China: "Privilege-Like" Protection in China: Nine Ways for US Companies to Safeguard Confidential Communication and Attorney Work Product at Home and Abroad

Appeared in Law360 on March 25, 2016.

Originally appeared in Kaye Scholer's Spring 2016 M&A and Corporate Governance Newsletter.

Attorney-client privilege is one of the principles accorded sacred status in US law. What is taken for granted in the US, however, may not apply in China. As a result, if US companies are not careful handling multijurisdictional matters such as anti­corruption investigations, they may lose "privilege-like" protection in China and also risk losing attorney-client privilege in the US. On the other hand, with careful planning, the lack of attorney-client privilege in China does not mean that US companies have no choice but to open their kimonos in China and lose attorney-client privilege in the US.

US-style attorney-client privilege does not exist in China. Nonetheless, the combined effect of a confidentiality obligation imposed by the PRC Lawyers Law and the nonexistence of a US-style discovery means that attorney-client communication and attorney work product enjoy "privilege-like" protection to a certain degree in China.

Chinese law creates a duty, and in the context of criminal proceedings a right, for lawyers to maintain clients' confidential information. The PRC Lawyers Law requires lawyers to "keep confidential facts and information learned during the representation which clients . . . are unwilling to have disclosed."[2] The PRC Criminal Procedures Law takes this requirement a step further by providing that "defense lawyers have the right to keep confidential facts and information learned during the representation of clients."[3] A limited exception exists with respect to information on a crime being contemplated or committed that "severely impairs national or public security or causes serious personal injury."[4]

The impact of this confidentiality duty or right can be significant since discovery rules in China generally require litigants to collect and produce their own evidence. US-style pre-trial discovery does not exist in China. A party to litigation cannot request the other party to produce documents, answer questions or participate in a deposition. In their inquisitional role, courts may "investigate and collect evidence" if a party to litigation is "confirmed to be unable to collect materials due to objective and external circumstances"[5] or if courts "deem necessary." In practice, they hardly ever collect evidence from or compel the production of evidence by litigants. In practice, only on rare occasions would a court take it upon itself to retrieve information or documents on file with government agencies to which private litigants do not have access.

The combination of the confidentiality duty or right on the part of lawyers and very restrictive discovery rules means that attorney-client communication and attorney work product enjoy some protection in China. It also means that in practice, absent extraordinary circumstances, lawyers generally are not compelled to divulge a client's confidential information or turn over their work product—nor are their clients.

Not All Lawyers Are "Born Equal"...

For clients and lawyers to claim or assert lawyers' confidentiality duty or right in order to avoid having to disclose confidential client information, lawyers must fall into one of the following two categories: (i) duly licensed PRC lawyers practicing in PRC local law firms[6] or (ii) duly licensed foreign (non-PRC) lawyers registered as foreign lawyers with the PRC Ministry of Justice, working out of a PRC government-approved representative office of any international law firm.

This limitation means that not all lawyers are "lawyers" within the definition of the PRC Lawyers Law, and that those lawyers who do not meet the definition do not have the confidentiality duty or right under the PRC Lawyers Law. Lawyers outside the definition of "lawyers" include: (i) in-house legal counsel in China who are PRC nationals, including those who passed the PRC bar; (ii) in-house legal counsel who are foreign (non-PRC) lawyers, including those who may maintain active and valid bar memberships in the US; and (iii) unregistered foreign (non-PRC) lawyers visiting or on assignments in China, including in-house counsel from US home offices and law-firm practitioners.

This classification of lawyers—and the resultant different treatment of their right or duty to protect confidential client information—ultimately derives from the PRC Lawyers Law,[7] which covers "lawyers" who are, among others, "engaged by clients to provide legal services" and who are licensed or registered in China.[8] In-house counsel are considered employees of a company that employs them and that is not their "client," whereas unregistered foreign (non-PRC) lawyers fall outside the PRC Lawyers Law.

"Privilege-Like" Protection Is Not Attorney-Client Privilege

The "privilege-like" protection that may cover the communications with, and work product from, licensed PRC law-firm lawyers and registered foreign (non-PRC) lawyers mentioned above does not equate to attorney-client privilege, as it does not go further to provide "evidentiary protection analogous to the attorney-client privilege."[9] In contrast, the PRC Civil Procedures Law does not specifically exclude lawyers from the obligations to testify.[10] While the PRC Criminal Procedures Law excludes criminal defense lawyers from the obligation to testify and to turn over "evidence that can prove a criminal suspect guilty or innocent," it does not exclude other lawyers from these obligations.[11] Although in practice there is hardly any precedent of lawyers being required to testify on their clients' matters or turn over evidence, the existence of a legal basis to require them to do so make client communication and attorney work product vulnerable.

A significant concern to US companies operating in China is finding themselves subject to administrative investigations and proceedings under Chinese laws, such as the PRC Anti-Monopoly Law, the PRC Anti-Unfair Competition Law, the PRC anti-corruption laws and regulations, the PRC Anti-Money Laundering Law, that could trigger investigations and legal proceedings in the US under corresponding US laws. Chinese law generally requires the cooperation of the parties subject to investigation with no specific exception to lawyers of such parties. For example, under the PRC Anti-Monopoly Law, the enforcement authorities have broad authority and power to question the entities or persons subject to investigation as well as "other relevant entities or persons" and such entities and persons must cooperate with the investigation.[12] No specific exception is available to lawyers. The enforcement authorities also have broad authority and power to examine and copy information and documents relevant to the investigation.[13]

Likewise, no specific exception is made for attorney-client communications or attorney work product. Although in practice the enforcement authorities generally do not demand cooperation from lawyers to the party subject to investigation and do not demand those lawyers to disclose confidential client information or attorney work product, they have the legal authority and power to do so. Further, if they make such demand on the party subject to investigation, the party may not refuse to turn over the information or attorney work product.

What Happens in China May Not Just Stay in China—It Could Affect Legal Proceedings in the US

The fact that the "privilege-like" protection under Chinese law does not equate to attorney-client privilege could have an impact on legal proceedings in the US in connection with events taking place in China.

First, in the event of discovery in connection with such legal proceedings where the Chinese privilege law applies, a litigant may not refuse to produce documents on the basis of attorney-client privilege in China, since US-style attorney-client privilege does not exist under Chinese law. In Wultz v. Bank of China, the court affirmed this point, stating that under Chinese law, "the duty of confidentiality is an ethical obligation and not an evidentiary protection analogous to the attorney-client privilege,"[14] and therefore, the court compelled the production of those documents governed by the Chinese law.

Second, even if the US privilege law applies, the privilege could be lost if elements of attorney-client communication are not met. In Wultz v. Bank of China, the court held that "the person to whom the communication is made [must be] a member of the bar of a court."[15] In that case, the court found that communications with Bank of China's in-house department were not communications with attorneys because half of the bank's legal department were not licensed attorneys; moreover, there was no specification on whether the communications from the legal department were made by licensed attorneys. Consequently, the court stated that such communications could not be protected by the attorney-client privilege.

Third, in the event that client communications or attorney work product is required to be turned over to Chinese authorities in their investigations and administrative proceedings due to lack of attorney-client privilege protection in China, caution must be exercised to ensure that attorney-client privilege in the US is not inadvertently lost in this process.

Tips on Maximizing "Privilege-Like" Protection in China and Preserving Attorney-Client Privilege in the US

US companies with operations in China should take steps to maximize "privilege-like" protection in China and be mindful of the differences between privilege rules in China and the US in order to preserve attorney-client privilege in the US.

  1. Remember, only the following two types of lawyers have confidentiality duty: (i) duly licensed PRC lawyers practicing in PRC local law firms and (ii) duly licensed foreign (non-PRC) lawyers registered with the PRC Ministry of Justice. Furthermore, US companies should know that criminal defense lawyers have a right to assert client confidence, which is one step further in terms of protection than a mere ethical confidentiality duty.
  2. In China, always maintain a panel of outside lawyers who fall into the above two categories, including criminal defense lawyers who must be PRC lawyers practicing in PRC local law firms, so that when it is desirable to move matters from in-house counsel not covered by "privilege-like" protection to such outside lawyers, it can be done immediately.
  3. Be mindful that in-house legal counsel in China do not have a confidentiality obligation by operation of law. Therefore, it is advisable that each in-house legal counsel be required to enter into a confidentiality agreement with the company.
  4. When retaining outside lawyers, be sure to include in the engagement letter a clear and broad request for confidentiality, since an expression of "unwillingness to have disclosed" on the part of clients seems necessary to bind lawyers under the Lawyers Law.
  5. Have procedures and protocols in place that comply with record-keeping requirements under PRC law, and keep, manage and destroy records and documents accordingly.
  6. Limit China-based affiliates' access to US company servers located outside China that may contain sensitive information and legal data.
  7. Be mindful of the kinds of information and data stored or available on servers of China-based affiliates located in China. Restrict the ability of employees in China to download and save sensitive information on their personal laptops or other electronic devices. Broad investigative power and authority of PRC government agencies would generally enable them to access such information and data in connection with administrative investigations and proceedings.
  8. Have protocols in place to facilitate the involvement of US-licensed in-house or outside lawyers (rather than having only in-house legal counsel in China) in order to avoid losing attorney-client privilege in the US inadvertently.
  9. When client communications or attorney work product has to be turned over to Chinese authorities in their investigations and administrative proceedings, caution must be exercised to ensure that attorney-client privilege in the US is not inadvertently lost.

» See the entire newsletter (PDF).

[1] Special thanks to Weiran Song for her research assistance on this article.

[2] Art. 38, The Lawyers Law of the People's Republic of China, enacted on May 15, 1996, as amended (the Lawyers Law).

[3] Art. 46, The Criminal Procedures Law of the People's Republic of China, enacted on July 1, 1979, as amended (the Criminal Procedures Law).

[4] Art. 38, Lawyers Law; Art.46, Criminal Procedures Law.

[5] Art. 64.2, The Civil Procedures Law of the People's Republic of China, enacted on April 9, 1991, as amended (the Civil Procedures Law).

[6] This category also includes criminal defense lawyers, since foreign (non-PRC) lawyers are not permitted to act as criminal defense lawyers, regardless of whether or not they are registered as foreign lawyers in China.

[7] Registered foreign (non-PRC) lawyers are also generally governed by the Lawyers Law because the Regulations on the Administration of Representative Offices of Foreign Law Firms applicable to foreign (non-PRC) lawyers are subset regulations promulgated under the Lawyers Law.

[8] Art. 2.1, Lawyers Law.

[9] Wultz v. Bank of China, 11 Civ.1266 (SAS), 2013 U.S. Dist. Lexis 154343 (S.D.N.Y. Oct.24, 2013).

[10] Art. 72.1 of the Civil Procedures Law provides that "those who know the factual situation of cases shall have the obligations to testify."

[11] Art. 46, 60.1 and 135, Criminal Procedures Law.

[12] Art. 39.1(2), The Anti-Monopoly Law of the People's Republic of China, enacted on August 1, 2008 (the AML).

[13] Art. 39.1(3), AML.

[14] Wultz v. Bank of China, 11 Civ.1266 (SAS), 2013 U.S. Dist. Lexis 154343 (S.D.N.Y. Oct.24, 2013).

[15] It is unclear from the opinion what "licensed" Bank of China in-house legal counsel means, since (i) in China the license of a duly licensed PRC lawyer practicing in a PRC law firm will become inactive and suspended once such person becomes an in-house counsel and (ii) under the Lawyers Law, an in-house counsel is an employee of the company, not a lawyer serving a client. Perhaps the Wultz court didn't consider it necessary to examine this further, since the mix of "licensed" and nonlicensed counsel at the Bank of China's legal department alone already destroyed its chances to claim that communications were from lawyers. However, it seems that even if the communications were from "licensed" in-house legal counsel, the communications may still not be privileged because in-house legal counsel in China are not lawyers under the Lawyers Law. With a suspended license, an in-house legal counsel may not be "a member of the bar of a court."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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