Privilege Developments in the Corporate Context — 2008 — Article
Proposed Federal Rule of Evidence 502 passed the Senate Judiciary Committee by voice vote on January 31, 2008, and, once enacted by both houses of Congress, it will be the most significant development in the field of attorney-client privilege since Upjohn v. United States, 449 U.S. 383 (1981). Pending that, this is article examines important recent developments in the law of privilege and work product protection. It focuses on privilege developments in the corporate setting.
Corporate Attorney-Client Privilege. The Third Circuit explored the contours of the corporate attorney-client privilege in In re Teleglobe Commc’ns Corp., 493 F.3d 345 (3d Cir. 2007). Facts in a sentence: Two bankrupt subsidiaries filed suit against their ultimate parent for directing the subsidiaries to undertake a massively expensive project and then failing to fund them adequately to finish it, leading to their bankruptcy. Among the holdings in Judge Thomas L. Ambro’s opinion:
1. The common-interest privilege does not apply to representation of parent and sub. Rather, that is a joint representation of two clients.
2. Waiving the joint attorney-client privilege requires the consent of all joint clients. While either client may unilaterally waive the privilege as to its own communications with a joint attorney, it may do so only as long as those communications concern only the waiving client. Neither client may “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.”
3. Explicitly limiting the scope of the joint representation up front is strongly encouraged.
4. The privilege remains intact as between jointly represented parties even after a conflict has developed between them rendering continuation of the joint representation improper. (At some point, this may no be longer true.)
5. Intra-corporate sharing of legal advice does not effect a waiver of privilege because all entities are joint clients.
6. Advising parent company personnel who also serve as officers or directors of a subsidiary effects no waiver if the advice is given to them in their parent company capacity.
Special Board Committees. Public companies commonly form special committees of disinterested directors to address allegations of misconduct. The special committee is empowered to engage counsel and other advisors, conduct an investigation, and, after the investigation has concluded, either take definitive action itself or report back to the full board for the board to act. The Special Committee in Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. Nov. 30, 2007) (Ryan I) (a derivative action challenging options backdating), was of the latter variety. When the Special Committee and its counsel ultimately reported to the board, the defendant directors under investigation and their counsel were present. Those directors then used the information so conveyed to them to defend themselves in the derivative litigation that had been brought against them.
The Ryan I Court held that, on these facts, the privilege and protection that otherwise would apply to the work product of the Special Committee’s counsel had been waived. Ryan I raised significant concern in the corporate community, not to mention among the defendants in that derivate action, who moved for leave to file an interlocutory appeal. In denying this motion, in Ryan v. Gifford, 2008 Del. Ch. LEXIS 2 (Del. Ch. Jan. 2, 2008) (Ryan II), Chancellor William B. Chandler III emphasized, inter alia, that: (i) the defendant directors affirmatively used the work product of the Special Committee’s counsel to defend themselves in litigation; (ii) this use was not in furtherance of their fiduciary responsibilities as board members but to advance their own personal interests; and (iii) the Special Committee lacked the power to act independently but was required to report back to the full board, unlike, for example, a special litigation committee formed pursuant to Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981).
Disclosures to Prospective Corporate Purchaser. Before buying a company, a bidder must evaluate litigation pending against the company. The seller will sometimes arrange for its counsel to make disclosures concerning the litigation to prospective bidders. What happens when one of the plaintiffs in the litigation then seeks to learn what was disclosed? Nidec Corp. v. Victor Co. of Japan, 2007 U.S. Dist. LEXIS 48841 (N.D. Cal. July 3, 2007), holds that the disclosures are not privileged because there is no common legal interest between bidder and seller — the bidder is not anticipating becoming a co-litigant, merely becoming the majority shareholder of a litigant. The court recognized, however, that the disclosures may still retain work product protection because that is not generally waived by a disclosure to someone unlikely to disclose it to an adversary.
Disclosure to Auditors. On a similar analysis, United States v. Textron, 507 F.Supp.2d 138 (D.R.I. 2007), holds that disclosure to an outside auditor waives attorney-client privilege, but not work product protection. The papers sought by the IRS in Textron were the corporation’s tax accrual papers, which included estimates by counsel expressing in percentages their judgments as to the likelihood of the corporation’s prevailing in any litigation over certain tax issues and dollar amounts reserved as a result. Privilege was waived because the auditors were not clients, but work product protection was preserved because disclosure to the auditor did “not substantially increase the opportunity for potential adversaries to obtain the information.”
Disclosure to Investment Banker. Most decisions to consider the issue hold that a lawyer’s communications with the investment banker of his or her client (like communications to an outside auditor) are not privileged because the banker is neither the client nor someone retained by the lawyer to assist in the rendering of legal advice to the client. For a contrary view, see Stafford Trading, Inc. v. Lovely, 2007 U.S. Dist. LEXIS 13062 (N.D. Ill. Feb. 22, 2007), which upheld an assertion of privilege on the theory that the investment banker confidentially communicated with in-house or outside counsel to the client “for the purpose of obtaining or providing legal advice.” (Although not addressed by the Stafford Trading Court, work product protection would likely also have been available, on the same theory as Textron and Nidec.)
Privilege Post-Corporate Dissolution. Whether a dissolved corporation may assert the attorney-client privilege is a recurring and inconsistently resolved issue (see, e.g., Joseph, Privilege Developments 2006, NAT’L L. J., Nov. 13, 2006, at 14). Taking the negative view, City of Rialto v. U.S. Dep’t of Defense, 2007 U.S. Dist. LEXIS 48381 (C.D. Cal. May 25, 2007), holds that “[a] dissolved corporation does not have the same concerns as a deceased natural person and therefore has less need for the privilege after dissolution is complete.”
That does not, however, necessarily lead to the conclusion that no one may assert the privilege. At the time of the corporation’s dissolution in City of Rialto, another entity became the sole shareholder of the dissolved corporation and acquired all of its assets, including the documents as to which the dissolved corporation wished to assert privilege. The City of Rialto Court recognized that, normally, the transfer of control over the corporation also results in a transfer of the attorney-client privilege, but that the mere transfer of assets from one entity to another does not generally transfer the privilege. At the same time, however, the court followed the line of cases holding that, if the practical result of a corporate transaction is the transfer of control of a business and the continuation of that business under new management, the authority to assert or waive the attorney-client privilege may be deemed to follow as well. Held, while privilege did move, here it was waived.
Waiver via Disclosure in SEC Filing. Does reporting a reserve figure in a filing with the Securities and Exchange Commission waive privilege or work product protection otherwise attaching to documents used in arriving at the reserve? The defendant oil company in In re BP Prods. No. Am., 2006 Tex. App. LEXIS 9008 (Oct. 13, 2006), reported in an SEC filing that it had reserved $700 million to resolve claims for injury and death arising out of an explosion at a refinery. The reserve figure was computed by an in-house attorney. Plaintiffs served a document request for all documentation underlying the reserve figure on the grounds (1) that it was not privileged and (2) even if it once was, publication of the reserve figure in the SEC filing waived the privilege.
The BP Court rejected both arguments. First, it found that the documents were not only privileged but entitled to work product protection, as core (opinion) work product. Second, the court found that there had been no waiver. It did not provide so much an affirmative analysis as a distinction — that privilege would have been waived had the documents been disclosed to auditors, but they were not. (As noted above, though, with respect to auditors in this context, the real issue is usually work product protection.)
* Mr. Joseph, of Gregory P. Joseph Law Offices LLC in New York, is a fellow of the American College of Trial Lawyers and former Chair of the Litigation Section of the American Bar Association. He may be reached at email@example.com. © 2008 Gregory P. Joseph
Share this article: