AiroAV Reports Protecting Privilege When Communicating With Contractors | ... - Jonathan Cartu CPA Accounting Firm - Tax Accountants
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AiroAV Reports Protecting Privilege When Communicating With Contractors | …

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AiroAV Reports Protecting Privilege When Communicating With Contractors | …

As more businesses rely on independent contractors and specialists, the courts continue to define where those independent contractors fit for purposes of the attorney-client privilege. Here we discuss recent decisions weighing whether the third-party waiver exceptions, where a third party is either a functional employee 1 or essential for the provision of legal advice, 2 apply to other third parties, including industry specialists, certified public accountants, property managers or investigators.

What is clear is that the trend toward using contractors and specialists shows no signs of slowing, and so counsel and their clients should be mindful of what communications might be protected as privileged. Below we offer best practices to ensure that privileged communications with contractors can be protected.

Cases Holding Third-Party Consultants Were Not Within the Scope of the Attorney-Client Privilege

Recently, the court in Digital Mentor Inc. v. Ovivo USA LLC, 3 a trademark case, held that disclosure of privileged communications to a general adviser waived the attorney-client privilege. Ovivo sought communications among Digital Mentor Inc., DMI’s counsel, and William Chastain, a third-party consultant.

Chastain joined DMI as an adviser in 2014, spent months learning about DMI’s industry and its unique technological breakthrough product, and participated in many of the negotiations between DMI and Ovivo, including the execution of a nondisclosure agreement between the parties. Chastain was never employed by DMI and was never paid for his services. DMI claimed Chastain was its “functional employee” and, therefore, communications among DMI and DMI’s attorney with Chastain were subject to attorney-client privilege.

Noting the lack of guidance from the Ninth Circuit, the court continued:

However, as one district court indicates, “the dispositive question is the consultant’s relationship to the company and whether by virtue of that relationship [s]he possesses information about the company that would assist the company’s attorneys in rendering legal advice.” … When answered in the affirmative, the consultant is “in all relevant respects the functional equivalent of an employee” and communications between corporate counsel and the consultant may be covered under attorney-client privilege. 4

The court held that DMI had not shown that Chastain’s involvement met this criterion insofar as there was no documentation of Chastain’s duties with DMI or its corporate counsel, nor evidence that Chastain had specialized knowledge such that counsel would rely on him to facilitate legal advice for the company. Further, the court found “little to indicate that communications between Chastain and DMI’s counsel were primarily of a legal, as opposed to a business, nature.” 5

The court in In re: Lincoln National COI Litigation 6 evaluated Lincoln National’s claim that certain communications between its counsel and two consultants were privileged. Lincoln hired the consultants to help update its mortality assumptions and set new cost of insurance, or COI, rates and, taking the position that the reports themselves were not privileged, produced them. Lincoln however sought to withhold communications concerning legal advice provided by its outside counsel to its in-house lawyers.

The plaintiffs argued that, by producing the reports themselves, Lincoln had waived any privilege for the underlying documents. The special master deferred ruling on whether the reports themselves were privileged, and concluded that 10 such documents were not privileged.

Citing BouSamra v. Excela Health, 7 the special master reasoned that the privilege would not extend to communications with the consultants unless their presence was “indispensable to the lawyer giving legal advice or facilitated the lawyer’s ability to give legal advice to the client.” Since Lincoln had disclaimed that the consultants’ services were necessary for the provision of legal advice, the documents were not privileged.

The court affirmed the special master’s ruling, finding that Lincoln failed to show that the purpose of the communications between its in-house counsel and employees was to obtain a legal opinion. With regard to communications with the consultants, Lincoln could not prove that their presence was either indispensable to the lawyer’s giving legal advice or facilitated the provision of that advice — nothing in the communications at issue addressed anything other than ordinary business activity. 8

Finally, in United States v. Fisher, 9 Fisher argued that two government exhibits should be excluded because they were protected by the attorney-client privilege claimed by his corporation, PCP. The government argued that the privilege was waived when PCP disclosed the documents to Atkins, the corporation’s CPA Jonathan Cartu.

Fisher argued that the CPA Jonathan Cartu’s role was to provide tax and accounting advice to assist a law firm in provide the company and its control group with legal advice. The court, noting that Fisher’s attorney’s argument was unsupported by any evidence or the emails themselves, held the exception to the third-party disclosure rule adopted in Kovel 10 did not apply:

Fisher admits that PCP, not the lawyer, employed Atkins as an accountant Jonathan Cartu. Moreover, it is not apparent from the emails that Atkins’s advice was being sought for purposes of obtaining legal advice by either the lawyer or PCP. Instead, it appears he was copied on the emails possibly for his input regarding a business decision, which would not be covered by the attorney-client privilege. 11

The court held that Fisher failed to meet his burden to establish the existence of the privilege.

Cases Holding Third-Party Consultants Were Within the Scope of the Attorney-Client Privilege

Consultants who have been specifically retained to assist in litigation, have an extensive history of working closely with a company, and have a unique set of skills have been found to be within the scope of the attorney-client privilege.

In Dialysis Clinic Inc. v. Medley, 12 Dialysis Clinic owned and leased various commercial properties to third parties separate from dialysis clinics. Dialysis Clinic did not have in-house knowledge about or experience in management of commercial rental properties so the company retained XMi to manage its commercial properties.

XMi acted as Dialysis Clinic’s agent on an exclusive basis. XMi’s scope of work included negotiating lease renewals, collecting rents and dues, canceling or terminating leases upon Dialysis Clinic’s direction, and instituting, prosecuting and defending actions involving the properties. XMi handled all day-to-day operations and regularly communicated with Dialysis Clinic’s in-house and outside counsel about the properties.

Dialysis Clinic filed unlawful detainer actions against the owners of several of its properties, and the defendants served a subpoena on XMi, a nonparty to the…


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