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., Inc. v. 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.