In particular, the Sandoz court held that, even wholly within a corporate client, nonlawyer personnel cannot disseminate corporate counsel’s legal advice without losing the privilege; and the court held that the common interest privilege attaches only to communications that include lawyers representing all of the clients participating in the common effort, and does not apply to communications between or among the clients themselves.
A recent federal district court decision highlights some meaningful limitations on the attorney-client privilege―limitations about which in-house and outside corporate counsel should be aware. See Sandoz v. Lannett, C.A. No. 20-3538, __ F. Supp. 3d __, (E.D. Pa. Nov. 4, 2021). In particular, the Sandoz court held that, even wholly within a corporate client, nonlawyer personnel cannot disseminate corporate counsel’s legal advice without losing the privilege; and the court held that the common interest privilege attaches only to communications that include lawyers representing all of the clients participating in the common effort, and does not apply to communications between or among the clients themselves.
Sandoz served as a distributor for Cediprof, a drug manufacturer. Cediprof terminated its contract with Sandoz, and Lannett succeeded Sandoz as Cediprof’s distributor. Sandoz brought a claim in arbitration against Cediprof, and filed a federal suit in the Eastern District of Pennsylvania against Lannett, claiming that Lannett had interfered wrongfully with the contract between Sandoz and Cediprof.
On Nov. 4, 2021, U.S. District Court Judge Gerald Austin McHugh of the Eastern District of Pennsylvania issued a detailed opinion, addressing multiple attorney-client privilege issues that Sandoz raised in a motion to compel. The Sandoz opinion is one that warrants attention from in-house and outside corporate counsel because it illustrates that the attorney-client privilege is not as far reaching as some corporate counsel may believe. Highlights from the opinion follow:
Choice of Law
Sandoz was pending in federal court based on the court’s diversity jurisdiction. In such instances, federal courts apply state substantive law to privilege issues. Therefore, in Sandoz, the court looked to Pennsylvania state law to resolve the issues that Sandoz raised in its motion to compel.
Elements and Burden of Proof
The court recited the familiar elements of the attorney-client privilege:
A party invoking attorney-client privilege must prove that:
- the asserted holder of the privilege is or sought to become a client;
- the person to whom the communication was made is a member of the bar of a court, or his subordinate;
- the communication relates to a fact of which the attorney was informed by his client, without the presence of strangers, for the purpose of securing either an opinion of law, legal services or assistance in a legal matter, and not for the purpose of committing a crime or tort;
- the privilege has been claimed and is not waived.
The party invoking the privilege bears the initial burden of proof that the privilege applies to a particular communication. The Sandoz court emphasized, particularly in the corporate context, that the “privilege does not extend to business advice or protect clients from factual investigations.” See Gillard v. AIG Insurance, 15 A.3d 44, 52 n.8 (Pa. 2011).
Potential misstep by Sandoz Court?— “Absence of Attorney”
The Sandoz court took a restrictive view of the attorney-client privilege in multiple respects. In perhaps the most stark departure from precedent, the court held that non-lawyer employees of a corporate client cannot disseminate corporate counsel’s legal advice within the corporation without waiving the privilege. “Document 46” was “an email chain among only Lannett employees with no counsel copied, passing on legal advice from outside counsel.” The court held that, because “no attorney [was] present” on the email chain, Document 46 failed to satisfy the requirement that, in order to be privileged, a communication must be made to an attorney or the attorney’s agent.
That holding is at odds with seemingly settled precedent that, when the client is a corporate entity, the privilege extends to intra-corporate, and thus intra-client, communications not directly involving an attorney when those communications are either in preparation for otherwise privileged communications with counsel or in order to disseminate legal advice received from corporate counsel. See SEPTA v. Caremark PCS, 254 F.R.D. 253, 258-59 (E.D. Pa. 2008); SmithKline Beecham v. Apotex, 232 F.R.D. 467, 477 (E.D. Pa. 2005) (‘‘A document need not be authored or addressed to an attorney in order to be properly withheld on attorney-client privilege grounds … Documents subject to the privilege may be transmitted between nonattorneys so that the corporation may be properly informed of legal advice and act appropriately.’’) (internal quotation marks and punctuation omitted); also see Restatement (Third) Law Governing Lawyers Section 73, cmt. g (nonlawyer constituent members of an organizational client “may be apprised of privileged communications after they have been made … in order to conduct the affairs of the organization in light of the legal services provided”).
There appears to be no sound logical reason to hold that Document 46 is not privileged. Lannett, a corporation, was the client. Its outside counsel provided Lannett with legal advice. As a corporation, Lannett can only receive such privileged communications through individual human beings. Lannett’s outside counsel delivered legal advice to certain representatives of counsel’s corporate client, and then those representatives merely passed corporate counsel’s advice on to other constituent members of the same corporate client. There was no dissemination of the confidential advice to a nonclient. Document 46 merely represented more thorough consumption and digestion of corporate counsel’s advice by the client. Corporate counsel should be able, for instance, to deliver legal advice to the chair of the board of directors of the client, and then the chair should be able to forward that advice on to, for instance, the CEO by email or in a conversation without waiving the privilege; but the Sandoz court has held otherwise.
In a departure from other parts of the opinion where it took a restrictive view of the privilege, the Sandoz court extended the privilege to communications that Lannett’s “outside third-party communications consultant” had with Lannett’s corporate attorneys. The Sandoz court held that the communications were protected because the outside consultant’s presence and participation in the communications “was indispensable to the lawyer giving legal advice” to Lannett. Thus, discordantly, the court protected communications with a nonemployee of a corporate client but found that the dissemination of legal advice entirely within a corporate client is not protected.
Common Interest Privilege
The Sandoz court’s discussion of the common interest privilege provides perhaps the most important cautionary tale for corporate counsel. While the court recognized the existence of a common interest privilege under Pennsylvania law, the court limited that privilege significantly.
The court recited the elements of the common interest privilege as:
a party seeking to invoke the common interest doctrine must show: the parties’ agreement to same; a common interest in the litigation or a jointly shared litigation strategy; the communications were made pursuant to such agreement, and the continued confidentiality of the communications …
The Sandoz court noted that the nature and extent of the commonality necessary to sustain the common interest privilege is not clear under Pennsylvania law. The court stated that a common business or commercial interest is not sufficient; instead, a common legal interest is necessary. The test that the court adopted is that the parties “must share at least a substantially similar legal interest.” In that regard, the court concluded that Lannett and Cediprof shared a substantially similar legal interest sufficient to sustain a potential common interest privilege.
However, the court held that the common interest privilege does not protect communications between the clients sharing the common interest when those communications occur outside the presence of attorneys. The court further held that, even when the communications include counsel for one of the client participants, but not counsel for all client participants, the common interest privilege is lost, and the communications are not protected from disclosure. That restrictive holding is not unprecedented, but it does run counter to the weight of authority, including the Restatement (Third) of the Law Governing Lawyers, which states that common interest doctrine protection can extend to communications between or among clients themselves, even with no attorneys immediately involved in those particular communications.
The Sandoz court took to heart some language from Pennsylvania cases, indicating that the attorney-client privilege should be applied grudgingly. The court’s holding that the privilege does not protect wholly intra-corporate dissemination of legal advice between or among non-lawyers appears anomalous and may be an outlier. However, while at odds with the Restatement and other cases, the court’s restrictive view of the common interest doctrine is not unique. In-house and outside counsel should be cognizant of these limitations and exercise caution in similar circumstances in order to avoid situations where client and counsel may assume or believe that the privilege will apply when a court may well later conclude that it does not.
Kevin P. Allen is the co-managing partner of Duane Morris’ Pittsburgh office. He is also the author of “The Attorney-Client Privilege and the Work-Product Doctrine in Pennsylvania,” now in its sixth edition.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.