Working with vendors is commonplace in practically every industry and corporation, including advertising agencies, law firms, financial advisors, and so on. Utilizing the expertise of an outside vendor frees up resources within the company so employees can focus on other projects or allows a company to access the expertise of others without bearing the overhead costs associated with employing such individuals. While working with vendors has obvious advantages, the vendor relationship can pose certain legal risks if the proper precautions are not taken. Specifically, certain types of communications with vendors could potentially involve privileged communications and documents, thereby raising the risk of inadvertent waiver of the attorney-client privilege.
As an exemplary hypothetical, assume that a company’s marketing department engages a vendor to help it develop a new advertising campaign. As part of the campaign, the vendor proposes new trademarks and slogans to be used in connection with the campaign. Although the vendor is providing recommendations on proposed trademarks and slogans, in-house counsel is charged with undertaking the due diligence to ensure the proposed marks and slogans are available for use. Let’s further assume that, while performing the due diligence, in-house counsel discovers a significant risk. This discovery can lead to multiple conversations with both the company’s own employees, as well as the vendor. Even more problematic, employees may forward any legal advice received from their own counsel to the vendor without understanding the potential repercussions. It is impractical to instruct the company to avoid working with vendors, but allowing unfettered communication such as described in this hypothetical could pose significant problems in later litigation. This article is intended to provide practical suggestions on how best to mitigate the risk of privilege loss, without unduly interfering with the business operation.
The Scope of Privilege: Attorney-Client Communications and Attorney Work Product
As a first step, it is important for the business client to understand what constitutes privileged information. Documents, communications, or information is privileged if it falls within either the work-product doctrine or the attorney-communication privilege. The attorney work-product doctrine protects “documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).” Fed. R. Civ. P. 26(b)(3)(A). Some examples of these types of documents that could inadvertently be shared with vendors include advice respecting the ways a word or phrase should not be used in advertising to avoid a particular party’s claim or advice respecting terms to include in various licensing structures to avoid tax liability.
The attorney-client communication privilege, on the other hand, protects communications made for the purpose of either obtaining or rendering legal advice. Upjohn Co. v. U.S., 449 U.S. 383, 395-96 (1981). In addition to the foregoing, some examples of these types of documents that could inadvertently be shared with vendors include PowerPoints that incorporate the advice of counsel or advice from an attorney regarding tax structure or strategy.
Both types of privilege can be waived. Work-product privilege is waived if a person discloses “the underlying material under circumstances substantially increasing the possibility that an opposing party will obtain the information.” 2 Christopher B. Mueller & Laird C. Kirkpatrick, Federal Evidence §5:38 (4th ed. 2016). The attorney-client privilege is waived if the client or lawyer reveals the substance of what one told the other. Id. at §5:33.
Once the business client has an understanding of what could be considered privileged communications, the next step is to implement safeguards to prevent and/or mitigate the risk associated with an inadvertent waiver of privilege.
How to Avoid Waiving the Privilege When Communicating with Vendors
Legal training for your business clients is the first line of defense. Most business people do not know what a privilege claim is and how important maintaining privilege can be for the continued success of the business. As a result, the company’s employees do not understand the consequences of their actions when they inadvertently waive the privilege by disclosing legal advice to a vendor. Annual or periodic training of employees will educate new employees about this issue, as well as provide a reminder for the company’s seasoned veterans.
The training should not only educate your business team, but also should offer practical tips of how to avoid an issue. Some training has suggested the extremes, warning business clients to avoid emailing a vendor or putting anything in writing. That advice, however, does not provide a sustainable solution. Business is done through email, PowerPoints, instant messaging, and varied other forms of written communications. Moreover, merely communicating information verbally rather than in writing does not avoid a waiver of the privilege.
Instead, arm your business with the tools it needs. Explain that the ultimate answer can be communicated to the agency, but the “why” cannot. Using the example above, if the business decided that a trademark that its agency proposed too high a risk as a brand, but could be used in a descriptive manner, the business client can tell the agency it has decided to use the term only in certain ways and should not describe the risks to the agency nor why the business has made this decision. While this may not appease the agency, it is the safest course of action.
If your business pushes back, carefully consider what can be sent to a vendor that may assist the business client without waiving the privilege. Going back to the above example, your business client could provide a list of examples of how to use the terms and how not to use them. In some limited circumstances, if it is prepared to explain in litigation why it did so, it could forward the raw results of an availability search, which are not covered by any privilege. See J.T. Colby & Company, Inc. d/b/a Brick Tower Press v. Apple Inc., No. 11 Civ. 4060(DLC), 2013 WL 1903883, at *34 (SDNY May 8, 2013). In no circumstances, however, should counsel’s written opinion ever be forwarded.
Given the demands on in-house counsel, training is often an ambitious goal that is pushed to a back burner in order to meet demands imperative to a business plan. Therefore, when practical, utilize outside counsel for training sessions. While providing your business clients the necessary training, outside counsel will also gain an understanding of the demands on your business clients.
Reminder to your Business Clients
It is generally a good practice to display a statement at the top of your emails and other documents sent to business clients that the communication is covered by the attorney client privilege and/or contains attorney work product and that the communication should not be forwarded. This labelling itself will not protect the communication if it does not otherwise qualify for protection or if the privilege is subsequently waived by a disclosure to a third party. But if your business client has received training, this statement will help remind him or her of the caution heeded when relaying the information to others, particularly to anyone outside the organization. If the recipient has not received training, it may at least prompt the employee to call and ask for advice.
If you know your advice will be forwarded, or reinterpreted by a business client and then sent on to a vendor, ask that your business client copy you on any such communication. If there is a dispute later, this practice will at least flag for those reviewing the communication that it may contain privileged information. As with the disclaimer, copying a lawyer does not necessarily shield the communication. However, at least you are aware of what is being said, and can request a recall of the communication or take steps that may cause the communication to fit within an exception to waiver.
Understand your Audience
When advising your client about an issue, make sure you know whether a vendor is assisting with the project at issue. If so, and if the vendor will remain engaged as the team works through legal issues, remind your business client about the attorney-client privilege and the implications it carries when those communications are forwarded outside the organization.
On occasion a business client may ask that in-house counsel speak directly to the vendor to avoid any possible miscommunications. In addition, it is not uncommon for employees from an agency to attend meetings that you attend with your business clients. Agencies want to be seamless and look and feel like one of the team members. When you join a meeting or conference call, make sure you know who is participating and what their affiliation is to the company. If a vendor is participating, speak with your business client separately and discuss the risks. If you are not confident that an exception to wavier would apply, it would be better to have the vendor step out or leave the call before addressing certain issues than to waive the privilege.
Exceptions to Waiver
Despite your best efforts, a business client may insist that the “why” for your advice be communicated to a vendor or accidentally communicate the legal reason behind a decision. In these situations, there are three exceptions that may be employed to protect a communication from waiver: (1) the work product doctrine, (2) the functional equivalents doctrine; and (3) the common interest doctrine. While these can be useful tools to have in your arsenal, they should be wielded with care.
The most helpful exception in the case of a vendor is the doctrine of functional equivalents. Under the doctrine of functional equivalents, the attorney-client privilege is extended to independent contractors or vendors when the person is the functional equivalent of the company’s employees. In re Bieter Co., 16 F.3d 929, 938-39 (8th Cir. 1994). The application of this doctrine has varied across the Circuits. While the Second Circuit has taken a narrow approach, courts elsewhere have started to recognize that companies no longer operate solely through employees, and thus, have adopted a much broader interpretation of the functional equivalents doctrine. See Fosbre v. Las Vegas Sands Corp., No. 2:10-cv-00765-APG-GWF, 2016 WL 183476 (D. Nev. Jan. 14, 2016) (collecting cases).
For example, in Fosbre, the District Court for the District of Nevada held that where an independent contractor had a role similar to that of an employee and the attorney-client privileged would otherwise apply, the doctrine of functional equivalents would protect communications between an attorney and the third-party. Id.
If a disclosure has occurred, the privilege may potentially be saved if the document that was disclosed falls within the definition of attorney work-product. As discussed, above, the waiver principles for work product differ from attorney-client communications. See Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A., 160 F.R.D. 437, 448-49 (S.D.N.Y. 1995). If a document falls into the classification of work product, disclosure of the document does not function as a waiver of the privilege unless the “disclosure to a third party substantially increases the likelihood that the work product will fall into the hands of the adversary.” Id.In the case of a vendor, it is unlikely the disclosure would substantially increase the risk that the document would fall into the hands of an adversary. This is particularly true if the vendor contract provides for maintenance of confidentiality of communications. Keep in mind, however, that a document is protected under the attorney-work product doctrine only if it is prepared in anticipation of litigation. See Cellco P'ship d/b/a Verizon Wireless v. Nextel Commc'n, Inc., No. Civ.A. 03–725–KAJ, 2004 WL 1542259, at *1 (S.D.N.Y. July 9, 2004) (protecting a communication from in-house counsel to an advertising agency under the work-product doctrine). Accordingly, it will not save a communication that was provided outside the potential claim or litigation context.
The common interest doctrine may also protect a communication sent to a vendor, but like the work-product exception, its applicability is more limited. The common interest doctrine is an extension of the attorney-client privilege that provides a limited extension to waiver when an attorney-client communication is disclosed to a third party. To qualify for protection, “(1) the party who asserts the rule must share a common legal interest with the party with whom the information was shared and (2) the statements for which protection is sought were designed to further that interest.” See Gulf Island Leasing, Inc. v. Bombardier Capital, Inc., 215 F.R.D. 466, 471 (S.D.N.Y. 2003). The biggest hurdle to extending the attorney-client privilege to a communication from a company’s attorney to a vendor is the requirement that the parties share a common legal interest, not just a common business interest. See In re FTC, No. M18–304 (RJW), 2001 WL 396522 at *2 (S.D.N.Y. April 19, 2001). Thus, while the common interest doctrine commonly is found to apply in a joint defense scenario, it is not as solid a shield in day-to-day communications with a vendor because the shared interest in that context is business, not legal. For example, two courts in the Southern District of New York have found where in-house counsel provided advice to an advertising agency regarding a business strategy that “happen to include a concern about litigation[,]” the privilege was waived. Id., see also Cellco P’ship, 2004 WL 1542259, at *1.
The attorney-client privilege is sacrosanct. It gives attorneys the ability to have open and honest conversations with their clients, which is imperative in any industry. Help your business clients appreciate the value of the attorney-client privilege and preserve it, even when outside vendors are involved in a project.