Attorney-Client Privilege for In-House Counsel

The purpose of the attorney-client privilege, as stated by the Supreme Court in Upjohn Co. v. United States, 449 U.S. 383 (1981), is to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” That concept seems pretty straightforward in, for example, a criminal case. However, as any in-house attorney knows, this concept becomes pretty murky when applied to attorneys working inside entities: Who is the client? Which attorneys are covered? Are those attorneys always covered? Which communications? With whom? On what subjects? The questions are endless and the situations are complex.

The following is a roadmap for common issues relating to the attorney-client privilege. While we don't have a black letter law answer to every strange fact pattern that may arise, there are some guidelines for keeping your communications privileged and your memos and e-mails out of opposing counsel's hands.

Who Owns the Privilege?

The first issue facing an entity that retains or employs attorneys (either as in-house counsel or as outside counsel) is “Who owns and controls the privilege?” and, relatedly, “Who can waive the privilege?”

The minority approach to the “who owns the privilege” question in the United States is called the Control Group Test. Under the Test, the privilege can only be invoked by employees:

1. Who have communications with counsel, and
2. Are in a position to control, or have a substantial role in controlling or determining, the course of action a company may take based on the legal advice sought or received.

This approach is often criticized because of its narrowness of scope. The Test does not allow for the “sharing” of privileged information or communications with those who “need to know,” and limits knowledge to senior executives and decision-makers.

The majority approach to the question is the Subject Matter Test. Under this test, the privilege extends to situations where:

1. Communication is made for the purpose of giving or receiving legal advice;
2. The employee who communicates with the attorney does so at the direction of a superior (or is the apex executive);
3. Direction is given by the superior to obtain legal advice for the company;
4. Subject matter of communication is within scope of employee's duties; and
5. Communication is not disseminated beyond those who “need to know.”

This approach is much more flexible, as it allows for sharing of the privilege among those who need to know and is not limited to senior executives and legal decision-makers. In addition to being the majority approach, this is the approach taken by federal courts sitting in non-diversity cases.

Waiver by a Company

The attorney-client privilege belongs to the company, not any individual employee. Therefore, a decision about whether to waive belongs to the company, not the employees. Only an authorized agent of the company, generally senior corporate management or the board of directors, can choose to waive the privilege.

A disclosure of privileged communications will not constitute a waiver if:

1. The disclosure is inadvertent;
2. The holder of the privilege took reasonable steps to prevent disclosure; and
3. The holder promptly took reasonable steps to rectify the error.

However, just because a regular employee ( i.e., a non-control person) cannot technically waive the company's privilege doesn't mean that they won't screw it up. A company should take measures to ensure that only “need to know” employees have access to confidential information. Additionally, a company should take steps to ensure that confidential information is kept confidential. As explained above, this is where labeling can help.

In some instances, a company may want to selectively waive the attorney-client privilege through selective disclosure. This can occur in audits, in SEC or other government filings, in response to subpoenas from the government, or in criminal investigations.

In a government investigation, a company may be tempted to selectively waive its privilege in order to gain “cooperation credit” with the government. However, in most cases, opting to inform the government about legal impressions and conclusions reached during an internal investigation will not affect the federal government's decision about whether to prosecute the company.

In fact, under the so-called “Filip Guidelines,” prosecutors can't ask for waiver of privilege and no credit is given for waiver, advancement of attorneys' fees, joint defense agreements, or disciplined or terminated employees. Instead, it is the disclosure of facts learned during an internal investigation that allow a company to gain the cooperation credit. Because facts themselves are never privileged, there is no risk of waiving privilege, and potentially huge upside, to disclosing facts learned in an investigation voluntarily.

If a decision is made to waive the privilege, the scope of the waiver should first be considered. If the company discloses a final report (for example, of an internal investigation), the disclosure waives privilege as to some, or all, of the underlying notes, interview material, and memos. This is known as the “sword and shield doctrine.” Further, if a partial disclosure is made (for example, of some privileged communications or documents on a subject), it is likely that the privilege is waived for all privileged material related to that subject. Therefore, in order to avoid inadvertently waiving the entire privilege as to a subject, a company must be very careful to fully protect its privilege even in instances where a partial disclosure of some privileged material may seem to be beneficial.

Legal Advice Versus Business Advice

For in-house counsel, perhaps the most important daily consideration is whether advice is business advice or legal advice. This is because, as the U.S. Court of Appeals for the Fifth Circuit succinctly stated, the “privilege accorded to communications between attorney and client does not apply except where the attorney acts in [its] professional capacity.” Pollock v. United States, 202 F.2d 281, 286 (5th Cir. 1953).

The Primary Purpose Test provides that when a communication contains a mixture of business and legal advice, courts will generally look for the communication's “primary purpose.”

Communications made while an in-house counsel is acting partly in a legal capacity may be discoverable if the communication encompasses a significant business purpose. These issues are especially important when an in-house attorney is participating in a board meeting.

Examples of significant business purposes:

1. Advice on business terms of a deal (price, duration, payment terms, etc.);
2. Negotiation of a business deal;
3. Factual information related to a deal (facts are never privileged);

Examples of primary legal purposes:

1. Advice on legal terms of a deal (structure of business, termination strategy, venue provisions, arbitration clauses, choice of law clauses, etc.);
2. Legal consequences of business options; and
3. Litigation strategy and communications regarding business consequences of litigation.

Labeling Communications with In-House Attorneys

Although it might be the favorite tactic of executives everywhere, transmitting a document or other communication to a lawyer does not affect its privileged status. Documents and communications not otherwise privileged do not become privileged by the transmittal to a lawyer. Additionally, the fact that a document does, or does not, contain a “Privileged” or “Confidential” label does not affect its attorney-client privileged status. Simply stated, a label does not shield anything. The test is whether the communication has the necessary elements to be considered privileged.

So, why should you label?

1. Labeling a document or communication may help a court determine the mindset of the sender at the time the communication was sent. However, blanket use of labeling (at the top of every e-mail sent, for example), can seriously undermine this argument.
2. A label raises a red flag to alert employees that they need to be careful with the e-mail (so that they keep it on a “need-to-know” basis). Again, this purpose is seriously undermined if it's on every e-mail you send.
3. Labeling may also alert persons who accidentally receive the e-mail that they need to destroy it.

In-House Attorneys As Witnesses

In some instances, an in-house attorney is the best choice to represent a company as a corporate representative at a deposition. This can occur when the interpretation of a contract is at issue in litigation and the in-house attorney was heavily involved in negotiation or in other contexts where the in-house attorney is unusually involved or personally acquainted with the underlying facts of a dispute.

In and of itself, the designation of an in-house attorney as a corporate representative does not automatically waive privilege. However, waiver will occur when the attorney testifies about portions of the attorney-client communication. Waiver will also occur when a company places the attorney-client privilege at issue in the litigation, or when a company asserts reliance on counsel as an element of a defense (the sword and shield doctrine, as discussed above).

Recently, it has become relatively common for issues regarding discovery to lead to depositions of corporate employees. In order to avoid getting pulled into such disputes, in-house counsel should avoid getting involved in the mechanics of document production. A non-legal officer is a safer choice.

PR Firms and the Attorney-Client Privilege

Most courts have found that public relations advice from a consultant hired by a company, or even the lawyer, is not privileged. In a recent Southern District of New York case, the court found that unless the public relations firm's communications were “nearly indispensable” or “necessary” for the legal representation of the client, the communications are not privileged. Despite the party's claim that the communications were “contributing legal recommendations, providing next step action plans, and weighing strategic considerations in order to promote [the party's] overall legal goals,” the court determined that any privilege was waived with disclosure to the public relations firm. Egiazaryan v. Zalmayev, 2013 WL 945462 (S.D.N.Y. March 8, 2013). In light of these kinds of holdings, it is better not to disclose any confidential information to public relations firms. Facts are okay, but strategy is not.

Parent/Subsidiary Communications

In some instances, there may be a question as to whether communication with subsidiaries is privileged. Generally, the rule is that communications between employees of a subsidiary and counsel for the parent corporation can be afforded privilege if the employee has information necessary to the representation of the parent concerning matters within the scope of employment. Admiral Ins. v. U.S. Dist. Ct., 881 F.2d 1486, 1493 n.6 (9th Cir. 1989). To the extent that the communications relate to representation of the subsidiary, and not the parent, there is a risk that the communication would not be afforded privilege.

Witness Interviews by In-House Counsel

In-house attorneys are often required to conduct witness interviews in the course of internal investigations. In order to retain the privilege during these interviews, and to avoid these interviews from becoming discoverable, it is helpful to use the following guidelines:

1. Do not audiotape or videotape the interview.
2. Do not use questionnaires.
3. Your notes should contain your “impressions and conclusions,” not verbatim recording of what was said.
4. Instruct witnesses to include a notation on any notes made for the interview that they are being made at the direction of counsel to assist in legal advice.
5. Consider reading each witness “the warnings” (see below).

“The Warnings” are to be used in instances when it is important to make sure that an employee knows who the attorney represents and who owns the privilege on the communications. They include the following statements:

• The attorney represents the company ' not the employee.
• This is a factual inquiry for a legal purpose.
• The company holds the attorney-client privilege and decides whether it is waived.
• Any information obtained can be used in a variety of ways, including government agencies.
• The witness is to keep the information shared confidential.
• Tell the truth.

Useful Reminders

1. Label documents intended to be privileged as “Privileged” or “Confidential,” but don't overuse it.
2. If possible, write minutes or notes of the meeting to reflect whether attorney advice is legal or business.
3. Try to keep legal and business discussions segregated in communications.
4. Keep separate files for privileged documents and communications.
5. Keep communications on a “need-to-know” basis.
6. Avoid becoming a witness.

Jason A. Copling is a shareholder with the commercial law firm, Munsch Hardt Kopf & Harr, P.C. in Dallas. He can be reached at [email protected].

The purpose of the attorney-client privilege, as stated by the Supreme Court in Upjohn Co. v. United States , 449 U.S. 383 (1981), is to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” That concept seems pretty straightforward in, for example, a criminal case. However, as any in-house attorney knows, this concept becomes pretty murky when applied to attorneys working inside entities: Who is the client? Which attorneys are covered? Are those attorneys always covered? Which communications? With whom? On what subjects? The questions are endless and the situations are complex.

The following is a roadmap for common issues relating to the attorney-client privilege. While we don't have a black letter law answer to every strange fact pattern that may arise, there are some guidelines for keeping your communications privileged and your memos and e-mails out of opposing counsel's hands.

Who Owns the Privilege?

The first issue facing an entity that retains or employs attorneys (either as in-house counsel or as outside counsel) is “Who owns and controls the privilege?” and, relatedly, “Who can waive the privilege?”

The minority approach to the “who owns the privilege” question in the United States is called the Control Group Test. Under the Test, the privilege can only be invoked by employees:

1. Who have communications with counsel, and
2. Are in a position to control, or have a substantial role in controlling or determining, the course of action a company may take based on the legal advice sought or received.

This approach is often criticized because of its narrowness of scope. The Test does not allow for the “sharing” of privileged information or communications with those who “need to know,” and limits knowledge to senior executives and decision-makers.

The majority approach to the question is the Subject Matter Test. Under this test, the privilege extends to situations where:

1. Communication is made for the purpose of giving or receiving legal advice;
2. The employee who communicates with the attorney does so at the direction of a superior (or is the apex executive);
3. Direction is given by the superior to obtain legal advice for the company;
4. Subject matter of communication is within scope of employee's duties; and
5. Communication is not disseminated beyond those who “need to know.”

This approach is much more flexible, as it allows for sharing of the privilege among those who need to know and is not limited to senior executives and legal decision-makers. In addition to being the majority approach, this is the approach taken by federal courts sitting in non-diversity cases.

Waiver by a Company

The attorney-client privilege belongs to the company, not any individual employee. Therefore, a decision about whether to waive belongs to the company, not the employees. Only an authorized agent of the company, generally senior corporate management or the board of directors, can choose to waive the privilege.

A disclosure of privileged communications will not constitute a waiver if:

1. The disclosure is inadvertent;
2. The holder of the privilege took reasonable steps to prevent disclosure; and
3. The holder promptly took reasonable steps to rectify the error.

However, just because a regular employee ( i.e., a non-control person) cannot technically waive the company's privilege doesn't mean that they won't screw it up. A company should take measures to ensure that only “need to know” employees have access to confidential information. Additionally, a company should take steps to ensure that confidential information is kept confidential. As explained above, this is where labeling can help.

In some instances, a company may want to selectively waive the attorney-client privilege through selective disclosure. This can occur in audits, in SEC or other government filings, in response to subpoenas from the government, or in criminal investigations.

In a government investigation, a company may be tempted to selectively waive its privilege in order to gain “cooperation credit” with the government. However, in most cases, opting to inform the government about legal impressions and conclusions reached during an internal investigation will not affect the federal government's decision about whether to prosecute the company.

In fact, under the so-called “Filip Guidelines,” prosecutors can't ask for waiver of privilege and no credit is given for waiver, advancement of attorneys' fees, joint defense agreements, or disciplined or terminated employees. Instead, it is the disclosure of facts learned during an internal investigation that allow a company to gain the cooperation credit. Because facts themselves are never privileged, there is no risk of waiving privilege, and potentially huge upside, to disclosing facts learned in an investigation voluntarily.

If a decision is made to waive the privilege, the scope of the waiver should first be considered. If the company discloses a final report (for example, of an internal investigation), the disclosure waives privilege as to some, or all, of the underlying notes, interview material, and memos. This is known as the “sword and shield doctrine.” Further, if a partial disclosure is made (for example, of some privileged communications or documents on a subject), it is likely that the privilege is waived for all privileged material related to that subject. Therefore, in order to avoid inadvertently waiving the entire privilege as to a subject, a company must be very careful to fully protect its privilege even in instances where a partial disclosure of some privileged material may seem to be beneficial.

Legal Advice Versus Business Advice

For in-house counsel, perhaps the most important daily consideration is whether advice is business advice or legal advice. This is because, as the U.S. Court of Appeals for the Fifth Circuit succinctly stated, the “privilege accorded to communications between attorney and client does not apply except where the attorney acts in [its] professional capacity.” Pollock v. United States , 202 F.2d 281, 286 (5th Cir. 1953).

The Primary Purpose Test provides that when a communication contains a mixture of business and legal advice, courts will generally look for the communication's “primary purpose.”

Communications made while an in-house counsel is acting partly in a legal capacity may be discoverable if the communication encompasses a significant business purpose. These issues are especially important when an in-house attorney is participating in a board meeting.

Examples of significant business purposes:

1. Advice on business terms of a deal (price, duration, payment terms, etc.);
2. Negotiation of a business deal;
3. Factual information related to a deal (facts are never privileged);

Examples of primary legal purposes:

1. Advice on legal terms of a deal (structure of business, termination strategy, venue provisions, arbitration clauses, choice of law clauses, etc.);
2. Legal consequences of business options; and
3. Litigation strategy and communications regarding business consequences of litigation.

Labeling Communications with In-House Attorneys

Although it might be the favorite tactic of executives everywhere, transmitting a document or other communication to a lawyer does not affect its privileged status. Documents and communications not otherwise privileged do not become privileged by the transmittal to a lawyer. Additionally, the fact that a document does, or does not, contain a “Privileged” or “Confidential” label does not affect its attorney-client privileged status. Simply stated, a label does not shield anything. The test is whether the communication has the necessary elements to be considered privileged.

So, why should you label?

1. Labeling a document or communication may help a court determine the mindset of the sender at the time the communication was sent. However, blanket use of labeling (at the top of every e-mail sent, for example), can seriously undermine this argument.
2. A label raises a red flag to alert employees that they need to be careful with the e-mail (so that they keep it on a “need-to-know” basis). Again, this purpose is seriously undermined if it's on every e-mail you send.
3. Labeling may also alert persons who accidentally receive the e-mail that they need to destroy it.

In-House Attorneys As Witnesses

In some instances, an in-house attorney is the best choice to represent a company as a corporate representative at a deposition. This can occur when the interpretation of a contract is at issue in litigation and the in-house attorney was heavily involved in negotiation or in other contexts where the in-house attorney is unusually involved or personally acquainted with the underlying facts of a dispute.

In and of itself, the designation of an in-house attorney as a corporate representative does not automatically waive privilege. However, waiver will occur when the attorney testifies about portions of the attorney-client communication. Waiver will also occur when a company places the attorney-client privilege at issue in the litigation, or when a company asserts reliance on counsel as an element of a defense (the sword and shield doctrine, as discussed above).

Recently, it has become relatively common for issues regarding discovery to lead to depositions of corporate employees. In order to avoid getting pulled into such disputes, in-house counsel should avoid getting involved in the mechanics of document production. A non-legal officer is a safer choice.

PR Firms and the Attorney-Client Privilege

Most courts have found that public relations advice from a consultant hired by a company, or even the lawyer, is not privileged. In a recent Southern District of New York case, the court found that unless the public relations firm's communications were “nearly indispensable” or “necessary” for the legal representation of the client, the communications are not privileged. Despite the party's claim that the communications were “contributing legal recommendations, providing next step action plans, and weighing strategic considerations in order to promote [the party's] overall legal goals,” the court determined that any privilege was waived with disclosure to the public relations firm. Egiazaryan v. Zalmayev, 2013 WL 945462 (S.D.N.Y. March 8, 2013). In light of these kinds of holdings, it is better not to disclose any confidential information to public relations firms. Facts are okay, but strategy is not.

Parent/Subsidiary Communications

In some instances, there may be a question as to whether communication with subsidiaries is privileged. Generally, the rule is that communications between employees of a subsidiary and counsel for the parent corporation can be afforded privilege if the employee has information necessary to the representation of the parent concerning matters within the scope of employment. Admiral Ins. v. U.S. Dist. Ct. , 881 F.2d 1486, 1493 n.6 (9th Cir. 1989). To the extent that the communications relate to representation of the subsidiary, and not the parent, there is a risk that the communication would not be afforded privilege.

Witness Interviews by In-House Counsel

In-house attorneys are often required to conduct witness interviews in the course of internal investigations. In order to retain the privilege during these interviews, and to avoid these interviews from becoming discoverable, it is helpful to use the following guidelines:

1. Do not audiotape or videotape the interview.
2. Do not use questionnaires.
3. Your notes should contain your “impressions and conclusions,” not verbatim recording of what was said.
4. Instruct witnesses to include a notation on any notes made for the interview that they are being made at the direction of counsel to assist in legal advice.
5. Consider reading each witness “the warnings” (see below).

“The Warnings” are to be used in instances when it is important to make sure that an employee knows who the attorney represents and who owns the privilege on the communications. They include the following statements:

• The attorney represents the company ' not the employee.
• This is a factual inquiry for a legal purpose.
• The company holds the attorney-client privilege and decides whether it is waived.
• Any information obtained can be used in a variety of ways, including government agencies.
• The witness is to keep the information shared confidential.
• Tell the truth.

Useful Reminders

1. Label documents intended to be privileged as “Privileged” or “Confidential,” but don't overuse it.
2. If possible, write minutes or notes of the meeting to reflect whether attorney advice is legal or business.
3. Try to keep legal and business discussions segregated in communications.
4. Keep separate files for privileged documents and communications.
5. Keep communications on a “need-to-know” basis.
6. Avoid becoming a witness.

Jason A. Copling is a shareholder with the commercial law firm, Munsch Hardt Kopf & Harr, P.C. in Dallas. He can be reached at [email protected].