Commercial Litigation and Arbitration

Corporate Attorney-Client Privilege — Parent/Subsidiary Conflict

Third Circuit Judge Thomas Ambro has written an important opinion analyzing the corporate attorney-client privilege — focusing on in-house counsel but not limited to them — in the context of claims brought by subsidiaries (in bankruptcy) against their ultimate parent. In re Teleglobe Commn’cs Corp. 2007 U.S. App. LEXIS 16942 (3d Cir. July 17, 2007). The opinion is important because the same issues arise after a sale or spin-off of a subsidiary when the new owners sue in the name of the former sub alleging fraud/fiduciary breach and seek privileged information from the lawyers to the parent to prove their case.

Facts in two sentences: The wholly-owned two subsidiaries and their immediate parent (Teleglobe) were directed by the ultimate parent (BCE) to develop and roll out a fiberoptic network with BCE funding. During the telecom meltdown of 2001, BCE cut off the funding, leaving the subsidiaries and their immediate parent insolvent due to the financial commitments they had made.

The subsidiaries, in bankruptcy, sued on a variety of fraud and fiduciary duty grounds, and sought attorney-client privileged materials targeting the ultimate parent’s in-house counsel who had also represented the immediate parent and the subsidiaries. Among the significant holdings and observations:

1. Purpose/Dimensions of Privilege. ‛Communication between counsel and client is not, in and of itself, the purpose of the privilege; rather, it only protects the free flow of information because it promotes compliance with law and aids administration of the judicial system. Thus, following Upjohn's lead in not applying the privilege mechanically does not counsel in favor of applying the privilege anytime it might increase the flow of information; rather, Upjohn counsels a more nuanced inquiry into whether according a type of communication protection is likely to encourage compliance-enhancing communication that makes our system for resolving disputes more operable.... Th[e] truth-seeking rationale [for ordering privileged documents disclosed] is a problem because the privilege is admittedly not truth-seeking... ‘It does not advance resolution of the issue to argue ... that the attorney-client privilege is an obstacle to the search for the truth’“ (emphasis in original; citations omitted).

2. Limiting Scope of Joint Representation Permitted/Encouraged. ‛While it is permissible for lawyers and clients to limit the scope of representation in a single-client representation [citation omitted], it is particularly common in co-client situations because of the limited congruence of the clients' interests. As the Restatement notes, a co-client relationship is limited by ‘the extent of the legal matter of common interest.’“

3. Partial Unilateral Waiver of Joint Privilege Possible. While ‛waiving the joint-client privilege requires the consent of all joint clients ... [a] wrinkle here is that a client may unilaterally waive the privilege as to its own communications with a joint attorney, so long as those communications concern only the waiving client; it may not, however, unilaterally waive the privilege as to any of the other joint clients' communications or as to any of its communications that relate to other joint clients“ (citation omitted).

4. Representing Parent & Sub ≠ Common Interest Privilege. The Common Interest — or Community-of-Interest — Privilege is inapplicable when the same counsel represent both parties (here, ultimate parent and subs) precisely because there are not separate counsel for each. To be eligible for the Common Interest Privilege, ‛the communication must be shared with the attorney of the member of the community of interest.... The requirement that the clients' separate attorneys share information (and not the clients themselves) derives from the community-of-interest privilege's roots in the old joint-defense privilege, which ... was developed to allow attorneys to coordinate their clients' criminal defense strategies“ (emphasis in original; citations omitted). Accordingly, when the same lawyers represent parent and subsidiary, that is a joint representation, for ethical and privilege purposes.

5. Eureka: The Privilege Remains Intact As Between Jointly Represented Parties Even After Lawyers Are Conflicted. Under the rule of Eureka Inv. Corp. v. Chicago Title Ins. Co., 743 F.2d 932 (D.C. Cir. 1984), when a joint attorney fails to end the joint representation even after the co-clients’ interests have become adverse, ‛the black-letter law is that when an attorney (improperly) represents two clients whose interests are adverse, the communications are privileged against each other notwithstanding the lawyer's misconduct.... If the communications were outside the scope of the joint representation, then sharing them with a conflicted joint attorney is of no moment, even if the conflicted attorney acted improperly in accepting the communications.

6. Intra-Corporate Sharing of Legal Advice ≠ Waiver. ‛[C]ourts almost universally hold that intra-group information sharing does not implicate the disclosure rule [i.e., that the privilege has been forfeited because the advice has not been maintained in confidence].... It makes the most sense ... to rest not applying the disclosure rule to many intra-group disclosures on the ground that the members of the corporate family are joint clients. This reflects both the separateness of each entity and the reality that they are all represented by the same in-house counsel (whether that counsel typically takes up office with the parent or with a subsidiary).“

7. No Disclosure/Waiver Effected by Advising Parent Personnel Who Also Serve as Officers/Directors of Wholly-Owned Subsidiary. A ‛disclosure occurs when the parent shares an otherwise confidential attorney-parent communication with an officer, director, or agent of a subsidiary in that capacity.... Courts recognize corporate officers' and directors' ability to sit on multiple boards by ‘chang[ing] hats.’ ... Thus it does not break confidence to share an attorney-parent communication with an officer of the parent in her capacity as officer of the parent, even though she is also a director or officer of a subsidiary“ (emphasis in original; citations omitted).

8. No Joint Representation When Seeking Info from Sub for Parents’ SEC Filings. ‛When .. in-house counsel of the parent seek information from various subsidiaries in order to complete the necessary public filings, the scope of the joint representation is typically limited to making those filings correctly. It does not usually involve jointly representing the various corporations on the substance of everything that underlies those filings.“

9. Maintaining Joint Representation Too Far Into a Spin-Off Transaction Risks Jeopardizes Privilege. Balanced against the Eureka rule, which protects advice given to one co-party which has in fact become adverse to the other co-party despite joint counsel’s failure to end the joint representation is the principle that a joint representation continues to exist to the extent that the same lawyer is advising the co-parties on matters of common interest:

Maintaining a joint representation for the spin-off transaction too long risks the outcome of Polycast [Tech. Corp. v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y. 1989)], and Medcom [Holding Co. v. Baxter Travenol Lab., 689 F. Supp. 841, 842 (N.D. Ill. 1988)]—both cases in which parent companies were forced to turn over documents to their former subsidiaries in adverse litigation--not to mention the attorneys' potential for running afoul of conflict rules. That the companies should have separate counsel on the matter of the spin-off transaction, however, does not mean that the parent's in-house counsel must cease representing the subsidiary on all other matters. After all, spin-off transactions can be in the works for months (or even years), and during that time it is proper (and obviously efficient) for in-house counsel to continue to represent the subsidiary (jointly or alone) on other matters.... The majority—and more sensible—view is that even in the parent-subsidiary context a joint representation only arises when common attorneys are affirmatively doing legal work for both entities on a matter of common interest. A broader rule would wreak havoc because it would essentially mean that in adverse litigation a former subsidiary could access all of its former parent's privileged communications because the subsidiary was, as a matter of law, within the parent entity's community of interest. [Citation omitted.]

10. Garner v. Wolfinbarger Inapt Because There Is No Duty on the Part of a Parent to Bail Out a Sub. ‛If the Debtors [plaintiffs] were not insolvent (or in that hazy ‘zone of insolvency’...) at the time of the otherwise privileged communications, then BCE was the only beneficiary of the Debtors' success, and it could not, therefore, breach its fiduciary duty to itself.... Even if BCE owed the Debtors and their creditors fiduciary duties, it seems a stretch to argue that BCE's decision not to fund Teleglobe implicated those duties. A fiduciary ordinarily has the obligation (protected by the business judgment rule) to manage the affairs of a corporation in such a way as to maximize its economic value; it does not have a duty to guarantee or bail out a corporate family member when it loses money.“

Held, case remanded to District Court, which ‛may only compel BCE to produce disputed documents because of the adverse-litigation exception to the co-client privilege ... if it finds that BCE and the Debtors were jointly represented by the same attorneys on a matter of common interest that is the subject-matter of those documents. Finding that BCE and Teleglobe were jointly represented is not enough, as Teleglobe cannot unilaterally waive the co-client privilege that attaches to documents that involve BCE and were created in the course of the joint representation.“

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