Third-party advisors regularly assist corporate executives and boards of directors in making business decisions. It is important for corporate clients and their counsel to understand whether their communications with these advisors concerning legal matters are protected by the attorney-client privilege. Courts have struggled over the years to develop an analytical framework that justifies allowing a corporation to share privileged communications with advisors without risking waiver of the attorney-client privilege. Careful attention must be paid to the applicable privilege rules, as courts have applied three very different standards to analyze when privileged material may be shared with business advisors without risking waiver.
The first standard is the “functional equivalent” standard. This standard arose as a natural extension of the Supreme Court’s decision in United States v. Upjohn, which rejected the “control group” test for evaluating when a corporation’s communications are privileged and held as privileged communications between a corporate attorney and an employee of the corporation acting within his scope of employment. Going a step further, some courts have held that communications between a corporate attorney and an outside advisor who is the “functional equivalent” of an employee are also privileged provided that the communications were made for the purpose of seeking or rendering legal advice.
The functional equivalent standard is useful for identifying a class of advisors who belong within the zone of privilege and whose participation in privileged communications would not be expected to result in waiver. In the case law, a wide variety of business advisors have been held to be the functional equivalent of employees, including financial advisors, public relations and real estate consultants, product designers and scientists. The functional equivalent test, however, may result in privilege waiver in cases where the advisor is not sufficiently like an employee (for example, where the advisor works also for other clients or has a home office in another city). This can result in unexpected waiver decisions that have nothing to do with the free flow of communication between the corporation and counsel that Upjohn emphasized is the core of the corporate attorney-client privilege.
The second standard that courts employ to determine whether a business advisor is within the zone of corporate privilege is the “facilitator” standard. This standard analogizes the business advisor to a foreign language interpreter who assists an attorney whose client speaks a foreign language. The presence of the interpreter does not waive the attorney-client privilege. In the same way, a financial or other business advisor may play an important role in facilitating the client and the client’s attorney to understand a complicated factual situation. As one court stated: “Accounting concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in some cases. Hence, the presence of an accountant . . . while the client is relating a complicated tax story to the lawyer ought not destroy the privilege.”
The facilitator standard, like the functional equivalent standard, is effective in identifying a class of business advisors that should not involve a waiver of privilege, but strictly applied this standard also results in unexpected waivers where the business advisor goes beyond the role of merely interpreting or facilitating and becomes more actively involved in business decision making. Moreover, some courts apply the facilitator standard strictly and may find waiver where the advisor is not “essential” to providing legal advice to the client. Other courts apply the facilitator standard more broadly focusing on whether the outside advisor was “useful” in providing legal advice to the client or whether the communications between corporate counsel and the business advisor were made in confidence for the purpose of rendering legal advice.
The third standard for determining whether a business advisor is within the zone of privilege is the “communications concerning legal matters” standard. Under this standard, the focus of analysis is placed not on the role of the business advisor or whether the advisor was essential or useful to the legal advice rendered, but on the nature of the communication. The sharing of an otherwise confidential communication concerning legal matters with an outside business advisor does not destroy the corporation’s attorney-client privilege. The attorney-client privilege extends to all communications concerning legal matters, especially those in which corporate attorneys participate.
This standard squarely bases the privilege determination upon the core principle identified in Upjohn of maximizing the free flow of information between and among the client, the business advisor and corporate counsel concerning the corporate client’s legal matters. It also reflects the expectations of all parties to these sensitive communications that they remain privileged and confidential. This standard also creates a relatively bright line test for evaluating privilege which results in a more predictable framework for evaluating whether privileged information can be safely shared with business advisors. When the applicable jurisdiction does not follow this third standard, corporate clients and their counsel must be more circumspect about sharing privileged information with corporate business advisors.
The views expressed in this article are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.