Company's Confidential Disclosure of Protected Information to Informal Advisory Board Is Found to Waive Attorney-Client Privilege

Authored by D. Brian Kacedon, Sydney Kestle, Douglas W. Meier, and John C. Paul

The attorney-client privilege permits a party in a litigation to withhold and protect communications with its attorneys that would otherwise need to be produced to the party's adversary in litigation. The privilege is subject to a number of requirements and a recent case illustrates how easy it is to inadvertently waive the privilege by disclosing the privileged communications even if the disclosures are made in confidence to people who are advising the party. The case highlights the importance of having formal relationships with such advisors, for example, by having such advisors serve either as a  formal board of directors or an advisory board with specifically delineated authority established through employment contracts or written agreements or both.

In BSP Software, LLC v. Motio Inc.,¹the court addressed BSP's request for a ruling that it had not waived the attorney-client privilege applicable to certain email chains. The court had earlier held that the attorney-client privilege protected the four emails in question when they were created. BSP then shared the emails with an advisory board it had assembled. The opposing party, Motio, argued that BSP waived privilege by disclosing those email chains to its advisory board. The advisory board was made up of people selected in large part because of their "long-standing relationships and years of familiarity" with BSP, to provide business and financial advice. Importantly, BSP did not have a written agreement detailing advisory-board functions. Nor did it officially employ or pay the board for services rendered.

Decision

The district court relied on Seventh Circuit attorney-client privilege law to reach its decision. The Seventh Circuit has repeatedly underscored the limitations placed on attorney-client privilege, stating "because the privilege is in derogation of the search for the truth . . . , [it] must be strictly confined." Waiver of the privilege is one such limitation and may arise from disclosures to third parties outside the scope of the privilege, whether inadvertent or otherwise. Thus, this case turned on whether the informal advisory board—neither employed nor paid by BSP—fell outside the scope of the privilege.

BSP argued that its advisory board should be treated as the functional equivalent of a duly constituted board of directors. Because disclosing privileged information to a formal board of directors does not waive the privilege, disclosing it to an advisory board likewise should not constitute a waiver, according to BSP. The district court declined to adopt this analogy, noting not only its general skepticism on similar arguments, but also the Seventh Circuit's failure to explicitly adopt any such understanding. 

The district court highlighted two concerns to justify its decision. First, it did not want to exacerbate already-existing uncertainty about waiver. Some courts have accepted functional-equivalent arguments, using multifactor tests to assess the nature of the relationship between consultant and employee. The district court here, however, found these tests highly subjective and unpredictable. In its view, the tests do not simplify waiver determinations because they lack any meaningful bright-line rule. Rather, they "blur the line between privilege and waiver, complicating [a company's] decision about whether to disclose information to a third party."

The district court also feared expanding the scope of privilege through the repeated acceptance of functional-equivalent arguments. In the court's view, if courts recognize privilege in "every situation where a financial consultant worked exhaustively to guide a company through a restructuring deal, the exception would swallow the basic rule." Noting the Seventh Circuit's repeated disavowal of pervasive attorney-client privilege, the district court cautioned against the use of any test or analysis that adds entities to the necessarily narrow scope of privilege. Accordingly, the court found that BSP failed to protect the disclosures it made to its advisory board and therefore waived privilege.

The district court further noted that, even if it recognized functional-equivalent arguments and applied the multifactor tests, BSP would have failed on the merits. BSP failed to show that its relationship with the advisory board involved matters "critical to the company's position in litigation." It could establish only that it hired the advisory board for financial and business advice, not legal advice. Moreover, BSP could not show that the advisory board had any sort of decision-making authority, as a real board of directors would have had. BSP also failed to show that the advisory board possessed information unknown to anyone else at BSP. The district court stated that, ultimately, the advisory board was more "akin to a kitchen cabinet of trusted friends" and thus, should not fall within the scope of the privilege.

BSP also raised several alternative arguments, to no avail. It first suggested that communications to the advisory board remained privileged because the board shared responsibility for the subject matter underlying the consultation. The district court derided this suggestion, opining that the board's lack of binding authority precluded any finding of "shared responsibility." BSP next invoked the common-interest doctrine. The district court dismissed this invocation, however, commenting that a mere mutual understanding of purpose does not automatically protect disclosures. BSP needed to show that the advisory board was specifically recruited for common litigation interests, not just common business interests.

Finally, BSP argued that its relationship with the advisory board assumed a degree of confidence and that confidence should protect all disclosures. The district court found this inadequate, noting that confidentiality alone does not foreclose waiver. The more important consideration is the recipient of the disclosure and that person's relationship to the discloser—"[a] promise of confidentiality is not an elixir that cures the ill of waiver."

As a final note, the district court did recognize that BSP did not disclose with the intent to waive or with the intent to use that privileged information affirmatively against Motio. Thus, BSP's waiver extended only to the four privileged emails and not to the broader subject matter.

Strategy and Conclusion

This case represents an example²of the limits placed on attorney-client privilege. Before a company discloses attorney-client communications or other potentially privileged information to independent consultants or others who are not formally employed by the company, it should consider whether the relationship with the consultants is sufficiently formal under that applicable law to prevent the privilege from being waived. Simply maintaining the information in confidence with the consultant was insufficient to prevent privilege from being waved in this case.

Endnotes
¹The BSP Software, LLC v. Motio, Inc. opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/BSP_Software_v_Motio.pdf.

²See previous LES Insights article on attorney-client privilege at http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=54e5d5a3-7cac-44ae-9abc-c84917210270.

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