call about that advice. Although Madison argues counsel was included on all communications and that the communications would not have occurred “but for the fact that a lawsuit was filed,” these considerations are insufficient to show that Ms. Rondan provided any information to Madison’s attorneys to enable them to render legal advice or to provide legal services.[28]

Best Practices

While each case will turn on its facts, there are steps counsel can take to best ensure privileged and protected communications with PR firms retain their protection by making a clear record of what role the PR firm will play.

First, it should be counsel who engages a PR firm, and counsel should provide a clear, written description of the PR firm’s role in the litigation in their engagement letter. To the extent that an engagement expands beyond the initial scope, additional engagement letters should make clear what the PR firm’s role will be in each.

Not every communication with PR firms will involve the provision of legal advice and so companies should not try and overreach by copying counsel on routine communications. If a communication is to remain privileged, there must be a legal reason why the PR firm is involved. Communications designed to address nonlegal matters, like public perception, will not be deemed privileged. Privileged communications should only be shared with PR firms to the extent necessary, and only with PR consultants so integrated into the client’s business and structure that the consultant can be qualified as a functional equivalent of an employee.

When challenged, counsel should prepare affidavits that evidence the specific tasks assigned to the PR firm and why its involvement was necessary for the provision of legal advice. If establishing that the consultant is the functional equivalent of an employee, the affidavits should establish the PR firm’s integration into the company’s structure and routine interaction with counsel for legal advice.

Finally, regardless of whether a communication remains privileged, because attorney work-product protection is not so easily waived, counsel should demonstrate that disclosure did not make the information available to their adversaries.

[1] See In re Copper Mkt. Antitrust Litig., 200 F.R.D. 213 (S.D.N.Y. 2001), where the court held that the public relations firm was the functional equivalent of the corporation’s employee and, therefore, the attorney-client privilege was not waived when the corporation’s counsel shared communications with the public relations firm. In so holding, the court rejected the argument that third-party consultants came within the scope of the privilege only when acting as conduits or facilitators of attorney-client communications, the requirements of the original third-party waiver doctrine adopted in United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961).

[2] In In re Grand Jury Subpoenas Dated March 24, 2003, 265 F. Supp. 2d 321 (S.D.N.Y. 2003), a target of a grand jury investigation hired a public relations firm to assist in influencing the outcome of the investigation. When subpoenaed by the government to produce documents and testify before the grand jury regarding communications with the target, the public relations firm asserted the attorney-client privilege on behalf of the target. The court upheld the privilege, recognizing the need for lawyers to be able to engage in frank discussion of facts and strategies with the lawyers’ public relations consultants.

[3]United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961). The Second Circuit held that the privilege could extend to communications between a client and a nonattorney third party if “the communication [is] made in confidence for the purpose of obtaining legal advice from the lawyer.” Id. at 922. In applying this rule, the court found that the privilege could reasonably extend to an accountant assisting a law firm in an investigation into an alleged federal income tax violation.”

[4] 200 F.R.D. 213 (S.D.N.Y. 2001).

[5] Id. at 219-20 (citing In re Bieter, 16 F.3d 929 (1994) (privilege would apply to communications between independent consultants hired by the client and the client’s lawyers if those consultants were the functional equivalents of employees)).

[6]449 U.S. 383, 391 (1981) (Supreme Court rejected that only corporation’s high-level “control group” could communicate with attorneys without the privilege being waived and held that lower-level employees could be used as agents of the corporation when they had relevant information needed by corporate counsel to advise client).

[7] 265 F. Supp. 2d 321 (S.D.N.Y. 2003).

[8] United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961).

[9] No. 3:16-cv-017756, 29019 U.S. Dist. LEXIS 168088 (D. Or. Sep. 27, 2019).

[10] Id. at *14-15 (“The Eighth Circuit . . . applied Upjohn to cover communications between corporate counsel and outside consultants” when the outside consultant “was in all relevant respects the functional equivalent of an employee.”) (citations omitted).

[11] Id. at *17-18, distinguishing Universal Standard Inc. v. Target, 331 F.R.D. 80 (S.D.N.Y. May 6, 2019).

[12] 2018 U.S. Dist. LEXIS 204438 (N.D. Cal. Nov. 30, 2018).

[13] Id. at *5.

[14] 265 F. Supp. 2d 321 (S.D.N.Y. 2003).

[15] Id. at *17.

[16] Id. at *17-18.

[17] 329 F.R.D 628 (N.D. Cal. 2019)

[18] 9 Cal. App. 5th 833, 215 Cal. Rptr. 3d 475 (App. 2d Dist. 2017) (court held Behunin had not proven the communications were reasonably necessary for counsel’s representation and determined the privilege had been waived).

[19] 329 F.R.D. at *634.

[20] Id.

[21] 16 F.3d 929 (8th Circ. 1994).

[22] Id. at *635-36.

[23] 331 F.R.D. 80 (S.D.N.Y. 2019).

[24] Id. at 90 (citations omitted).

[25] Id. at *91-92.

[26] No. 15-4890-KHV, 2019 U.S. DIST Lexis 71601 (D. Kan. Apr. 29, 2019).

[27] Id. at *3-4.

[28] Id. at *5-6.

Copyright © 2020 Pepper Hamilton LLP
For more on protecting privilege, see the National Law Review Law Office Management section.

Maintaining Attorney-Client Privilege Over Communications with Consultants Involved in Internal Investigations

When a company retains outside counsel to conduct an internal investigation of alleged wrongdoing, attorney investigators sometimes need or require the assistance of outside consultants, such as forensic accountants or technology specialists, to effectively represent and communicate with their client. While the extension of the attorney-client privilege to communications between counsel and such outside consultants has been recognized, the consultant must be integral to counsel’s ability to perform the investigation and convey and discuss the results to the client, and privileged communications with the consultant should be narrowly restricted.

In a recent case, SEC v. Navellier & Assocs., Civil Action No. 17-11633-DJC (D. Mass. Jan. 22, 2019), the court held that the attorney-client privilege did not extend to an outside consultant hired as part of an internal company review to assist counsel in advising clients regarding possible future litigation with the Securities and Exchange Commission regarding exchange traded funds. According to the court, the third party “must be ‘necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.’” The court emphasized that the third-party consultant’s involvement must be nearly indispensable or serve some specialized purpose in facilitating the attorney-client communications. The court found that the consultant’s role in that case, while helpful in assisting counsel, did not rise to the required level of necessity; thus, communications between counsel and consultant were not privileged. The Navellier decision serves as a reminder to both companies and counsel to analyze as a threshold matter whether the consultant is truly necessary or merely helpful or convenient, and tailor communications with the consultant accordingly.

©2019 Epstein Becker & Green, P.C. All rights reserved.

See more on attorney-client responsibilities on the National Law Review Law Office Management page.

Keeping Third Party Communications Protected by the Attorney-Client Privileged

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A recent Pennsylvania federal court decision highlights the difficulty in keeping third party communications privileged.  (King Drug Co. of Florence, Inc. v. Cephalon, Inc., No. 06-CV-1797, 2013 WL 4836752 (E.D. Pa. Sept. 11, 2013)).  In Cephalon, the court found third party communications privileged because the third party performed a role for Cephalon substantially identical to that of Cephalon employees.  The Federal Trade Commission (FTC) had sought an order requiring Cephalon to produce documents shared with or created by its third party consultants in connection with work the consultants performed for Cephalon that Cephalon withheld or redacted based upon theattorney-client privilege.

In keeping the documents protected, the court followed other courts and adopted the broader “functional equivalent” approach to third party communications.  According to the court, this approach “reflects the reality that corporations increasingly conduct their business not merely through regular employees but also through a variety of independent contractors retained for specific purposes.” Cephalon, 2013 WL 4836752, at *7.  The broader “functional equivalent” analysis looks at the following factors.  First, third party consultants must perform a role substantially identical to that of an employee.  For example, in Cephalon, the consultants worked closely with employees by providing managerial support, strategic advice, and participating in making preservations to senior management.  The consultants also had dedicated office space and were subject to confidentiality agreements.  Second, the documents or communications must be kept confidential.  And, third, the documents or communications must be made for the purpose of providing or obtaining legal advice.

However, not all courts agree with this broader approach.  Other courts have adopted a narrower “functional equivalent” test.  The main differences with the narrower approach are that consultants must be incorporated into the staff to perform a corporate function that is necessary in the content of actual or anticipated litigation, and possess information needed by attorneys in rendering legal advice.  See In re Bristol-Myers Squibb Sec. Litig., No. 00-1990, 2003 WL 25962198, at *4 (D.N.J. June 25, 2003).

The varying scope of the functional equivalent test highlights that the most important factor in keeping third party communications privileged is to know your jurisdiction’s viewpoint.  Other considerations include making certain that consultants are the functional equivalent of employees, and that the communications are kept confidential and created for the purpose of obtaining or providing legal advice.

Article by:

Karne O. Newburn

Of:

McDermott Will & Emery

Congress Passes Bill Fixing Attorney-Client Privilege Waiver Problem for Consumer Financial Protection Bureau

The National Law Review recently published an article, Congress Passes Bill Fixing Attorney-Client Privilege Waiver Problem for Consumer Financial Protection Bureau, written by Phillip L. Stern and Michael C. Diedrich with Neal, Gerber & Eisenberg LLP:

Neal Gerber

The U.S. Senate has passed H.R. 4014, a House bill that adds the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to the list of federal banking agencies with whom supervised entities may share information without effecting a waiver of the attorney-client privilege as to third-parties. President Obama is expected to sign the bill into law.

The bill, sponsored by Rep. Bill Huizenga of Michigan (R), is intended to address a perceived shortcoming in the original Dodd-Frank Act, which created the Bureau. Under Dodd-Frank, the new Bureau was given broad supervisory and enforcement powers over large swaths of the financial and credit services industries. The Act, however, did not provide – as is the case with other Prudential Regulators, including the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (see12 U.S.C. 1828(x)) – that the attorney-client privilege would not be waived when otherwise privileged information is shared by a supervised entity with the Bureau except with respect to its dealings with the Bureau.

The bill fixes this omission and adds the Bureau to the list of Prudential Regulators for whom the privilege is not waived as to material submitted in the course of any supervisory or regulatory process. Moreover, the Bureau can share the supervised entity’s privileged information with other Prudential Regulators without triggering a waiver of the supervised entity’s privilege except with respect to that Prudential Regulator. The law thus closes what many commentators and members of Congress felt was a loophole that would impede cooperation among supervised entities and the Bureau.

The Bureau had tried to address the omission through a bulletin it issued on January 4, 2012 (CFPB Bulletin 12-01) in which it stated that because its supervisory powers were equivalent to those of the Prudential Regulators, it had the power “to receive privileged information from supervised entities without effecting a waiver of privilege.” Due to the omission in the Act that created the Bureau, most commentators feared that the Bureau’s unilateral decree was insufficient to protect the privilege. Similarly, Congress expressed a preference for a statutory scheme to address inter-agency sharing of privileged material over any agency pronouncement or rule-making. SeeCongressional questioning of Raj Date, Deputy Director of the CFPB, on 7/19/12 before House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit.

In addition to adding the Bureau to the list of Prudential Regulators for the purpose of maintaining attorney-client privilege, the bill also adds the Bureau to a different statutory list (12 U.S.C. 1821(t)(2)(A)) of credit agencies among whom sharing of privileged information will not result in a waiver as to third-parties including the Farm Credit Administration, the Farm Credit System Insurance Corporation, the National Credit Union Administration, and the Federal Housing Finance Agency.

Though H.R. 4014 does close the gap as to sharing of information obtained through supervisory examinations and among government regulators, the law does not address a major concern of supervised entities – that material obtained through the course of an examination will be shared with the Bureau’s enforcement division and form the basis of an action. According to the Congressional summary of the bill, the provision prohibiting information gathered by the CFPB in its supervisory or regulatory capacity will not be construed as a waiver of privilege as to “any person or entity other than the CFPB…” (emphasis added). The concern as to the Bureau itself, and its two divisions, remains.

© 2012 Neal, Gerber & Eisenberg LLP

Four Practical Tips for Protecting the Attorney-Client Privilege

The critical protection offered by the attorney-client privilege—maintenance of the confidentiality of communications between an attorney and client—is increasingly under attack from both government regulators and private litigants. Moreover, there are some situations in which it is not at all obvious that the protections afforded by the attorney-client privilege are put at risk. For example, in stark contrast to US attorney-client privilege protections, the privilege is not even recognized in some situations outside the US, such as conversations between business people and in-house counsel. Here are some practical tips for ensuring that your communications with counsel are protected by the attorney-client privilege and not subject to disclosure.

1. CLEARLY IDENTIFY PRIVILEGED COMMUNICATIONS

Communications that are clearly attorney-client privileged, i.e., they are made for the purpose of seeking or providing legal advice, should be identified as such. Use of phrases within the body of privileged communications, such as “I am seeking legal advice related to…” or “In response to your request for legal counsel regarding…” further confirm that the communication is privileged. Use of the “privilege” label does not create a privilege that might not otherwise exist. Therefore, do not overuse the “privilege” label; doing so may make it more difficult to establish the protection of the privilege for communications that were truly made to obtain or provide legal advice.

2. PRIVILEGE RULES OUTSIDE THE US ARE DIFFERENT

Although most countries recognize some form of attorney-client privilege, the scope and application of the privilege may vary significantly by country. For example, while communications between in-house counsel in the US and their internal business clients in the US are protected by the same privileges that apply to outside US counsel, there is no in-house counsel privilege in the majority of countries in the European Union (EU). Those countries reason that inside counsel are not independent of their employers and therefore are not entitled to the same privilege protections afforded communications with outside counsel who are deemed to be independent. EU law is also unlikely to recognize as privileged a communication between in-house counsel based in the US and a business client based in the EU. Indeed, in one case, the EU seized legal memoranda from inside counsel and relied on them to determine that a company knowingly violated the law. Case law further suggests that the EU may not even recognize as privileged a communication between outside US counsel and a business client located in the EU. The implications of the starkly different treatment of the attorney-client privilege as between the US and the EU can be serious. For example, parties to litigation in the US may attempt to seek discovery of sensitive communications between in-house counsel in the EU and internal business clients based in the EU. To maintain the protection of the attorney-client privilege outside the US to the greatest extent possible, the following steps should be taken:

  1. analyze the attorney-client privilege rules in each jurisdiction in which your company has operations,
  2. based on that analysis, determine whether it is necessary to engage local outside counsel to maximize the protection of the attorney-client privilege,
  3. limit the privileged information sent by US inside counsel to European offices, and
  4. limit access to US legal department files and servers by non-US offices.

3. USE CAUTION WHEN COMMUNICATING WITH OUTSIDE DIRECTORS

Most outside directors have other business interests, and many are employed by other companies. If these outside directors use email addresses provided by their employer or other business interests, they may subject emails relating to the company on whose board they serve, including attorney-client communications, to discovery because they have a very limited, if any, expectation of privacy related to an email address that is controlled by their employer or unrelated business interest. To protect email communications with outside directors to the greatest extent possible, the outside directors should use either an email address provided by the company on whose board they serve or a personal email address. If that is not possible, any board-related emails going to or from another company’s email address should be clearly identified in the subject line as board-related business and, if to or from an attorney, that the communication is privileged, and the outside director should segregate those emails in a separate folder.

4. IN-HOUSE COUNSEL SHOULD CAREFULLY CONSIDER THE RISKS OF SIGNING AFFIDAVITS OR SWORN STATEMENTS

Signing affidavits or other sworn statements on behalf of the company, such as verifications of discovery responses in litigation, may subject the signer to a deposition or other discovery of the factual basis on which the statement or affidavit was made. If the affidavit or sworn statement is signed by in-house counsel, protecting information obtained by in-house counsel in the course of investigating the matter that led to the affidavit or statement becomes very difficult because the act of signing may be viewed as a waiver of the attorney-client privilege. Therefore, to the extent possible, use non-attorney business people to sign affidavits or other sworn statements on behalf of the company.

In sum, recognition of those situations in which the protection of the attorney-client privilege may be at risk and adherence to best practices are necessary to continue maintaining the confidentiality of attorney-client communications.

© 2012 Andrews Kurth LLP