Third Parties and Attorney-Client Privilege:

Common Interest, Functional Equivalence,

Waiver

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WEDNESDAY, DECEMBER 11, 2019

Presenting a live 90-minute webinar with interactive Q&A

Kevin D. Collins, Partner, Bracewell, Austin, Texas

Donna L. Fisher, Special Counsel, Pepper Hamilton, Harrisburg, Pa.

Brian C. Spahn, Shareholder, Godfrey & Kahn, Milwaukee

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Kevin D. Collins, Esq. Donna L. Fisher, Esq. Bracewell LLP Pepper Hamilton LLP

Brian C. Spahn, Esq.Godfrey & Kahn S.C.

Third Party Attorney-Client Privilege Waiver Exceptions: Kovel, Functional Employee Equivalent and Common Interest Doctrines

December 11, 2019

I. Overview – Attorney-Client Privilege; Attorney Work-Product Doctrine; and Waiver

II. Exceptions to Third-Party Waivers – Kovel Doctrine; Functional Employee Equivalent Doctrine; Common Interest Doctrine

III. Best Practices/Lessons Learned

IV. Q & A

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Table of Contents

A. Attorney-Client Privilege

B. Attorney Work-Product Doctrine

C. Waiver

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Part I: Overview

Generally:

- The person or entity asserting the privilege must be a client;

- The person to whom the communication was made must be an attorney acting in that capacity at the time of the communication;

- The communication must have been made by the client, not a third party;

- The communication must be made in confidence; and

- The communication must be for the purposes of obtaining legal advice or assistance in a legal proceeding.

States, federal and foreign systems each have their own particular law on the attorney-client privilege (i.e., protection in one jurisdiction does not mean protection in another jurisdiction).

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A. Attorney-Client Privilege

The work-product doctrine is a qualified immunity from the discovery of an attorney’s written statements, private memoranda and personal recollections that are made in anticipation of litigation.

The immunity is qualified in that it is subject to discovery by the opposing party upon a special showing of undue hardship or injustice.

Attorney opinions made in anticipation of litigation are never subject to discovery.

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B. Attorney Work-Product Doctrine

Attorney-Client Privilege Waiver:

- The attorney-client privilege is waived when the communication is made in the presence of, or communicated to, a third party.

- The question is whether confidential communications were disclosed.

Work Product Waiver:

- Work-product protection is waived when protected materials are disclosed in a way that substantially increases the opportunity for potential adversaries to obtain the information.

- The question is to whom was the disclosure made.

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C. Waiver

A. Kovel Doctrine

B. Functional Employee Equivalent Doctrine

C. Common Interest Doctrine

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Part II: Exceptions to Third-Party Waivers

Kovel, an accountant and former IRS agent, was employed by a law firm that specialized in tax law.

Kovel was subpoenaed to testify at a grand jury investigation of one of the law firm’s clients but refused to answer several questions on the grounds of attorney-client privilege.

Court analogized the law firm’s reliance on Kovel to an attorney’s need for an interpreter when his or her client speaks only a foreign language.

The “presence of the accountant is necessary, or at least highly useful, for the effective consultation between the client and lawyer which the privilege is designed to permit.” 296 F.2d at 922.

Emphasized that the privilege was maintained only when seeking legal advice, not accounting advice.

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A. Kovel Doctrine - United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961)

Ackert was employed by Goldman, Sachs and Co., an investment banking firm. In 1989, Ackert and a Goldman Sachs sales representative pitched an investment proposal to Paramount that was expected to reduce Paramount’s tax liability.

Meyers, Paramount’s VP and tax counsel, conducted legal research and analysis to advise Paramount proposal, including contacting Ackert to discuss the transaction.

IRS conducted an audit of Paramount and issued a summons to Ackert seeking his testimony about the 1989 investment proposal.

Citing Kovel, Paramount asserted attorney client privilege with respect to questions concerning any conversations Ackert had with Meyers or in Meyers’ presence.

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United States v. Ackert, 169 F.3d 136 (2nd Cir. 1999)

IRS sought an order directing Ackert to answer its questions. The magistrate judge ruled in favor of Paramount on the basis that Meyers had been collecting information from Ackert in order to give legal advice.

Second Circuit reversed, distinguishing between communications with a third party that are helpful or important to an attorney’s legal advice from communications with a third party for the purpose of translating communications between attorney and client.

- “Meyers was not relying on Ackert to translate or interpret information given to Meyers by his client. Rather, Meyers sought out Ackert for information Paramount did not have about the proposed transaction and its tax consequences. Because Ackert’s role was not as a translator or interpreter of client communications, the principle of Kovel does not shield his discussions with Meyers. “

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United States v. Ackert, 169 F.3d 136 (2nd Cir. 1999)

Defendant sought advice from Price Waterhouse on the structure of a transaction.

Defendant’s legal department discussed structure, purpose and tax consequences of transaction.

Defendant, relying on Kovel, withheld documents exchanged as privileged.

Magistrate judge distinguished between an accountant being hired merely to give additional legal advice about complying with the tax code from being hired to assist in understanding financial information.

Recommended the court hold that Kovel only applied if the consultation with the third party was necessary to effectuate legal advice.

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United States v. Chevron Texaco Corp.,241 F. Supp. 2d 1065 (N.D. Cal. 2002)

Communications with other third party consultants may still be privileged as long as the consulting service is rendered for legal rather than business advice.

- Communications with the consultant must be kept confidential.

- Reports or statements made by or to the consultant without an attorney’s direction or supervision are presumably made in the ordinary course of business and so are not privileged.

Translation analogy still applies – the consultant must be translating information or facilitating the communication between the lawyer and client so that the lawyer can render legal advice.

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Application of Kovel Doctrine to Other Third-Party Consultants

Target of grand jury investigation hired a PR firm to assist in influencing the outcome of the investigation. Government subpoenaed the PR firm to produce documents testify before the grand jury regarding communications with the target.

PR firm asserted the attorney-client privilege on behalf of the target, arguing that the purpose of its public relations campaign was to counter unbalanced and inaccurate press reports about the target.

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

Court held communications between target and PR firm without the attorney may be privileged but only if made for purpose of obtaining legal services.

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In re Grand Jury Subpoenas Dated March 24, 2003, 265 F. Supp. 2d 321 (S.D.N.Y. 2003)

Action involved violations of the Fair Labor Standards Act and class action claims under the New York Minimum Wage Act.

The defendant had reached out to its legal counsel for advice on the classification of apprentices.

After counsel had provided legal advice on the classification question, defendant retained a human resources consultant to conduct a “job function analysis.” 94 F.Supp. 3d at 592.

Defendant produced some of consultant’s interview notes without asserting privilege objection.

Results/conclusions of job function analysis were communicated in memorandum to counsel, which defendant withheld as privileged.

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Scott v. Chipotle Mexican Grill, Inc., 94 F. Supp. 3d 585 (S.D.N.Y. 2015)

Court held the attorney-client privilege did not protect the memorandum:

- Report did not provide any specialized knowledge that the attorney could not have acquired or understood on his/her own.

- None of the communications between HR consultant and employees were designated privileged.

- Defendant’s own HR team could have easily performed the analysis.

- Legal counsel did not use the HR memorandum to render legal advice as the law firm’s legal advice was provided before receiving HR memorandum.

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Scott v. Chipotle Mexican Grill, Inc.,94 F. Supp. 3d 585 (S.D.N.Y. 2015) (cont’d)

Protects communications between organizations and non-employees who are the “functional equivalent” of employees.

Factors that courts consider in applying the test are whether:

- consultant had primary responsibility for a key corporate job

- consultant filled role for organization that was understaffed

- there was a “close and continuous working relationship” between consultant and organization’s principals on issues interrelated with legal issues

- consultant was sole source of information important to organization

- people inside and outside organization treated consultant as if consultant represented organization

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B. Functional Employee Equivalent Doctrine

Courts disagree over the evidence necessary to meet the functional employee equivalence doctrine.

Courts also disagree whether the “functional equivalence test” is in lieu of, or in addition to, the “necessity test” to determine whether the attorney client privilege protects these communications. See, e.g., Viacom, Inc. v. Sumitomo Corp. (In re Copper Mkt. Antitrust Litig.), 200 F.R.D. 213 (S.D.N.Y. 2001)

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Functional Equivalent Doctrine (cont’d)

Foreign corporation was embroiled in high profile scandal involving both regulatory and civil litigation aspects.

Corporation had no experience with publicity issues in high profile cases. Further, only 2 of 3 executives in corporation’s communications department spoke English and their language skills were not sufficient for media relations.

Corporation hired PR firm to assist with media relations in connection with the scandal and litigation.

PR firm conferred frequently with the corporation’s U.S. litigation counsel and general counsel in preparing press releases and other materials which incorporated the lawyers’ advice.

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In re Copper Mkt. Antitrust Litig.,200 F.R.D. 213 (S.D.N.Y. 2001)

Court held that the PR firm was the functional equivalent of the corporation’s employee.

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:

- [I]n this case, RLM is the functional equivalent of a Sumitomo employee. Accordingly, the analysis set forth in Kovel and its progeny concerning whether the privilege applies to communications made to third parties for the purpose of facilitating attorney-client communications is inapposite.

200 F.R.D. at 220.

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In re Copper Mkt. Antitrust Litig.,200 F.R.D. 213 (S.D.N.Y. 2001) (cont’d)

Plaintiff sustained injuries from a one-car accident in which he was driving. At the hospital, a blood alcohol test was performed, which came back well above legal limits. Hospital reported results to police, and charges were brought.

Plaintiff sued hospital and “Jane and John Does 1 – 10, employees of hospital,” for violation of personal health information but not medical malpractice or for personal injury. Treating physician, an independent contractor, was not joined.

Under joint representation agreement, counsel for MultiCarealso represented treating physician.

When defense counsel informed plaintiff that he represented hospital and physician, plaintiff took position that defense counsel could have no privileged communications, or ex parte communications, with physician.

Hermanson v. Multicare Health Syst., 448 P.3d 153, 2019 Wash. App. Lexis 2273 (2019)

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No one disputed that physician was an agent for Multicare.

Court issued order prohibiting Multicare’s counsel from having ex parte, privileged communications with physician.

Multicare appealed, arguing (1) physician was functional equivalent of employee, (2) ex parte, privileged communications were permitted under joint representation agreement, and (3) not allowing physician to have attorney of choice was violation of due process rights.

Washington State Court of Appeals affirmed. It acknowledged the federal courts had expanded the attorney-client privilege to allow privileged communications with a contractor who “in all relevant respects [was] the functional equivalent of an employee” but declined to adopt the federal courts’ approach.

Hermanson v. Multicare Health Syst. (cont.)

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Multicare’s argument that ex parte, privileged communications with physician were appropriate since he was separately represented pursuant to joint representation agreement was also rejected. Court held that a party cannot circumvent the physician-patient privilege with a joint representation agreement.

Court refused to address Multicare’s argument regarding physician’s constitutional right to have attorney of choice:

- no authority for Multicare’s counsel to assert physician’s due process rights where physician not a party to the action

- record devoid of any declaration by physician that he chose Multicare’s attorney to represent him.

Hermanson v. MultiCare Health Syst. (cont.)

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Plaintiff and another physician held staff privileges at defendant’s facility. During the course of a peer review, Defendant discovered that the physicians provided unnecessary treatments.

Defendant hired outside counsel to advise it regarding disclosing physicians’ names. Outside counsel wrote an opinion letter.

Defendant retained a public relations firm to advise it on potential public statements about the physicians and forwarded the legal analysis to the PR firm.

After defendant publicly disclosed the physicians’ names, plaintiff sued. In discovery, plaintiff sought outside counsel’s opinion and related emails.

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BouSamra v. Excela Health, 210 A.3d 967, 2019 Pa. LEXIS 3277 (2019)

Pa. Superior Court held PR firm input was not required in order for outside counsel to provide legal advice:

- PR firm not involved in the legal issue in question.

- PR firm provided no input into that decision.

- Outside counsel never communicated with PR firm.

Court also held PR firm was not functional equivalent of an employee:

- Defendant had a staffed PR department.

- PR firm was hired for crisis management on discrete assignments.

- PR firm controlled staffing and methodology of its projects.

Court also held work-product privilege did not protect the legal opinion sent to the PR firm because the opinion was not sent to help outside counsel in preparing for litigation.

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BouSamra v. Excela Health (cont.)

Pa. Supreme Court affirmed ruling on attorney-client privilege, holding that disclosure to the PR firm was not indispensable to the lawyer giving legal advice. Nor was it necessary to facilitate the lawyer’s ability to give legal advice.

Court acknowledged that it had never articulated the proper analysis for waiver of the attorney work product doctrine in Pennsylvania and had explicitly had declined to undertake an assessment of the appropriate waiver analysis.

Court adopted the rule that the work product doctrine is waived when the work product is shared with an adversary or disclosed in a manner which significantly increases likelihood that an adversary or anticipated adversary will obtain it.

Because lower court had applied wrong test, case was sent back.

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BouSamra v. Excela Health (cont.)

Lawsuit by plaintiff against the defendant family involving an unsuccessful business deal.

To induce settlement, Behunin’s attorney hired a PR firm to create a social media campaign to induce the Schwab family to settle.

The Schwabs sued for defamation and invasion of privacy and requested information exchanged between Behunin, Behunin’s attorney and the PR firm.

Court held Behunin had not proven the communications were reasonably necessary for counsel’s representation and determined the information was not privileged.

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Behunin v. Superior Court, 9 Cal.App.5th 833, 215 Cal.Rptr.3d 475 (App. 2d Dist. 2017)

Plaintiff filed a claim against defendant alleging improper distribution of funds held in escrow.

In discovery, defendant sought deposition responses from, and documents provided to, a “contract landman” hired by plaintiff as an independent contractor.

Court held extending the privilege to a consultant performing a role similar to that of an employee reflected the reality that corporations conduct business with independent contractors retained for specific purposes. 2017 U.S. Dist. LEXIS 48715, at *17-18.

Court held that the contract landman “easily qualifies” as the functional equivalent of an employee, noting landman was routinely performing same work as employees. 2017 U.S. Dist. LEXIS 48715, *24-25.

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Endeavor Energy Res. v. Gatto & Reitz, No. 2:13CV542, 2017 U.S. Dist. LEXIS 48715 (W.D. Pa. 2017)

AKA –

- “Community of interest” rule; “Co-client” privilege; “Joint prosecution” privilege; “Joint defense” privilege.

“The joint defense privilege was adopted as an exception to [the] waiver rule, under which communications between a client and his own lawyer remain protected by the attorney-client privilege when disclosed to co-defendants or their counsel for purposes of a common defense.” United States v. Stepney, 246 F. Supp. 2d 1069, 1075 (N.D. Cal. 2003).

Courts now recognize the doctrine as also applying to parties in civil litigation.

Generally speaking, the common interest doctrine applies when the parties – 1) share a common interest; 2) the communication is confidential; 3) the communication is in furtherance of the common legal interest; and 4) the communication is related to pending or reasonably anticipated litigation.

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C. Common Interest Doctrine

Courts have applied the Common Interest Doctrine inconsistently.

- Hard line test requires that the parties’ “common interest” is nearly “identical.” More flexible test requires that the parties’ “common interest” must be closely aligned.

Jurisdictions also differ as to whether litigation is necessary to invoke the common interest doctrine or whether the doctrine also applies in the transaction context.

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Common Interest Doctrine (cont’d)

Company sued competitor and two former employees alleging misappropriation of trade secrets.

After filing lawsuit, plaintiff approached U.S. Attorney’s Office in an attempt to have that office initiate a criminal prosecution of former employees.

Plaintiffs voluntarily turned over a forensic expert’s report to the federal prosecutors.

Plaintiff then sought to withhold from discovery expert’s report and correspondence with the prosecutors on the ground of the joint prosecution privilege.

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Dresser-Rand Co. v. Schutte & Koerting Acquisition Co. 242 F. Supp. 3d 576 (S.D. Tex. 2017)

Court recognized that work-product privilege protects the work-product of consulting experts.

Court also noted that the joint prosecution privilege has been found to exist in the context of False Claims Act litigation where it has been inferred that a common interest exists between a FCA relator and the Government in prosecuting such claims.

However, relying in-part on the sword-shield doctrine whereby the privilege is waived when a party selectively presents certain materials to an adversary to prove a point, the court ruled that no common interest existed between the civil litigants and a potential criminal prosecution.

Because plaintiffs made a “calculated disclosure to further the government’s inclination to prosecute” they waived any privilege attached to the information voluntarily divulged to the government.

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Dresser-Rand Co. v. Schutte & Koerting Acquisition Co. 242 F. Supp. 3d 576 (S.D. Tex. 2017) (cont’d)

Company sought to restructure and refinance eleven-billion Euro loan agreement with a consortium of banks. In doing so, Company retained Ernst & Young to advise on federal tax implications and possible future litigation with IRS.

IRS audited the company and sought E&Y work-product.

District court ruled that company waived attorney-client privilege by sharing E&Y analysis with the consortium of banks because the banks’ interest was commercial rather than legal.

Second Circuit reversed.

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Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015)

Second Circuit held that the banks’ common interest with the company was of a sufficient legal character to prevent waiver by sharing communications.

- “[I]t is … unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply.” 806 F.3d at 40.

- “The communications regarding tax opinions were … ‘made in the course of an ongoing common enterprise’ and ‘intended to further the enterprise.’” Id. at 42.

Parties may share a “common interest” even if they are not parties in ongoing litigation.

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Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015) (cont’d)

Second Circuit also ruled that work-product doctrine applied to E&Y tax advice memorandum because it “was specifically aimed at addressing the urgent circumstances arising from the need for a refinancing and restructuring and was necessarily geared to an anticipated audit and subsequent litigation, which was on this record highly likely.” Id. at 44.

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Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015) (cont’d)

Patent infringement case. University obtained documents from third party, a company defendant used to design and manufacture product.

- At issue was an email that third party produced in response to subpoena and then sought to claw back due to privilege.

- Scientist at defendant sent an email to the company’s general counsel and copied an third party employee.

- At the time the email was sent, defendant and third party were negotiating, but had yet to execute, a license and supply agreement.

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The Regents of the University of California, et al. v. Affymetrix, Inc., Case No. 17cv1394 (S.D. Cal. June 19, 2018)

The court noted the rule that sharing privileged material with third parties destroys the confidentiality of the communication and the privilege protection that is dependent upon that confidentiality.

The protection of the privilege under the community of interest rationale is not limited to joint litigation preparation efforts.

It is applicable whenever parties with common interest join forces for the purpose of obtaining more effective legal assistance.

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The Regents of the University of California, et al. v. Affymetrix, Inc., Case No. 17cv1394 (S.D. Cal. June 19, 2018) (cont’d)

Neither party disputed that the email in question sought legal advice. It was the inclusion of an employee at third party and his relationship to defendant that fell into “a somewhat nebulous area.”

The common interest rule is an exception to ordinary waiver rules designed to allow attorneys for different clients pursuing a common legal strategy to communicate with each other.

Ultimately, the court determined that because both parties were not represented by counsel, the common interest doctrine did not apply.

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The Regents of the University of California, et al. v. Affymetrix, Inc., Case No. 17cv1394 (S.D. Cal. June 19, 2018) (cont’d)

Determine the applicable law, to extent possible. As the most recent cases demonstrate, despite the attorney client privilege being one of the oldest privileges, still being developed.

When retaining consultants, either in-house or outside counsel should initiate the engagement.

The engagement letter/agreement should make explicit that the consultant is being retained to assist counsel in providing legal advice.

Counsel should emphasize at the outset of each consultant engagement that all communications and documents generated in the engagement should be considered confidential and only shared with individuals within the company who have a need for the information—and never with a third-party without approval of counsel.

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Part IV: Best Practices/Lessons Learned

In-house or outside counsel and the consultant must regularly consult with each other about the engagement, and counsel should oversee the consultant’s work. Simply retaining outside counsel to engage the consultant is probably not enough to ensure protection from subsequent discovery. Key meetings and communications should involve counsel.

Counsel should be prepared to identify the specialized role that a consultant performed for the client and that that role involved working closely with the lawyers. (Consultant is the “translator.”)

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Best Practices/Lessons Learned (cont’d)

With respect to work-product, counsel must be mindful that only information prepared in anticipation of litigation will be protected. The anticipated litigation should be easily articulated.

With respect to the common interest doctrine, make sure the “common” interest is easily articulated. The parties’ interests must be closely aligned and, in some jurisdictions, identical.

Make sure that each communication is made in the course of, and for the purpose of, furthering the common interest.

Entering into a joint defense agreement may help but, in the end, the parties’ course of conduct will drive the determination.

Information should only be shared among the lawyers, not the clients.

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Best Practices/Lessons Learned (cont’d)

Thank You

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Kevin D. Collins, Esq. Donna L. Fisher, Esq. Bracewell LLP Pepper Hamilton LLPkevin.collins@bracewell.com fisherd@pepperlaw.com

Brian C. Spahn, Esq.Godfrey & Kahn S.C.bspahn@gklaw.com