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Attorney-Client Privilege and The Functional-Equivalent Doctrine

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  • Posted on: Jan 22 2020

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy, 51 N.Y.2d 62, 67-68 (1980).

Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “[o]bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac, 27 N.Y.3d at 624 (citing Spectrum, 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac, 27 N.Y.3d at 624 (quoting Matter of Jacqueline F., 47 N.Y.2d 215, 219 (1979)); Spectrum, 78 N.Y.2d at 377. For this reason, “[t]he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac, 27 N.Y.3d at 624. (quoting Rossi v Blue Cross & Blue Shield of Greater N.Y., 73 N.Y.2d 588, 593-594 (1989)).

Where the communications are made in the presence of third parties, whose presence is known to the client, the communications are not privileged from disclosure because they are no longer deemed to be confidential. Ambac, 27 N.Y.3d at 624 (citations omitted). Similarly, communications lose their protection where a communication is made in confidence but subsequently revealed to a third party. Id. As the Court of Appeals has held: “A lack of confidentiality and subsequent disclosure also destroy the privilege as a matter of fairness: ‘when [the privilege holder’s] conduct touches a certain point of disclosure, fairness requires that the privilege shall cease whether he intended that result or not.’” Id.

Attorney-Client Privilege and Corporations

“Corporations, as other clients, may avail themselves of the attorney-client privilege for confidential communications with attorneys relating to their legal matters,” whether that attorney is in-house or outside counsel. Rossi, 73 N.Y.2d at 592. The privilege thus applies to communications “between a corporation’s employees and the corporation’s in-house” or outside counsel “for the purpose of providing legal advice to the corporation.” Stock v. Schnader Harrison Segal & Lewis LLP, 142 A.D.3d 210, 216 (1st Dept. 2016).

In Frank v. Morgans Hotel Grp. Mgt. LLC, 2020 NY Slip Op 20010 (Sup. Ct., N.Y. County Jan. 13, 2020) (here), Justice Gerald Lebovits addressed the question whether the privilege applies to communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis. As discussed below, Justice Lebovits held that it does.

The Functional-Equivalent Doctrine

Under the functional-equivalent doctrine, the attorney-client privilege will shield otherwise-qualifying communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis, where the individual is acting as a corporate employee rather than a fully independent contractor. See Pecile v. Titan Capital Grp., 119 A.D.3d 446, 447 (1st Dept. 2014), citing Matter of Copper Mkt. Antitrust Litig., 200 F.R.D 213, 219-219 (S.D.N.Y. 2001). Since the functional-equivalent doctrine expands the scope of the privilege, courts narrowly apply it.

In applying the doctrine, the courts consider whether a consultant or other contractor has in practice “assum[ed] the functions and duties of [a] full-time employee” and has been “so thoroughly integrated” into the corporation’s structure that he or she “is a de facto employee of the company.” Export-Import Bank of the U.S. v. Asia Pulp & Paper Co., 232 F.R.D. 103, 113 (S.D.N.Y. 2005); Matter of Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 219 (S.D.N.Y. 2001) (holding that a contractor should be treated as the functional equivalent of a division of the client corporation because the contractor “was, essentially, incorporated into [the corporation’s staff] to perform a corporate function that was necessary in the context” of the corporation’s affairs at the relevant time).

In determining whether to apply the doctrine, courts look at “whether the consultant had primary responsibility for a key corporate job” and could make decisions on the corporation’s behalf, whether the consultant enjoyed “a continuous and close working relationship” with “the company’s principals on matters critical to the company’s position in litigation,” and whether “the consultant is likely to possess information possessed by no one else at the company.” Asia Pulp & Paper, 232 F.R.D. at 113.

Frank v. Morgans Hotel Group Management LLC

Background

Frank concerned a discovery dispute in a personal injury action in which the plaintiff, Ilana Frank (“Frank”), alleged that while a patron of the bar at a hotel owned and operated by the defendants (collectively, “Morgans”), she fell and seriously injured her foot due to unsafe conditions on the premises.

In discovery, Morgans produced non-party Steven Benjamin (“Benjamin”) for deposition as a person with knowledge of the circumstances of the accident. At the time of Frank’s fall in 2015, Morgans employed Benjamin as its director of risk management. Benjamin left Morgans and thereafter functioned as Morgans’ director of risk management on a contract basis. During Benjamin’s deposition, Frank’s counsel sought to question him about, among other things, (i) communications between Benjamin and Morgans’ outside counsel, and (ii) a conversation that Benjamin had with another Morgans employee, Schantel Mansfield (“Mansfield”), in a three-way conference call among Benjamin, Mansfield, and outside counsel. In each instance, counsel for Morgans objected and directed Benjamin not to answer the questions, asserting that Benjamin was shielded by the attorney-client privilege as the functional equivalent of a Morgans employee.

Frank requested a judicial determination as to the validity of Morgans’ assertion of the attorney-client privilege over the disputed conversations involving Benjamin. Morgans did not object to Frank’s request for a privilege determination; it merely argued that its counsel’s assertions of privilege were proper.

The Court’s Decision

Justice Lebovits concluded that Benjamin qualified as the functional equivalent of a Morgans employee. Slip Op. at *2. The Court noted that the overlap between Benjamin’s duties and responsibilities as an employee and as a consultant of Morgans were material and supportive of its conclusion.

Benjamin was previously employed by Morgans as its director of risk management from 2007 to 2018; after his position with the corporation was eliminated, he was immediately retained as a consultant to perform many of the same duties, retaining the title of director of risk management. Benjamin has a Morgans email address, a Morgans phone number, and access to a Morgans file server.

In his current capacity as a consultant serving as director of risk management for Morgans, Benjamin retains responsibility for performing significant corporate functions: among other things, managing Morgans’ insurance programs nationwide (including negotiating the terms and conditions of Morgans’ various insurance policies), and working with Morgans’ financial staff regarding insurance-related budget and loss-forecasting issues. Benjamin is the only individual performing the duties and functions of the director of risk management role for Morgans, and is the only individual at Morgans with the requisite knowledge and experience of its insurance programs and the overall landscape of claims and litigation brought against it.

Benjamin also continues to have decision-making authority on corporate matters: With respect to suits brought against Morgans, Benjamin is responsible for assigning defense counsel to represent Morgans, and has authority to make settlement offers within certain insurance policy limits. Benjamin reports directly to a corporate principal, namely Morgans’ general counsel; and he has a direct line of communication with Morgans’ chief operating officer.

Id. (footnotes and citations to the record omitted).

Against these facts, the Court found that, even though Benjamin was formally “serving as a corporate consultant rather than an employee, in practice he [was] performing ‘the functions and duties of [a] full-time employee’ while being ‘thoroughly integrated’ into the corporation’s structure and staff.” Id., citing Asia Pulp & Paper, 232 F.R.D. at 113. Consequently, “to treat Benjamin as equivalent to an independent third party for privilege purposes, rather than as the functional equivalent of a corporate employee, would exalt form over substance,” said the Court. Id. The Court therefore held that the conversations between Benjamin and counsel for Morgans were “shielded by Morgans’ attorney-client privilege.” Id.

The Court rejected Frank’s argument that Benjamin was not the functional equivalent of an employee because, as a consultant, he was likely to possess information that no one else at the company would be privy to. Id. Justice Lebovits noted that under those circumstances, the consultant would be “more likely to be integrated within the corporation’s structure and acting on behalf of the corporation rather than as an ‘outsider.’” Id. (citation omitted).

Notwithstanding, the Court noted that in the case before it, there were other individuals besides Benjamin who would be likely to have knowledge of the details of an accident irrespective of whether Benjamin was acting as an independent third party or as a de facto Morgans employee. Id.  “That fact, without more,” said the Court, “says little about whether Benjamin is sufficiently integrated into Morgans’ corporate structure to be the functional equivalent of a Morgans employee.” Id.

The Court also addressed whether Benjamin’s assertion of privilege over the details of what he discussed with Mansfield during their conference call with Morgans’ counsel was privileged. After noting the difference between asking for facts and asking about discussions with counsel, the Court found that “counsel for Morgans expressly represented at the deposition that the call ‘was a legal conversation regarding the preparation for this case wherein we discussed legal theory, strategy, et cetera, of the sort that is protected by attorney-client privilege.’” Id. at *3. The Court further noted that “Frank provide[d] no basis … to reject that characterization, or to believe that Benjamin and Mansfield merely engaged in a conversation about the factual background of the case with counsel for Morgans silently on the line.” Id. (citations omitted). Therefore, held the Court, “[t]he call among Benjamin, Mansfield, and their counsel is … shielded by the attorney-client privilege, and counsel for Morgans properly directed Benjamin not to answer questions about what he had discussed with Mansfield during that call.” Id.

Finally, the Court considered whether the attorney-client privilege shielded Benjamin’s conversation with his counsel during Benjamin’s deposition. The discussion occurred in connection with a photograph that Frank’s counsel produced during Benjamin’s deposition. Frank’s counsel asked Benjamin several questions about the substance of what Benjamin and his attorney had discussed during the deposition break—including whether the attorney had coached Benjamin about how to answer those very questions. Id. In response to the questions, Benjamin testified that his attorney had not asked him any questions about the photograph or coached him; but instead that he did not “know what this [was] a picture of for sure,” and that he “[could] not comment on anything” relating to the photograph. Id. Morgans’ counsel also represented on the record that “the majority” of the break was spent by Benjamin conducting a private call unrelated to the action rather than “conferencing . . . regarding the photograph you produced.” Id. The Court held that “Frank provide[d] no basis … to reject either Benjamin’s testimony about the deposition break or counsel for Morgans’ representations.” Id. Thus, the Court concluded “that Frank ha[d] not established a basis to question Benjamin further on this topic.” Id.

Takeaway

The functional equivalent doctrine – an exception to the attorney-client privilege – originated in In re Bieter Co., 16 F.3d 929, 933-34, 939-40 (8th Cir. 1994), where the Eighth Circuit held that an individual who aided a two-person company’s development of a parcel of land was functionally equivalent to a company employee where he assisted with the project from its inception and for several years thereafter; worked out of the company’s office; was the company’s sole representative at meetings with potential tenants and local officials; appeared at public hearings on the company’s behalf; and often spoke with the company’s counsel alone. See also United States v. Graf, 610 F.3d 1148, 1158-59 (9th Cir. 2010).

Although several district courts within the Second Circuit have recognized the functional-equivalent doctrine as an exception to the protection of the attorney-client privilege, not all courts within the Circuit have embraced its application. Some district courts in the Circuit have questioned whether the Court of Appeals would adopt the doctrine given that it “has recognized very limited exceptions to privilege waiver.” Church & Dwight Co. v. SPD Swiss Precision Diagnostics, GmbH, 2014 WL 7238354, at *2 (S.D.N.Y. Dec. 19, 2014); In Re Restasis Antitrust Litig., 352 F. Supp. 3d 207, 213 (E.D.N.Y. Jan. 17, 2019); Homeward Residential, Inc. v. Sand Canyon Corp., 2017 WL 4676806, at *14 n.21 (S.D.N.Y. Oct. 17, 2017).

In contrast, courts outside of the Second Circuit have embraced the doctrine, stating that the approach by the courts in the Second Circuit was too restrictive. E.g., In re Flonase Antitrust Litig., 879 F. Supp. 2d 454, 459-60 (E.D. Pa. 2012); Fed. Trade Comm’n v. GlaxoSmithKline, 294 F.3d 141, 148 (D.C. Cir. 2002). As a result, these courts have endorsed “a broad practical approach” to account for the realities of “‘today’s marketplace, where businesses frequently hire contractors and still expect to be able to seek legal advice.’” Flonase, 879 F. Supp. 2d at 459-60 (quoting US. ex rel. Fry v. Health All. of Greater Cincinnati, 2009 WL 5033940, at *4 n.1 (S.D. Ohio Dec. 11, 2009)).

Regardless of the foregoing debate, as Frank shows, in New York State courts, the doctrine remains a viable exception to the waiver rules relating to the attorney-client privilege.

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