United States: Big News From The Big Easy: The Fifth Circuit Protects The Privilege For Communications Between In-House Counsel And Their Business Colleagues

Last Updated: June 11 2014
Article by James Beck

Here's a guest post we received from Reed Smith's Andrew Stillufsen about a discovery topic that afflicts drug/device defendants, as well as those representing any large corporate entity - the applicability of the attorney/client privilege to communications authored by in-house counsel.  Andy describes a recent successful outcome in a case involving a large oil company, but for the underlying subject matter, the dispute could just as easily have arisen in drug/device litigation.  As always, all the credit and/or blame for this post goes to the guest poster.

In-house counsel everywhere, and those who rely on their advice, breathed a sigh of relief last month when the Fifth Circuit overturned a district court decision and found that a memo drafted by in-house counsel at the request of a business colleague in connection with a contract negotiation was in fact protected by the attorney-client privilege.  This case serves not only as a validation of the role of in-house counsel in corporate transactions, but also is an important reminder of the importance of establishing the elements of the privilege on the face of a document, and thus be able to withstand even the most demanding court review.

In Exxon-Mobil Corp. v. Hill, ___ F.3d ___, 2014 WL 1796646 (5th Cir. May 6, 2014),  the court was presented with a question that many courts grapple with every day:  is a document drafted by an in-house lawyer a confidential communication for the purpose of providing legal advice, or merely a business communication that happened to be drafted by a lawyer?  Since the answer was not apparent on the face of the document, the court was forced to take a deep dive into the context of the drafting of the memo, and fortunately found that, given this context, it was in fact privileged.

The document at issue, called the Stein Memo after its author, was created in a fairly typical manner.  In the late 1980s Exxon was negotiating with another company over a contract to  clean its oilfields and store the cleaned materials, which included substances contaminated by naturally occurring radioactive materials ("NORM").  A business person involved in the negotiations asked in-house counsel Stein for advice regarding how to respond to a request from the other company for some relevant test results.  Stein's advice, including which test results to disclose and proposed language to accompany the test results, was memorialized by her in the Stein Memo. 

Fast forward over twenty years to discovery in new NORM-related litigation.  In 2008 Exxon inadvertently produced the Stein Memo to plaintiffs.  Exxon acted swiftly once it discovered that the memo had been produced, and thought it successfully clawed back the memo.  However, plaintiffs' counsel secretly kept a copy of it, and later distributed the memo to other plaintiffs' counsel involved in the NORM litigation.  After a somewhat tortured procedural history, which included a mixed record of asserting privilege over  the Stein Memo in various Louisiana state court suits,  the issue was finally ripe for decision by the federal district court after the Stein Memo was attached to a plaintiff's expert report filed in that court.

This case was before Judge Fallon in the Eastern District of Louisiana, who previously authored an influential decision that was harmful to the application of the attorney-client privilege to communications by in-house counsel in the pharmaceutical industry.  See In re Vioxx Prod. Liability Litig., 501 F. Supp.2d 789 (E.D. La. 2007).  In this case, the court rejected the theory, called "pervasive regulation" , that, given in-house counsel's central position − by necessity − in the flow of communications at the company, nearly every document touched by in-house counsel touched was therefore privileged.  Id. at  800-02.

The key question to be answered by the district court − as is nearly always the case for any court presented with a communication to or from in-house counsel − was whether the proponent of the privilege could clearly show that "the primary or predominate purpose of the attorney-client consultation is to seek legal advice or assistance."   Exxon Mobil Corp. v. Hill, 2013 WL 3293496, at *6 (E.D. La. June 28, 2013) (citing Paul R. Rice, 1 Attorney-Client Privilege in the United States, §7:1 (2d ed.)).   The court held that Exxon had "not met its burden of demonstrating that...Stein [was consulted] for legal advice, rather than business advice."    Id. at *7.  It did not find "sufficiently persuasive"  affidavits submitted by both Stein and the business person who originally sought Stein's advice, which asserted that they had met for the purpose of obtaining legal advice, and that they both considered the Stein Memo to be a confidential attorney-client communication.  Id.   Despite the fact that the Stein Memo was plainly written by an identified in-house attorney, and was addressed only to other Exxon employees, the court found highly persuasive that "from the face of the document [it appears] that the primary purpose of Stein's advice...was to help secure more favorable contract terms...."    Id.   Therefore, according to Judge Fallon, the primary purpose of the Stein Memo was not for the provision of legal advice, and it was not protected by the attorney-client privilege.

However, when the Fifth Circuit looked at the same evidence, it found that "[c]ontext here is key" and reached the opposite result.  Hill, ___ F.3d ___, 2014 WL 1796646, at *2.  After reviewing the record, the court found that "[t]he Stein Memo reflects the advice by in-house counsel concerning disclosure of certain key data during contract negotiations" that involved a number of legal issues and "were assisted by legal counsel" on both sides.  Id.  Critical to its analysis was that "[d]isclosure of material facts is a universal concern in contract law" and therefore "it is no surprise that Exxon would seek advice from its attorney as to how to respond."  Id. at *3.  In other words, Exxon "approach[ed] its in-house counsel for just the sort of lawyerly thing one would expect of an in-house lawyer:  advice on transactional matters."    Id. (emphasis added).  Therefore, "[e]specially when viewed in context, the Stein Memo cannot be mistaken for anything other than legal advice" and so was protected by the attorney-client privilege.  Id. 

Critically, in finding the Stein Memo privileged, the Fifth Circuit validated the role of in-house counsel in providing advice on corporate transactions.  However, another lesson should be drawn from this case.  As described in these decisions, both courts needed to look beyond the face of the document to determine whether or not it was in fact privileged.  As the proponent of the privilege, Exxon bore the burden of clearly showing that it was created for the primary purpose of providing legal advice.  Fortunately, even though the Stein Memo was drafted more than twenty five years ago, Exxon was able to locate the key witnesses and produce their affidavits in order to meet its burden.  It also was before a sympathetic appellate court that clearly understood the role of in-house counsel in the negotiation of corporate transactions.  Under different circumstances, and before a different court with a differing point of view (like the district court here), Exxon may not have achieved such a beneficial result.  This all serves to underscore the need to clearly establish all the elements of the attorney-client privilege on the face of a communication – including, critically, that its primary purpose is for the provision of legal advice – in order to provide the document with the best chance of the privilege being upheld under even the harshest scrutiny.  In-house counsel should take care to reference these important facts, where possible, in the document containing the advice.  ("I have considered your request for legal advice concerning....").

The fact that the Stein Memo is still easily found online as of the writing of this article emphasizes this need even further, as once a privileged genie is out of the bottle, it can be very difficult to put him back in.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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James Beck
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