United States: ESOS Regulations: Are You Ready To Report?

In our modern economy, businesses regularly use all manner of third-party consultants for many different reasons, including cost, efficiency, and expertise.  Less regularly, communications between businesses and consultants are the subject of discovery motion practice in litigation.  Two recent decisions out of the Southern District of New York demonstrate why businesses that use third-party consultants should proceed with caution to preserve claims of attorney-client privilege, and prevent the disclosure of what would otherwise be privileged communications.

In a normal business setting, the attorney-client privilege is not implicated when third-party consultants are involved in typical business functions, such as meetings, revising draft documents, and setting corporate policy.  However, the privilege can be, and often is, at issue when privileged communications are shared with these consultants.

The root of the problem lies with a basic tenet of the attorney-client privilege:  communications between attorney and client are confidential, but once that communication is shared with a third party, the privilege is waived.  In some cases, however, courts have found an exception to this normal waiver rule, depending upon the role of the third party and the nature of the communication.  See PR That's Protected, Corporate Counsel (Oct. 2014) (available here).

In both of the decisions examined below, the courts were focused on the critical question underlying this analysis: was the purpose of the third-party consultant's participation to improve the comprehension of the communications between attorney and client?  In both decisions, the answer was no—and because the third party was not essential to the facilitation of legal services, the privilege was held to be waived.

HR Consultant's Report Not Privileged Because It Was Not Used to Provide Legal Advice

At issue in the first decision, Scott v. Chipotle Mexican Grill, Inc., was a report prepared by the defendant company's third-party human resources consultant and addressed to the company's outside counsel.  The report was based on employee interviews and described certain activities of employees who fell into an "Apprentice" job category.  —F.Supp.3d —, 2015WL1424009, *5‑*7 (S.D.N.Y. Mar. 27, 2015).  According to the decision, the report, termed a "job function analysis," was created prior to the underlying litigation, and its purpose was "to get a really good understanding of what [Apprentices] do...in their day-to-day jobs...."  Id. at *5.

In a wage-and-hour Fair Labor Standards Act case, plaintiffs demanded production of the report.  Defendant resisted production and argued that the report was privileged, because the third-party consultant prepared the report in order to help outside counsel assess a legal issue central to the litigation: whether employees in the "Apprentice " category were properly classified.  Even though the report was addressed to outside counsel, however, this was not enough to prevent disclosure.  In the court's view, there was no other evidence that the report was prepared to actually assist outside counsel in providing legal advice.  Instead, the court concluded that the consultant had been hired merely to provide "factual research and to assist [defendant] in making a business decision."  Id. at *5.

In reaching this decision, the court in Scott relied on a key Second Circuit decision about the attorney-client privilege in the context of communications with third parties,  United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).  In Kovel, an accountant employed by a law firm assisted counsel in interpreting and understanding a client's financial data.  The Second Circuit held that the accountant could refuse to testify to a grand jury on privilege grounds because his services were "necessary, or at least highly useful for the effective consultation between the client and the lawyer."  Id. at 922.  Notably, however, the scope of the privilege was limited:

What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.  If what is sought is not legal advice but only accounting service...or the advice sought is the accountant's rather than the lawyer's, no privilege exists.

Id.  In other words, under Kovel, the privilege can be maintained to the extent that the communications with the consultant "is imparted in connection with the legal representation."  United States v. Schimmer, 892 F.2d 237, 243 (2d Cir. 1989) (emphasis added).

In applying the Kovel principles, the Scott court performed a detailed analysis of the record, and found that the third-party consultant's report "came after [defendant] received legal advice from two firms, and no subsequent contemporaneous documents show that it was used beyond assisting [defendant] in making a business decision."  2015WL1424009 at *5.  The timing issue was critical to the court, as there was no contemporaneous evidence that indicated that the client actually received any legal advice from outside counsel after the report was prepared.  Furthermore, the court found persuasive the fact that there was no mention in the record that the interviews conducted by the consultant were "privileged, confidential or to assist [the client] in obtaining legal advice."  Id. at *5.  In addition, the court noted that the assignment conducted by the consultant – a job function analysis – "refers to a non-privileged, factual investigation pertaining to the responsibilities of an employee or position."  Id. at *6.  Therefore, since no legal advice was given to the client by the attorney after the report was received, the privilege did not apply because the report was not prepared for the purpose of "obtaining legal advice from the lawyer." Id.

In reaching this decision, the court explained that the defendant could have protected the privilege better if it had been able to show that outside counsel "engaged [the consultant] as its agent for a specific type of information it could not otherwise obtain."  Id. at *6.  However, there was "virtually no contemporaneous documentation supporting the view that" the consultant was hired by outside counsel to assist it in providing legal advice. Id.

Furthermore, the court quickly discarded defendant's claim that the consultant was hired to provide outside counsel with specialized knowledge by noting that "it strains credulity to imagine that an attorney evaluating wage and hours laws would not be able to speak with employees or interpret those laws on his own."  Id. at *7.

When this was combined with the fact that no legal advice was actually given after receipt of the report, the court concluded that "application of the privilege was not necessary for [outside counsel] to perform some of their most fundamental client functions."  Id. at *7 (quotations and citations omitted).  Therefore, the consultant's report was not privileged and had to be produced.

Communications with Marketing Consultant Not Privileged Because Consultant Did Not Assist in Rendering Legal Advice

In the second decision from the Southern District of New York, the court confronted the question of whether communications between in-house counsel and a third-party marketing consultant related to the launch of an FDA-regulated product were privileged.  Church & Dwight Co., Incv. SPD Swiss Precision Diag., 2014WL7238354, No.: 14-cv-585 (S.D.N.Y. Dec. 19, 2014).  In any case, in Church & Dwight, defendant argued that these communications were privileged because "in light of the complex regulatory scheme to which the [product] was subject, it was essential for privileged legal advice and other communications to be shared between its outside marketing firm and [defendant's] in-house counsel."  Id. at *1.  This court also applied the Kovel analysis described above, and held that the communications were not privileged after concluding that the defendant did not sufficiently demonstrate "how the outside marketing firm improved counsel's comprehension of [defendant's] communications to counsel, or vice versa."  Id. at *2.

In its analysis, the court acknowledged that the release of an FDA-regulated product "requires the manufacturer to convey to its outside marketing firm certain messages or claims about the product that have been approved by the manufacturer's counsel."  Id.   However, the defendant failed to show that these communications—between the in-house lawyer and the marketing consultant for use in acknowledging that the FDA has authorized the sale of a product—were communications that assisted the lawyer in rendering legal advice, versus communications that assisted the marketing firm in publicizing FDA authorization.

In addition, and perhaps more importantly, the court concluded that the defendant could have—and in retrospect should have—conveyed these approved marketing messages without divulging ancillary privileged information to the consultant.  As a result, like in Scott, the privileged information was held to have been waived, and the communications were ordered to be produced. Because there was an easy and practical work-around that would have allowed the defendant to protect privileged information, the court felt there was no danger "that failing to recognize the attorney-client privilege here would have any damaging consequences."  Id. at 4.

Finally, the Church & Dwight opinion noted that both parties had assumed that a different framework—the  "functional equivalent" exception to privilege waiver—applied, instead of the Kovel framework for third parties necessary to the provision of legal services.  Under the functional equivalent analysis, communications with an outside consultant can retain their privilege if an outside consultant "is a de facto employee of the company," such that the consultant is deemed to be an extension of the client and not a third party at all.  See id. at *1 (citations and quotations omitted); see also In re Copper Market Antitrust Litig., 200 F.R.D. 213 218-219 (S.D.N.Y. 2001) (third-party public relations consultant was the functional equivalent of an employee where it was hired as part of a litigation strategy to assist a foreign company completely unfamiliar with how to handle local media).

The Second Circuit has never expressly recognized this exception, but the Church & Dwight court held that even if it did apply, the record demonstrated that the marketing consultant acted not as a de facto employee, but rather as a traditional outside consultant "operating at the direction of [defendant's] in-house staff."  Church & Dwight, 2014WL7238354 at *3 (citations and quotations omitted).

The Takeaway: Communications with Consultants Must Be Tied to Actual Legal Advice

These opinions provide important reminders about two key messages from such attorney-client privilege decisions.  The first is that courts continue to narrowly apply the attorney-client privilege only to what is necessary to preserve its underlying purposes: the free flow of information between attorney and client, and the provision of the best legal advice possible.  And the second follows from the first:  Where a claim of privilege is made with regard to communications with third-party consultants, courts will take a hard look at the context within which the communications were made to determine if the communications were actually related to the provision of legal advice.

For example, in the Scott decision, the court did not accept at face value the argument that the report was privileged because it was addressed to an attorney and related to some form of legal advice.  Instead, the court undertook a detailed examination of the timeline of when advice was given to the client, and when the report was commissioned and completed.  Similarly, in the Church & Dwight decision, the court, while accepting the argument that a company must meet certain requirements when launching an FDA-regulated product, found no evidence that the communications with the marketing consultant improved the attorney's comprehension of communications withthe client. Instead, the court found that the marketing consultant acted as a traditional consultant, and the approved messages could have been provided to it using non-privileged means.

Therefore, both outside and in-house counsel should keep in mind a few recommendations when and if it becomes necessary to disclose otherwise privileged communications to third-party consultants:

  • First, establish the actual legal need that the communications will fulfill, like putting a client's financial or technical information in a form that an attorney can understand
  •  Second, silence is not golden; make sure that legal advice that makes use of the outside consultant's work is actually imparted to the client
  • Third, and perhaps most important, create contemporaneous documentation of both the legal need for the consultant and the advice provided

As demonstrated in these two decisions, courts not only expect to see evidence of this in the record in support of claims of privilege, but they also will deny claims of privilege without it.

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

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions