Courts rendered a number of significant rulings concerning lawyer-client privilege in 2007. Privilege decisions in the context of related corporations, special committees of boards of directors, and competition investigations overseas led to important developments relating to the scope, preservation and waiver of the privilege. Here is a summary of three decisions made by U.S. and European courts that have special import for businesses in 2008 and beyond.
In re Teleglobe Communications Corp.: Scope of Privilege Among Corporate Family Members
Teleglobe involved a dispute within a corporate family. Teleglobe’s U.S. subsidiaries (the Debtors) went bankrupt. Their creditors brought a claim on behalf of the Debtors against BCE, Inc. – Teleglobe’s former parent – alleging that BCE had an obligation to fund Teleglobe’s U.S. operations and should not have allowed the Debtors to fail. During discovery, the Debtors sought to compel production of communications between BCE, Teleglobe and BCE’s in-house counsel on the basis that BCE’s in-house counsel represented all members of the corporate family (BCE, Teleglobe and the Debtors) jointly. The Debtors argued that because the corporate affiliates were joint clients, BCE could not assert privilege as a basis to withhold from the Debtors communications with BCE’s counsel. The Debtors also argued that Teleglobe had waived any privilege that its parent, BCE, might assert with respect to the documents sought. Further, the Debtors sought to extend the waiver argument to advice received from BCE’s outside counsel, which, the Debtors alleged, was stripped of any privilege because it was funneled through BCE’s in-house counsel. The U.S. district court, applying Delaware law, granted the Debtors’ motion for production. BCE appealed.
In reversing the trial court’s ruling and denying production, the U.S. Court of Appeals for the Third Circuit embraced a narrower definition of joint clients in the corporate-family context. The court held that a parent and subsidiary will be considered joint clients only when a lawyer affirmatively represents both entities in matters of common interest. While BCE and its subsidiary Teleglobe were joint clients of BCE’s in-house counsel, no joint client relationship existed between BCE and the Debtors. Moreover, Teleglobe could not unilaterally waive the privilege with respect to communications involving BCE without BCE acquiescing. Finally, the court held that although it was poor judgment for inhouse counsel to review documents prepared by BCE’s outside counsel once the interests of Teleglobe and BCE began to diverge, BCE reasonably expected its communications with outside counsel to remain privileged, and should not be punished for its in-house counsel’s ethical violation.
The Teleglobe Court cautioned that it did not intend that in-house counsel should forgo advising subsidiaries or that businesses should decentralize their corporate legal departments. The court provided advice for parent corporations that wish their communications with in-house counsel to be shielded from subsidiaries. To ensure preservation of the parent’s privilege in such circumstances, in-house counsel should (i) jointly represent parents and subsidiaries only when necessary; (ii) clearly limit the scope of such joint representations; and (iii) advise the parent to engage separate counsel for subsidiaries when their interests could diverge from those of the parent.
Ryan v. Gifford: Waiver of Privilege Through Disclosure of a Special Committee’s Report to Board Members Named in a Derivative Action
Ryan involved a shareholder derivative action before the Delaware Court of Chancery. The plaintiffs accused the chairman/CEO of Maxim Integrated Products, Inc. and five other Maxim directors, of breaching their fiduciary duties by approving or accepting backdated stock options. The Maxim board established a special committee to review Maxim’s options practices, with the assistance of outside counsel. The special committee eventually presented its report to the full board, including to those directors who were named as defendants in the pending action. Thereafter, the plaintiffs moved to compel production of the special committee’s report and all communications between the special committee, its outside counsel and Maxim. The special committee’s counsel opposed production on privilege grounds. The court ruled that the documents should be produced. It held that the special committee waived privilege over the report by sharing it with the director-defendants, because the interests of the directordefendants were "not in common with the client." The court noted that "[t]he Special Committee was formed to investigate wrongdoing and in response to litigation in which certain directors were named as individual defendants. This describes a relationship more akin to one adversarial in nature." The court further held that the committee, by sharing its findings with the director-defendants, waived privilege for all communications regarding the special committee’s investigation (not just the report).
Maxim moved the Supreme Court of Delaware for certification of an interlocutory appeal, but the motion was denied on January 2, 2008. Maxim can still appeal the Chancery Court’s decision, but not until final judgment is entered in the underlying litigation.
It is common for boards and special committees to share information. Before sharing such information in the future, counsel for both entities should consider whether non-committee directors have been, or could be, named as individual defendants in shareholder or derivative litigation and thereby occupy a position adverse to the special committee.
Akzo Nobel Chemicals, Ltd. v. Commission: Legal Advice of In-House Counsel Not Protected by Legal Professional Privilege in the European Union
During a raid seeking evidence of anticompetitive activity, the European Commission seized documents that reflected communications between Akzo’s employees and in-house counsel concerning Akzo’s competition compliance program. When Akzo protested, the investigators took a "cursory look" at the documents, and determined – on site – that they were not protected by legal professional privilege (LPP). Thereafter, the Commission issued a formal decision rejecting Akzo’s LPP defense. Ultimately, the matter came before the European Court of First Instance. While the court agreed that the Commission’s "cursory look" was improper in the face of an assertion of LPP, it sided with the Commission on the merits of Akzo’s LPP argument. Specifically, the court held that "the protection accorded to [the LPP] under Community law … only applies to the extent that the lawyer is independent, that is to say, not bound to his client by a relationship of employment." Affirming earlier European Court precedent, the court reiterated that under European Community law the LPP is limited to communications with outside counsel with European Union qualifications. Communications with Akzo’s in-house counsel were outside the scope of the LPP.
On December 8, 2007, Akzo took an appeal of the Court of First Instance’s decision to the European Court of Justice. The appeal is pending.
In-house counsel for businesses that are active in European markets should take note of Akzo when corresponding with operations overseas – particularly concerning competition matters. The scope of privilege under European Community law, when compared with the privilege recognized in the United States and Canada, is greatly circumscribed.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.