Litigation: Preserving privilege over information shared in business negotiations

Courts have developed a doctrine to share privileged communications when third parties share a “common legal interest”

The purpose of the attorney-client privilege is to facilitate open communication between the client and its counsel. It allows for the client to disclose highly confidential facts to counsel and for counsel to provide frank legal advice in confidence. In the corporate context, the “subject matter” test typically renders privileged any communication between an employee acting within the scope of employment and corporate counsel. The alternative “control group” test protects only communications with employees who are in a position to take a substantial part in the client’s decision for which the corporation seeks advice.

At one time, the “control group” test had widespread support but was rejected by the U.S. Supreme Court as too narrow. Where the “subject matter” test applies, privileged communications may be shared confidentially without waiver between and among all employees of the corporation acting in the scope of their employment.

Generally, the disclosure of privileged communications to third parties may result in waiver. Under most circumstances, a confidentiality agreement alone is insufficient to prevent a waiver of the attorney-client privilege. This is contrasted with attorney work product which generally can be protected by a confidentiality agreement. The precise scope of waiver is difficult to determine in advance of litigation, but generally it will apply to all communications concerning the same subject matter.

Waiver may result in catastrophic consequences for the client. This is especially vexing as in many circumstances, such as where the parties share a common legal interest, it is entirely understandable why the client needs to share privileged communications with a third party. As a result, the courts have developed a doctrine that allows clients to share privileged communications with third parties when they share a “common legal interest.”

A frequent paradigm involving the “common interest” doctrine involves a corporate client sharing privileged information with a counterparty in the negotiation of a proposed business transaction. A line of cases (Hewlett-Packard Co. v. Bausch & Lomb) hold that there is no waiver when a seller shares privileged information with a buyer concerning potential legal claims relating to the business. The Hewlett-Packard doctrine is based upon policy considerations that the law of attorney-client privilege should not restrict communications between buyers and sellers, create barriers to commerce, or increase the risk that buyers are unable to obtain important information concerning the value of businesses or products that they are buying. The various fact patterns where the common interest doctrine has been found to preserve the privilege notwithstanding the exchange of privileged information between buyer and seller include potential patent enforceability or exposure, product liability claims and other litigation that the buyer might have to prosecute or defend after the acquisition is consummated. The anticipation of potential joint litigation exposure creates a common legal interest that allows the parties to maintain privileges.

There are two lines of cases finding waiver under this general fact pattern. A few courts have simply rejected Hewlett-Packard as too broad. These courts decline to expand the privilege to include any person with whom the client may want to enter into a business transaction. The rationale of these courts is that such an expansion allows the cloak of privilege to sweep too broadly and swallow up the general rule that the disclosure of privileged information to a third party waives privilege.

Other courts simply apply the Hewlett-Packard standard but find waiver when the parties’ common legal interest is too remote or commercial considerations are paramount. Where potential legal ramifications are ancillary to the primary goal of negotiating and closing a commercial transaction, the common interest doctrine is held not to apply. Likewise, when privileged information about pending litigation is shared during due diligence primarily to encourage the buyer to engage in the transaction and there is little potential for joint litigation, the common interest doctrine does not apply and privilege is waived.

Many times, as a practical matter, the seller must share privileged information with a buyer because, absent the disclosure, a valuable transaction opportunity would be lost. The buyer naturally wants access to the information to evaluate the legal risks relating to the business or assets being sold. To maximize the likelihood of preserving the privilege in later litigation, parties who decide to share privileged information in negotiating a business transaction should carefully document any risk of joint litigation or common legal interest in a disclosure agreement. The parties should also provide specific procedures and strictly limit access to any privileged information in a disclosure protocol to specified persons in order to evidence the parties’ intention to maintain the confidentiality of the privileged information being shared. The parties should also consider in any final agreement provisions concerning indemnification and how to manage the joint litigation risk.

Contributing Author

author image

Richard B. Kapnick

Richard (“Brad”) B. Kapnick is a partner at Sidley Austin LLP. He is an experienced attorney serving as lead counsel in complex litigation matters including...

Additional Contributors: Courtney A. Rosen

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.