Asserting Attorney-Client Privilege When Affiliated Entities Interests Diverge

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Asserting Attorney-Client Privilege When Affiliated Entities Interests Diverge Navigating the Complexities of Joint Representation During Litigation, Spinoffs, Acquisitions or Insolvency TUESDAY, APRIL 19, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Charles C. Lemley, Partner, Wiley Rein, Washington, D.C. Richard A. Simpson, Partner, Wiley Rein, Washington, D.C. Nicole Audet Richardson, Associate, Wiley Rein, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Attorney-Client Privilege and Affiliated Entities Navigating the Complexities of Joint Representation During Litigation, Spinoffs, Acquisitions or Insolvency April 19, 2016 Charles C. Lemley Richard A. Simpson Nicole Audet Richardson Wiley Rein LLP These slides are accompanied by an oral presentation and are not to be relied upon for legal advice.

6 Presentation Agenda The Attorney-Client Privilege in the Corporate Context Attorney-Client Privilege & Corporate Transactions Preventing Unwanted Outcomes in Transactional Work Questions... and Webinar Conclusion 6

7 The Attorney-Client Privilege in the Corporate Context 7

8 Basic Requirements for Attorney-Client Privilege An attorney; A current or prospective client; A communication about a legal matter; and A reasonable expectation of confidentiality 8

9 What Happens When Client is a Corporation? Who is the client to whom the privilege applies? What is the scope of that privilege? Who can waive it? What if the corporation has affiliates? Does it matter how closely related the affiliates are? What factors do courts consider? Does it matter if they are represented by the same counsel? 9

10 Attorney-Client Privilege & Corporations Courts have long recognized that a corporation and its lawyer may enjoy an attorney-client relationship. The privilege belongs to the corporate client and it is invoked by representatives of the corporation. But, which individuals can speak for the corporate client? Control Group Test Subject Matter Test 10

11 The Control Group Test Focused on the corporate employee s place in the corporate hierarchy to determine whether that employee could enjoy the privileged communications with the corporation s lawyer. The privilege belonged only to those who are in a position to control or even take a substantial part in a decision about any action which the corporation may take upon the advice of the attorney, or if [they are]an authorized member of a body or group which has that authority. City of Philadelphia v. Westinghouse Elec. Corp., 210 F. Supp. 483, 485 (E.D. Pa. 1962). The United States Supreme Court rejected this test as too restrictive. See Upjohn. But it is still recognized in some jurisdictions. 11

12 Upjohn Company v. United States, 499 U.S. 383 (1981) The seminal case on the existence of the privilege between corporate counsel and the employees of a corporation is the Supreme Court's decision in Upjohn Company v. United States. The Upjohn Court refused to adopt a bright-line rule for applying the privilege, observing that the recognition of a privilege based on a confidential relationship should be determined on a case-by-case basis. However, the Court made clear that, [a]s a general rule, a communication is privileged at least when, as here, an employee or former employee speaks at the direction of the management with an attorney regarding conduct or proposed conduct within the scope of employment. 12

13 The Subject Matter Test Calls for a more broad application of the privilege that is based on the content of the communication and the employee s role. The subject matter test deems an employee's communication with the corporation's attorney privileged if (i) the communication is made at the direction of her superiors, and (ii) the subject matter of the attorney's advice and the communication is the performance by the employee of the employee's duties of her employment. In re USA Waste Mgmt. Res., L.L.C., 387 S.W.3d 92, 96 (Tex. App. 2012). 13

14 Control Group v. Subject Matter Test Control Test: upholds the attorney-client privilege only if the individual speaking to the attorney was vested by the corporation with authority to seek legal advice and to participate in the corporation's response to this advice. Subject-Matter Test: protects communications of employees made at the direction of superiors in the corporation to the corporation's attorneys regarding the subject matter upon which the attorneys' advice is sought and concerning the duties of employment. 14

15 Who Is the Lawyer? In-House Counsel? Outside Counsel? 15

16 In-House Counsel Communication It can often be difficult to determine which communications are privileged as in-house counsel often gives a mixture of legal and business advice. Consider: -Was the communication designed to meet problems that are predominantly legal? -Was in-house counsel engaging in activities typically performed by attorneys? -Does in-house counsel work in the legal department or in a business group? 16

17 Once Privilege Attaches... It may be waived only by someone with appropriate decision making authority: [T]he power to waive the corporate attorneyclient privilege rests with the corporation's management and is normally exercised by its officers and directors. The managers, of course, must exercise the privilege in a manner consistent with their fiduciary duty to act in the best interests of the corporation and not of themselves as individuals. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, , 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985) (footnote omitted). 17

18 What if the Corporation Has Affiliates? [C]ommunications between employees of a subsidiary corporation and counsel for the parent corporation, like communications between former employees and corporate counsel, would be privileged if the employee possesses information critical to the representation of the parent company and the communications concern matters within the scope of employment. Admiral Ins. Co. v. U.S. Dist. Court for Dist. of Arizona, 881 F.2d 1486, 1493 (9th Cir. 1989). Generally, the in-house counsel can advise an affiliate corporation without undermining the attorney-client privilege. 18

19 What if the Corporation Has Affiliates? Bottom Line: Courts usually protect as privileged communications among members of a corporate family. ABA Model Rule 1.13(a) explains that [a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. It is not automatic that a lawyer who represents a corporation, by virtue of that representation alone, also necessarily represents affiliated corporations, such as parents or subsidiaries. Whether that lawyer represents a client s corporate affiliate depends on the particular circumstances. 19

20 Factors Courts Weigh to Determine Whether an Attorney Represents Both a Parent and a Subsidiary Most courts weigh multiple factors, focusing on the operational commonality between the affiliated entities and their financial and legal interdependence. Courts consider: The relationship between the parent and the subsidiary corporation. The common interest that the parent and subsidiary may share in the subject matter of the communication. Are they closely related? Do they share joint management? Do they share legal and financial interest? 20

21 How are the Entities Related? Wholly Owned Subsidiaries That a parent corporation and its wholly owned subsidiary should be treated as a single entity for purposes of applying the attorney-client privilege doctrine has found support in a number of courts. However, even where a subsidiary is wholly owned, the particular factors of the corporate relationship may demand a different result with respect to attorney-client privilege. Corporations with less than a controlling share Other courts have lowered the standard of ownership to majority owned or a controlling share; some are willing to preserve the privilege to merely an affiliated corporation. 21

22 Focus on the Organizational Structure Where an organization appears to be composed of multiple legal entities, a court may conclude that each should have independent client status. In that case, each entity would need to establish its privilege as would unrelated corporations. 22

23 United States v. AT&T, 86 F.R.D. 603 (D.D.C. 1979). Here the court ruled that for purposes of the privilege, client included the named defendants and all wholly owned subsidiaries as well as majority owned subsidiaries, but minority owned subsidiaries and formerly attached companies were not clients for privilege purposes. Even still the privilege would apply when an attorney provides legal advice or assistance to a non-client affiliate if the advice or assistance is confidential among the clients and relates to a matter in which the agencies have a substantial identity of legal interest. 23

24 United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 359 (D. Mass 1950) The court acknowledged that affiliation by ownership and a common legal interest was enough to keep shared communications protected by the privilege. The decision focused on whether the purpose of the communications was legal and not business-oriented. 24

25 Is There a Joint Representation? Attorney Attorney Corporate Parent Subsidiary 25

26 Is There a Joint Representation? A joint representation can exist where the parent and subsidiary use the same counsel. Communications between the joint clients and their shared attorney are privileged against third parties. Neither joint client can unilaterally waive the privilege. Neither joint client may assert the privilege in a dispute between themselves. If the parent decides to waive the privilege, it cannot do so without the subsidiary s agreement. 26

27 Joint Representation, continued If parents and subsidiary are not considered a single client, the attorney can represent both as joint clients without undermining attorney-client privilege. But, whether the two entities are jointly represented is a fact-intensive inquiry. In the seminal case, In re Teleglobe Communications Corp., the Third Circuit determined that since a parent and its subsidiaries were separate corporate entities, they should remain so for privilege purposes. Thus, counsel who represents both the parent and a subsidiary may have two clients, not one. 27

28 In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007) In Teleglobe, a subsidiary declared bankruptcy and sought privileged documents from its former parent. The 3 rd Circuit rejected an automatic presumption that the attorney for the parent entity jointly represented the subsidiary. The majority-and more sensible-view is that even in the parentsubsidiary context a joint representation only arises when common attorneys are affirmatively doing legal work for both entities on a matter of common interest. On remand, the district court determined there was no joint representation of the parent and the non-bankrupt affiliates. 28

29 Courts Finding Joint Representation An Illinois bankruptcy court noted that parents and subsidiaries need to preserve their independent identities, finding that use of the same counsel for the parent and subsidiary resembles a joint representation; consequently, one party may not assert the privilege against the other. See In re Santa Fe Trail Transp. Co., 121 B.R. 794 (Bankr. N.D. Ill. 1990). Where the parent corporation had never hired separate counsel for its subsidiary until the date the subsidiary was sold to a new buyer, the only attorneys that could have been representing the subsidiaries in the transaction were the firms representing the parent and its fully owned subsidiary. See 625 Milwaukee, LLC v. Switch & Data Facilities Co., Case No. 06-C-0727, 2008 U.S. Dist. LEXIS (E.D. Wis. Feb. 29, 2008). 29

30 But Joint Representation Comes with Risks... Creating the attorney-client relationship with those other entities also creates ethics implications that could become critical if one of the jointly represented clients declares bankruptcy or is sold to a hostile company, etc. A former client usually can access the lawyer s communications with the other jointly represented clients, and may be able to disqualify the lawyer. 30

31 But lawyers may deliberately choose to represent only a component of the institution American Bar Ass'n Comm. on Prof. Ethics, Formal Opinion at 1001:262 The best solution to the problems that may arise by reason of clients' corporate affiliations is to have a clear understanding between lawyer and client, at the very start of the representation, as to which entity or entities in the corporate family are to be the lawyer's clients, or are to be so treated for conflicts purposes. Ass'n of the Bar of the City of New York Comm. on Prof'l and Judicial Ethics, Formal Opinion [C]orporate-family conflicts may be averted by... an engagement letter... that delineates which affiliates, if any, of a corporate client the law firm represents... Wolfram, 2 J. Inst. Study Legal Ethics at 364 [D]iscrete agreements between a lawyer and corporate-family client can define the relationship in such a way as to limit... the type of conflict obligations that the lawyer is and is not undertaking. 31

32 Joint-Representation v. Joint-Defense Joint-Representation: Ex: One lawyer representing multiple corporate entities. Joint-Defense ( common defense ): Ex: Entities each have their own attorney in the course of a joint defense. To show that the communications were made in the course of a joint defense effort, the party claiming the privilege must prove that the parties agreed to pursue a joint strategy. Although the parties must have common legal interests that are not completely adverse, there is no requirement that all the parties' defenses be compatible in all respects. 32

33 Attorney-Client Privilege & Corporate Transactions 33

34 What Happens to the Privilege? Mergers of Corporate Entities Spinoffs of the Corporate Entities Dissolution of a Corporate Entity Litigation Between the Corporate Entities 34

35 Mergers of Corporate Entities 35

36 The Common Interest Doctrine Allows parties to share documents and communications without waiving privilege. Applies where parties share a legal interest (as opposed to a commercial interest). The parties do not need to have identical interests in all respects. 36

37 CID Applied to Mergers The shared interest in the context of a merger needs to be identical and legal, not solely commercial. The disclosure must be designed to further that legal interest. 37

38 What Counts as a Common Interest? Most common examples of an adequate common interest: anticipated litigation or a pending merger. Factors that courts consider: Timing of the disclosure of the privileged information: Disclosure after signing a merger agreement is more likely to be privileged. See, e.g., In re JP Morgan Chase & Co. Securities Litigation, 2007 U.S. Dist. LEXIS 60095, at *15 (N.D. Ill. Aug. 13, 2007). Certainty of the transaction: Lack of a signed merger agreement or the existence of multiple suitors weighs against finding there has been no waiver. See, e.g., Nidec Corp. v. Victor Co. of Japan, 249 F.R.D. 575 (N.D. Cal. 2007). 38

39 Two Approaches to CID and Mergers New York versus Delaware 39

40 New York Approach This is a strict approach. Litigation must be pending or reasonably anticipated. See Ambac Assurance v. Countrywide Home Loans, 41 Misc. 3d 1213(A), 1213(A) (N.Y. Sup. Ct. 2013) (rev d, 124 A.D.3d 129, 998 N.Y.S.2d 329 (2014)). Other New York cases continue to require pending or anticipated litigation and the Court of Appeals has not ruled. 40

41 Delaware s Approach This approach is more flexible. Codified in Rule of Evidence 502(b)(3): Must have a shared legal interest, but litigation does not have to be pending or reasonably anticipated. Need an interest that is so parallel and nonadverse that, at least with respect to the transaction [the parties] may be regarded as acting as joint venturers. 3Com Corp. v. Diamond II Holdings Inc., 2010 Del. Ch. LEXIS 126, at *32-33 (Del. Ch. May 31, 2010). 41

42 Federal Case Law A wide body of federal case law has grown up around this issue. The weight of authority seems to be in favor of the more flexible approach: FSP Stallion 1 LLC v. Luce, 2010 U.S. Dist. LEXIS , at *57-58 (D. Nev. Sept. 30, 2010) (common-interest doctrine applies when parties are engaged in a common legal enterprise, even if actual litigation is not in progress). Nidec Corp. v. Victor Co., 249 F.R.D. 575, 578 (N.D. Cal. 2007) ( The protection of the privilege under the community of interest rationale, however, is not limited to joint litigation preparation efforts. It is applicable whenever parties with common interests join forces for the purpose of obtaining more effective legal assistance. ). 42

43 Does It Matter if the Merger is Never Consummated? Generally no. Hewlett-Packard, 115 FRD 308 (N.D. Cal 1987): The contemplated transaction was abandoned, but the court concluded that the parties reasonably anticipated joint litigation and the CID applied because at the time the [privileged information] was shared, there was a real possibility that [the buyer] would purchase [the entity]. 43

44 After the Transaction, What Happens to the Privilege? Ordinarily the buyer acquires control of the privilege, but some courts have held that privileged communications relating to the transaction itself are retained by the seller. Great Hill: The surviving corporation of a merger under DE law owns the privilege associated with all pre-merger communications in the absence of language stating otherwise in the merger agreement. Contrast with an asset purchase, where the selling company remains an independent legal entity and retains the privilege unless it is expressly transferred. 44

45 Scope of the Communications Covered by the Seller s Retained Privilege In Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), the court ruled that privileged communications related to the merger transaction itself are retained by the sellers, but rights with respect to other attorney-client communications are transferred to the buyer. For instance, if the target company s law firm had represented it prior to the merger transaction with respect to other matters such as intellectual property, the buyer would acquire all rights to all communications associated with those issues, but would not acquire rights to communications related to the merger transaction itself. 45

46 Spinoffs of Corporate Entities 46

47 The CID and a Divested Subsidiary A majority of courts have held that communications between a parent and a subsidiary retain their privileged nature even though the subsidiary is a discrete legal entity. But, a lawyer who represents a corporation does not automatically represent affiliated organizations. 47

48 Communications between Parents and Subsidiaries Inter corporate communications (between a parent and subsidiary or two subsidiaries) can receive the same protection as comparable intra corporate communications. Courts are less likely to retain the privilege where the parent and subsidiary have separate legal representation and appear adverse to each other. See Bowne of New York City, Inc. v. AmBase Corp., 150 F.R.D. 465, 491 (S.D.N.Y. 1993). 48

49 Dissolution of Corporate Entities 49

50 Dissolved Company Corporate attorney client privilege ends once a company ceases operations and no longer has someone to speak for it. Red Vision Systems v. Nat l Real Estate Information Servs., 108 A.3d 54 (Pa. Super. Ct. 2015). 50

51 Insolvent Company Protections of privilege are not eliminated. But, in a bankruptcy proceeding, the authority to exercise or waive the privilege may be transferred from the debtor entity to another party. Commodity Futures Trading Commission v. Wintraub, 471 U.S. 343, 349 (1985). 51

52 Litigation Between the Entities 52

53 Litigation Between the Entities Where two related corporate entities find themselves taking legally and commercially adverse positions with respect to pending litigation at the time communications are made to an attorney, courts would most likely decline to extend the protection of the attorney-client privilege to that communication. This could be the case even where the corporate entity is a wholly-owned subsidiary. In re Napster, Inc. Copyright Litig., No. C MHP, 2005 WL , at *5 (N.D. Cal. Apr. 12, 2005). 53

54 Preventing Unwanted Outcomes in Transactional Work 54

55 Tips for Preserving Attorney-Client Privilege Clearly document the scope of the relationship and identify who and who is not represented. Determine what privilege applies to communications. Limit distribution of legal advice to people who need to know. Do not refer to the substance of legal advice unless absolutely necessary. Establish a policy on copying and distributing documents containing legal advice and opinion. Consider whether a document heading will be helpful and identify documents that are privileged; but remember it will not be determinative. 55

56 Tips for Preserving Attorney-Client Privilege, continued. List the purpose of the communication and maintain separate filling systems for legal and business advice. Identify senders or recipients of communications by name and position. Restrict physical access to privileged documents. Cull and pull privileged documents before making documents available to prospective buyers or similar parties. Do not assume you can provide privileged information to anyone within the corporate group. 56

57 Best Practices to Prevent Joint Representation Expressly disclaim any representation to any entities that the attorney does not wish to represent, in writing if possible, and then make sure that the attorney s conduct is consistent with any disclaimers. End any attorney-client relationship clearly and unambiguously. Retain separate counsel for separate clients even if all counsel are paid for by a common source, especially when interests may be adverse. If the parent and a subsidiary are jointly represented, be clear about the scope before sharing information with counsel. 57

58 Best Practices Within a Merger A joint defense agreement or common interest agreement may help preserve the common interest privilege if entered into before privileged information is shared. Remember that communications made solely for commercial or business interests may not be protected under the common interest doctrine. 58

59 Best Practices (continued) Address the attorney-client privilege between the target and its counsel in the definitive documents, particularly where parties wish to deviate from the default privilege ownership (see Great Hill). Ensure that the attorney-client privilege has been maintained by sharing information only between counsel for each entity. Client to client communications are not likely to be protected. 59

60 Best Practices Upon Insolvency or Dissolution Insolvency As part of insolvency planning, management of the debtor should be informed of and weigh the risks of the potential loss of the privilege. Bankruptcy plans should expressly identify whether the privilege will be conveyed to a non-debtor party, as well as the scope and potential impact of such a transfer. Dissolution Corporations should not assume that the privilege will survive the death of the corporation. If maintaining privilege is necessary post-dissolution, there must be someone to speak for the entity to enforce the privilege. 60

61 Questions? Charles C. Lemley Richard A. Simpson Nicole Audet Richardson 61