Are Communications With Non-Employee Consultants Protected From Disclosure?
By Thomas V. Marino & Eva Adaszko
In the words of the U.S. Supreme Court, the attorney-client privilege “is the oldest of the privileges for confidential communications known to the common law.”(1)
It applies equally to individuals and corporations.(2) In today’s business environment, corporations often utilize outside professionals such as accountants, investment advisors, public relations firms, and other various types of professional consultants to conduct their business. In sum, corporations no longer conduct their business only through regular employees.(3) As a result, attorneys, both in-house and outside, have to communicate with those third-party non-employee consultants in order to understand their clients’ business and to provide fully informed and competent legal advice to their corporate clients. The question therefore arises whether the attorney-client privilege generally applicable to counsel’s communications with the employees of their corporate client, will also protect from disclosure counsel’s communications with those non-employees consultants. Expanding it to non-employee consultants is a hot topic of legal discourse which remains not fully resolved under either the federal common law or state laws.(4)
Recently, many federal courts have held that the attorney-client privilege can protect communications between corporate counsel and consultants who are the “functional equivalent” of employees, holding that “there is no reason to distinguish between a person on the corporation’s payroll and a consultant hired by the corporation if each acts for the corporation and possesses the information needed by attorneys in rendering legal advice.”(5) The “functional equivalent” doctrine, also referred to as the Bieter doctrine, is evolving and the courts that have adopted it have not yet clearly established one set of criteria for determining who is a “functional equivalent” or de facto employee.
The courts have adopted two approaches to the “functional equivalent” doctrine. Under the broad approach, the dispositive question is the consultant’s relationship to the corporation and whether by virtue of this relationship, the consultant possesses information that would assist the corporation’s counsel in rendering legal advice.(6) The following six factors have been considered by some federal district courts in New York:
- whether the company relied on the independent contractor “because its business is sporadic”;
- whether the independent contractor appeared on behalf of the company, corresponded with third parties as a representative of the company, or was ever viewed by others as a company employee;
- whether the independent contractor was “physically present” at the company, such as maintaining an office there, or spending “a substantial amount of his time” there;
- whether the company “lacked the internal resources necessary for an [actual] employee to perform” the services;
- whether the independent contractor “exercised[d] any measure of independent decision-making authority” within the company; and
- whether the independent contractor “ha[d] ever sought out legal advice from [the company’s] attorneys as part of his work with the [company].(7)
Under the narrow approach, the “functional equivalent” test will be met only if the consultants were retained to perform a function necessary in the context of actual or anticipated litigation.(8) Nonetheless, despite the apparent willingness to adopt the Bieter doctrine by federal courts, at least two federal district courts criticized the doctrine and expressed doubts about it being adopted by their respective circuits.(9)
The most recent decision from federal district court in New York is Church & Dwight Co., Inc. v. SPD Swiss Precision Diagnostics, GmbH(10) where the Court found that even if the “functional equivalent” doctrine was valid, it was inapplicable to the communications between defendant’s in-house counsel and the outside marketing firm hired by defendant because:
Applying the equivalent function exception to the facts here would swallow the privilege waiver rule and would extend the attorney-client privilege to communications with any third party who was hired to assist the client with something that client could not do on its own.(11)
While many states tend to follow federal precedent in the area of attorney-client privilege, those states where the attorney-client privilege is codified may be less likely to follow the federal common law and its expansion of the corporate attorney-client privilege.
Given the differing approaches that the courts have taken in determining whether communications between counsel and the non-employee consultants employed by their corporate clients will be protected from disclosure by the attorney-client privilege, it is advisable that the corporate directors, officers and counsel be familiar with the laws in each applicable jurisdiction. Also, to avoid potential problem with the wording of the consultant agreement and to possibly improve chances of maintaining the privilege, the agreement should specify how the consultant’s work will assist the client with legal matters as well as expressly provide that the consultant will work with the corporate client’s attorneys and keep all such communications confidential.
Nevertheless, corporate clients and their counsel should be cautious about sharing privileged information with non-employee consultants and other business advisors as it may constitute a waiver of the attorney-client privilege.
Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
CFTC v. Weintraub, 471 U.S. 343, 348 (1985)(citing Upjohn Co. v. United States, 449 U.S. 383 (1981).
In re Flonase Antitrust Litigation, 879 F. Supp. 2d 454 (E.D. Pa. 2012)(citing Edna Selan Epstein, The Attorney-Client Privilege and the Work-Product Doctrine 269 (5th ed. 2007).
The agency theory which under some circumstances applies to communications between attorneys, corporate clients and the third party which is either the agent of the attorney or client is not addressed by this article.
In re Copper Market Antitrust Litigation, 200 F.R.D. 213, 219 (S.D.N.Y. 2001); In re Bieter Co., 16 F. 3d 929 (8th Cir. 1994).
In re Flonasa Antitrust Litigation, 879 F. Supp. 2d 454, 459-460 (E.D. Pa. 2012)(discussing the broad practical approach adopted by various district courts); King Drug Co. of Florence, Inc. v. Cephalon, Inc., 2013 WL 4836752 (E.D. Pa. September 11, 2013).
Steinfeld v. IMS Health Inc., 2011 WL 6179505 (S.D.N.Y. December 9, 2011).
In Re Bristol-Myers Squibb Securities Litigation, 2003 WL 25962198 at *4 (D. N.J. June 25, 2003)(emphasis in the original).
BSP Software, LLC v. Motio, Inc., 2013 WL 3456870 at *3 (N.D. Ill. July 9, 2013)(addressing the “functional equivalent” test the Court stated: “We are doubtful that the Seventh Circuit would endorse this test, which has the potential to expand the privilege dramatically and thus would run contrary to the Seventh Circuit’s frequent admonition that the scope of the privilege must be carefully circumscribed)(citing In re Grand Jury Proceedings, 220 F.3d at 571); Church & Dwight Co., Inc. v. SPD Swiss Precision Diagnostics, 2014 WL 7238354 at *2 (S.D.N.Y. December 19, 2014)(“Because the Second
Circuit has recognized very limited exceptions to privilege waiver, the Court has doubts as to whether it would endorse such an approach.)
2014 WL 7238354 (S.D.N.Y. December 19, 2014).
Id. at *3.