European Union: Letter To North America: Keeping Your Communications Out Of European Courtrooms

Last Updated: 2 June 2008

This article was originally published in February 2008.

For multi-national companies, awareness of the rules of "privilege" - which determine when communications can be kept away from investigators and out of court in subsequent litigation - can prove critical.

In this month's letter, we report on a recent European decision regarding the scope of "legal professional privilege" in the context of European Commission anti-trust investigations, which will be of interest to any company with operations within the European Union. We also report on recent UK decisions on "without prejudice privilege", which is relevant to anyone trying to resolve a dispute with a British connection.

European Court Refuses To Extend Legal Professional Privilege To In-House Lawyers

The European Commission has in recent years made the fight against major cross-border cartels the number one priority in its antitrust enforcement activities. It is expected to only be a matter of time before, aided by new guidelines adopted in 2006, the Commission will exceed its previous record individual fine (on ThyssenKrupp in the lifts and escalators cartel) of €480 million (US$700 million) and total fines on cartel participants, also in the lifts and escalators cartel (€992 million / US$1.45 billion). Almost invariably, the investigations that lead to such fines are accompanied by unannounced inspections - so-called "dawn raids". Therefore, companies under investigation have an increasing need to know what type of documents are immune from seizure because they are "legally privileged". In an important recent judgment in the Akzo Nobel case, the European Court has clarified the rules in this regard.

In What Situations Do These Rules Apply?

The rules on legal privilege set out here only apply to antitrust investigations by the European Commission, and the European Court's judgment does not affect any national rules on privilege.

The Existing Rule

It has been established for nearly thirty years that communications between "clients" in a business and their in-house lawyers in the EC antitrust investigation context are not covered by legal privilege. This had been justified on the basis that the "bond of employment" did not make in-house lawyers sufficiently independent from the client to be accorded the same privilege protection as external lawyers.

The New Rule

When the case came to court, there were a large number of interventions by groups representing in-house lawyers as it was felt throughout the business community that this was an out-of-date rule based on a technicality that led to unfair differences in the protection between external and in-house lawyers. Regrettably, however, the European Court decided that it saw no grounds to change the fundamental rule.

Therefore, legal privilege protection has not been extended to communications with in-house lawyers in an EC antitrust context.

So What Has Changed?

Despite not changing the basic rule, the European Court clarified a number of procedural points that result in increased protection for companies under investigation. During a dawn raid, the European Commission may no longer take a cursory look at documents that the company claims are privileged, and any disputes in this regard must be solved by sealing the disputed document(s) in an envelope for the European Court to decide.

The decision has been appealed, but in the meantime a review of existing compliance programmes may well be advisable.

Update On "Without Prejudice Privilege" In The UK

"Without prejudice" communications play a crucial role in British litigation, affording parties a real opportunity to settle early. The "without prejudice" rule has the effect of preventing settlement communications being put before the court, although the precise scope of without prejudice privilege is far from clear. Four cases last year provided an insight into the current state of the UK's law with respect to this privilege.

In Barneston v Framlington Group Ltd the Court of Appeal held that negotiations conducted well before proceedings commenced could reasonably be considered as being "in contemplation of litigation" and would not therefore be admissible in evidence. The privilege does not depend purely on temporal considerations: it is the subject matter of the dispute rather than how long before the threat, or start, of litigation that the negotiations take place that matters. In this case, both parties had clearly been aware of the potential for litigation if they could not agree and therefore the negotiations were held to be privileged.

In Brown v Rice, the Court held that communications made during the course of mediation could be admitted as evidence to establish whether a settlement had been reached. This was the case even though the mediation agreement contained a clause providing that any settlement reached in the mediation would only be binding if it was in writing and signed by all the parties and that all information provided during the mediation was without prejudice and would be inadmissible in any litigation of the dispute.

In English and American Insurance Co Ltd (a company in administration) v Axa Re SA the Court determined that whether or not a communication is without prejudice will depend on the intention of the parties, which must be determined objectively. Axa submitted that two letters, which were hedged with conditions and constraints and expressly reserved the right to deny liability in full, notwithstanding the offer being made, should be regarded as without prejudice as they were part of ongoing settlement negotiations. The judge disagreed. The evidence showed that at the end of a without prejudice meeting, Axa was asked to set out its position in writing. The obvious purpose of this request was so that EAIC's administrators had a statement on record of Axa's position, which implicitly was to be an open statement confirming Axa's position. The letters were therefore to be viewed as open letters, not afforded privilege.

In Stax Claimants v Bank of Nova Scotia Channel Islands Ltd the claimants sought damages against a bank in respect of investments recommended by the bank. The bank argued that the claimants had in fact relied on their own independent financial advisers (IFAs). The claimants' lawyers met with the IFAs' lawyers and asserted privilege in respect of notes of the meeting and all correspondence. No claims had been brought against the IFAs and the purpose of the meeting was not to discuss settlement of such claims.

The Court held that the privilege only extended to genuine settlement discussions. Discussions which are aimed at progressing the litigation so as ultimately to achieve a settlement will not be subject to without prejudice privilege (however, they may be covered by litigation privilege). The negotiations must be sufficiently proximate to the litigation to benefit from the without prejudice rule.

It is important - when parties are trying to resolve a dispute in Britain - to understand these rules, and to ensure that communications which are not intended for the eyes of a judge come within the rules of without prejudice privilege.

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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