Second Circuit Reins in Risk of 'At-Issue' Attorney-Client Privilege Waivers

We are proud to say that we live by the Rule of Law. But in law, as in most other endeavors, exceptions can swallow the rules if the rule-makers are not careful. One area where exceptions pose a particular concern is when the privilege over communications with lawyers is called into question because those communications have been invoked to show someone's good faith in attempting to follow the law. It seems only fair to require someone to disclose what her lawyer actually said when she implies that she was acting in good faith because a lawyer told her that her conduct was lawful. But how far can the exception go before it swallows the rule and opens the door to disclosure of all legal communications, even when the substance of the communication is not “at issue”? This was the question recently before the United States Court of Appeals for the Second Circuit, which tried to bring clarity to a rule that has confused the courts for more than 30 years.

Background

The context for most businesses is clear. Companies seek privileged legal advice every day on myriad subjects, ranging from business transactions to compliance issues to defending claims or litigation. Companies and their lawyers take careful steps to preserve the legal privilege and to retain their ability to control whether they may at some point decide to waive the privilege. In some situations, a company may decide to defend a claim that it acted in bad faith, or that it engaged in an intentional or willful violation of the law, by asserting that it relied in good faith on the advice of counsel in embarking upon the course of conduct that is the subject of the litigation. In that circumstance, the company has squarely and affirmatively placed the legal advice it received “at issue” by relying upon that legal advice as a defense. Courts have universally observed the fairness of a rule that a client may not use the legal advice as a sword to defeat the claim against it while simultaneously shielding that legal advice and its underpinnings from examination.

'At-Issue' Waivers

The advice of counsel defense presents a clear example of an “at-issue” waiver of privilege. But, when else might a corporation's privileged communication be exposed to potential waiver by virtue of being deemed “at issue” in litigation? The boundaries of “at-issue” waivers have been anything but clear. Until recently, following a seminal case from 1975, courts have often analyzed “at-issue” privilege waivers by asking if the advice was relevant to the claims or defenses asserted in the case without requiring actual reliance by a party on the legal advice in the litigation. The consequences of this inquiry, while perhaps unintended, were that companies risked opening legal advice to discovery by simply defending conduct on which they had been advised by lawyer and not based not on their deliberate decisions to waive privilege by asserting they relied on the lawyer's advice as a defense. The implication for protecting legal reviews of conduct ' through internal investigations, legal reviews of policies and resulting changes, or the like ' can be profound.

The prevailing standard opened the door to unwarranted fishing expeditions for a proverbial smoking gun wrapped up in a neat package with legal analysis, particularly in cases involving complex facts and voluminous documents, as long as the advice was relevant to the claims in the litigation and had been given in connection with the conduct being challenged. Indeed, one might argue that that this standard promoted the use of privilege challenges as part of the standard playbook in litigation against corporations. It often led to the same type of “culture of waiver” faced by the business community when, until recently, the Department of Justice was permitted to consider whether a corporation had waived its attorney-client privilege when weighing the corporation's cooperation with a government investigation.

The Second Circuit recently took a big step forward by limiting when a client waives its privilege over communications with her lawyer to those times when the client puts her reliance on the advice “at issue” in defending the litigation. In rejecting a standard based primarily on relevance, the new Second Circuit test places waiver decisions in large part back into the hands of the party who obtained the legal advice. Under the Second Circuit's formulation, privilege is not waived unless the legal advice is both relevant and actually relied upon by a party in prosecuting or defending litigation.

The Overbroad Hearn Standard: Relevance Is Key

Courts have often used a three-part test for “at-issue” privilege waivers that was first described in the case of Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975). Under this test, the attorney-client privilege was waived when: 1) the privilege was asserted as the result of some affirmative act, such as filing suit or pleading in response to a claim; 2) through the affirmative act, the party asserting privilege put the protected information at issue by making it relevant to the case; and 3) upholding the privilege would deny the opponent access to information vital to his case or defense.

While the goal may have been to base waiver on a party's affirmative acts, the test's overbreadth and lack of clarity caused problems. What affirmative acts made privileged information relevant? If relevant, then relevant to whose position? Relevant in what way? Did just defending a case ' i.e., denying that one's conduct violated the law ' make privileged advice, the existence of which is routinely disclosed in privilege logs, relevant and “at issue”? Likewise, did pleading that one's conduct complied with the law make privileged advice relevant and therefore “at issue”? How did the fairness concept intrinsic in considering whether the other side needs the privileged information work? Nor was the fairness concept ' keeping the parties on an even footing for all claims and defenses in the case ' much help: All assertions of privilege could be considered unfair in the sense that they prevent disclosure to the other side. But, under the Hearn test, what distinguished situations where fairness requires disclosure of some privileged information from any other claim of privilege?

Courts struggled to apply the Hearn test, leading to uneven results and criticism. The Hearn emphasis on relevance and notions of fairness to the opposing party, with no limit as to what affirmative acts might trigger an “at-issue” waiver, jeopardized the privileged nature of far too many attorney-client communications. The Hearn approach, dependent upon relevance determined after the fact and often without objective analysis, led to inconsistency in predicting a company's ability to control the decision whether to assert or waive its privilege.

The Second Circuit's Clarification in Erie: Reliance Is Key

The Second Circuit previously had relied upon Hearn's propositions, but the court had never definitively said whether Hearn provided the full measure of an appropriate waiver standard. In the case of In re Erie County, 546 F.3d 33 (2d Cir. 2008), prisoners challenged the county's policy of strip-searching every inmate at the county lock-up. The county provided a privilege log that revealed ten e-mails between the county attorney and officials at the jail concerning the policy and its implementation. The prisoners wanted to see the e-mails. The county asserted the privilege and, after a series of inconsistent decisions below, the trial court ruled that the
e-mails must be produced because their subject matter ' the constitutionality of the policy and possible alternatives ' was relevant to issues in the case. There was no showing, however, that the defendants were relying on the advice to defend the claims against them. The case came before the Court of Appeals on a petition for mandamus to keep the e-mails from being produced pursuant to the lower court's order.

The Second Circuit held that the Hearn test's focus on relevance was neither enough to establish waiver of the privilege nor a sound way to test to see if waiver were appropriate. The court agreed with those critics who felt that “the Hearn test cuts too broadly” because privileged information can be relevant in any lawsuit. Because the Hearn test presumes that the privileged information is relevant and should be disclosed, it opens wide the door to waiver claims far too often; a more precise test was in order. The critical piece missing from the Hearn test is the client's actual reliance on the legal advice in making or defending a case: “Nowhere in the Hearn test is found the essential element of reliance on privileged advice in the assertion of the claim or defense in order to effect a waiver.” In other words, the party holding the privilege must deliberately make the legal advice a basis for the claim or defense for the privilege to be waived. The Second Circuit noted the advice of counsel defense as the “quintessential example” of reliance upon a privileged communication in defending litigation. Asserting good faith as a defense or placing state of mind at issue also may trigger a waiver, if based on specific legal advice. Beyond that, the Second Circuit declined to specify the degree of reliance on privileged communications required to constitute an “at-issue” waiver.

The Impact of Erie

Considering the Erie case both with and without the element of reliance illustrates the impact of the Second Circuit's decision. Under the Hearn test, the lower court found a waiver of the privilege, believing that the asserted defense of qualified immunity placed the emails of privileged advice regarding the policy “at issue” in the litigation. Applying the reliance element, however, led the Second Circuit to the opposite result: Only if the jailers asserted that they relied on the advice to show they were acting in good faith would the advice be waived; if they merely said they acted in good faith because there was a policy in place they had followed, the county attorney's e-mails about the policy simply played no part. Since the qualified immunity defense asserted in Erie was based on an objective standard ' whether the conduct violates clearly established rights ' the jailers' beliefs or states of mind were not put into issue by their assertion that their conduct was lawful. While there is a danger that the emails thus excused from discovery had advised the jailers that if they followed the policy, they would be violating the law ' making the e-mails critical to the issue of the jailers' good faith ' the question of waiver is a gate separate from the underlying advice, and the substance of the advice would be implicated only if the prisoners were claiming that the jailers had been given that advice and ignored it. That was not this case, but the example shows why all cases of waiver must be determined on a case-by-case basis. Under Erie, that determination will turn first on whether a party has relied on the advice in the documents being sought.

Conclusion

While Erie was a prisoner's rights case, the reliance aspect applies with equal force in the corporate world. Like so many corporate disputes, the Erie case involved legal review, development, and adaptation of policies ' activities undertaken by every company. Like many companies, the defendants in Erie changed their policy after obtaining legal advice. The Hearn approach arguably exposed such legal advice to disclosure whenever there was a challenge to conduct undertaken pursuant to a policy because the advice was relevant to the policy. Under Erie, defending the legality of the challenged conduct, by itself, should not be enough to constitute an “at-issue” waiver of privilege unless there also is reliance upon the legal advice about the policy in defending a case. Affirmatively asserting a person's good faith, state of mind, or reliance upon the advice of counsel as a claim or defense in the case may trigger the waiver of the privilege over such legal advice; that decision will continue to be made on a case-by-case basis.

Michael Dockterman is a partner in the Litigation Department of Wildman, Harrold, Allen & Dixon LLP (Chicago). He an be reached at [email protected] or 312-201-2652. Beth L. Fancsali is a partner in the same department and office. She can be reached at [email protected] or 312- 201-2470.

We are proud to say that we live by the Rule of Law. But in law, as in most other endeavors, exceptions can swallow the rules if the rule-makers are not careful. One area where exceptions pose a particular concern is when the privilege over communications with lawyers is called into question because those communications have been invoked to show someone's good faith in attempting to follow the law. It seems only fair to require someone to disclose what her lawyer actually said when she implies that she was acting in good faith because a lawyer told her that her conduct was lawful. But how far can the exception go before it swallows the rule and opens the door to disclosure of all legal communications, even when the substance of the communication is not “at issue”? This was the question recently before the United States Court of Appeals for the Second Circuit, which tried to bring clarity to a rule that has confused the courts for more than 30 years.

Background

The context for most businesses is clear. Companies seek privileged legal advice every day on myriad subjects, ranging from business transactions to compliance issues to defending claims or litigation. Companies and their lawyers take careful steps to preserve the legal privilege and to retain their ability to control whether they may at some point decide to waive the privilege. In some situations, a company may decide to defend a claim that it acted in bad faith, or that it engaged in an intentional or willful violation of the law, by asserting that it relied in good faith on the advice of counsel in embarking upon the course of conduct that is the subject of the litigation. In that circumstance, the company has squarely and affirmatively placed the legal advice it received “at issue” by relying upon that legal advice as a defense. Courts have universally observed the fairness of a rule that a client may not use the legal advice as a sword to defeat the claim against it while simultaneously shielding that legal advice and its underpinnings from examination.

'At-Issue' Waivers

The advice of counsel defense presents a clear example of an “at-issue” waiver of privilege. But, when else might a corporation's privileged communication be exposed to potential waiver by virtue of being deemed “at issue” in litigation? The boundaries of “at-issue” waivers have been anything but clear. Until recently, following a seminal case from 1975, courts have often analyzed “at-issue” privilege waivers by asking if the advice was relevant to the claims or defenses asserted in the case without requiring actual reliance by a party on the legal advice in the litigation. The consequences of this inquiry, while perhaps unintended, were that companies risked opening legal advice to discovery by simply defending conduct on which they had been advised by lawyer and not based not on their deliberate decisions to waive privilege by asserting they relied on the lawyer's advice as a defense. The implication for protecting legal reviews of conduct ' through internal investigations, legal reviews of policies and resulting changes, or the like ' can be profound.

The prevailing standard opened the door to unwarranted fishing expeditions for a proverbial smoking gun wrapped up in a neat package with legal analysis, particularly in cases involving complex facts and voluminous documents, as long as the advice was relevant to the claims in the litigation and had been given in connection with the conduct being challenged. Indeed, one might argue that that this standard promoted the use of privilege challenges as part of the standard playbook in litigation against corporations. It often led to the same type of “culture of waiver” faced by the business community when, until recently, the Department of Justice was permitted to consider whether a corporation had waived its attorney-client privilege when weighing the corporation's cooperation with a government investigation.

The Second Circuit recently took a big step forward by limiting when a client waives its privilege over communications with her lawyer to those times when the client puts her reliance on the advice “at issue” in defending the litigation. In rejecting a standard based primarily on relevance, the new Second Circuit test places waiver decisions in large part back into the hands of the party who obtained the legal advice. Under the Second Circuit's formulation, privilege is not waived unless the legal advice is both relevant and actually relied upon by a party in prosecuting or defending litigation.

The Overbroad Hearn Standard: Relevance Is Key

Courts have often used a three-part test for “at-issue” privilege waivers that was first described in the case of Hearn v. Rhay , 68 F.R.D. 574 (E.D. Wash. 1975). Under this test, the attorney-client privilege was waived when: 1) the privilege was asserted as the result of some affirmative act, such as filing suit or pleading in response to a claim; 2) through the affirmative act, the party asserting privilege put the protected information at issue by making it relevant to the case; and 3) upholding the privilege would deny the opponent access to information vital to his case or defense.

While the goal may have been to base waiver on a party's affirmative acts, the test's overbreadth and lack of clarity caused problems. What affirmative acts made privileged information relevant? If relevant, then relevant to whose position? Relevant in what way? Did just defending a case ' i.e., denying that one's conduct violated the law ' make privileged advice, the existence of which is routinely disclosed in privilege logs, relevant and “at issue”? Likewise, did pleading that one's conduct complied with the law make privileged advice relevant and therefore “at issue”? How did the fairness concept intrinsic in considering whether the other side needs the privileged information work? Nor was the fairness concept ' keeping the parties on an even footing for all claims and defenses in the case ' much help: All assertions of privilege could be considered unfair in the sense that they prevent disclosure to the other side. But, under the Hearn test, what distinguished situations where fairness requires disclosure of some privileged information from any other claim of privilege?

Courts struggled to apply the Hearn test, leading to uneven results and criticism. The Hearn emphasis on relevance and notions of fairness to the opposing party, with no limit as to what affirmative acts might trigger an “at-issue” waiver, jeopardized the privileged nature of far too many attorney-client communications. The Hearn approach, dependent upon relevance determined after the fact and often without objective analysis, led to inconsistency in predicting a company's ability to control the decision whether to assert or waive its privilege.

The Second Circuit's Clarification in Erie: Reliance Is Key

The Second Circuit previously had relied upon Hearn's propositions, but the court had never definitively said whether Hearn provided the full measure of an appropriate waiver standard. In the case of In re Erie County, 546 F.3d 33 (2d Cir. 2008), prisoners challenged the county's policy of strip-searching every inmate at the county lock-up. The county provided a privilege log that revealed ten e-mails between the county attorney and officials at the jail concerning the policy and its implementation. The prisoners wanted to see the e-mails. The county asserted the privilege and, after a series of inconsistent decisions below, the trial court ruled that the
e-mails must be produced because their subject matter ' the constitutionality of the policy and possible alternatives ' was relevant to issues in the case. There was no showing, however, that the defendants were relying on the advice to defend the claims against them. The case came before the Court of Appeals on a petition for mandamus to keep the e-mails from being produced pursuant to the lower court's order.

The Second Circuit held that the Hearn test's focus on relevance was neither enough to establish waiver of the privilege nor a sound way to test to see if waiver were appropriate. The court agreed with those critics who felt that “the Hearn test cuts too broadly” because privileged information can be relevant in any lawsuit. Because the Hearn test presumes that the privileged information is relevant and should be disclosed, it opens wide the door to waiver claims far too often; a more precise test was in order. The critical piece missing from the Hearn test is the client's actual reliance on the legal advice in making or defending a case: “Nowhere in the Hearn test is found the essential element of reliance on privileged advice in the assertion of the claim or defense in order to effect a waiver.” In other words, the party holding the privilege must deliberately make the legal advice a basis for the claim or defense for the privilege to be waived. The Second Circuit noted the advice of counsel defense as the “quintessential example” of reliance upon a privileged communication in defending litigation. Asserting good faith as a defense or placing state of mind at issue also may trigger a waiver, if based on specific legal advice. Beyond that, the Second Circuit declined to specify the degree of reliance on privileged communications required to constitute an “at-issue” waiver.

The Impact of Erie

Considering the Erie case both with and without the element of reliance illustrates the impact of the Second Circuit's decision. Under the Hearn test, the lower court found a waiver of the privilege, believing that the asserted defense of qualified immunity placed the emails of privileged advice regarding the policy “at issue” in the litigation. Applying the reliance element, however, led the Second Circuit to the opposite result: Only if the jailers asserted that they relied on the advice to show they were acting in good faith would the advice be waived; if they merely said they acted in good faith because there was a policy in place they had followed, the county attorney's e-mails about the policy simply played no part. Since the qualified immunity defense asserted in Erie was based on an objective standard ' whether the conduct violates clearly established rights ' the jailers' beliefs or states of mind were not put into issue by their assertion that their conduct was lawful. While there is a danger that the emails thus excused from discovery had advised the jailers that if they followed the policy, they would be violating the law ' making the e-mails critical to the issue of the jailers' good faith ' the question of waiver is a gate separate from the underlying advice, and the substance of the advice would be implicated only if the prisoners were claiming that the jailers had been given that advice and ignored it. That was not this case, but the example shows why all cases of waiver must be determined on a case-by-case basis. Under Erie, that determination will turn first on whether a party has relied on the advice in the documents being sought.

Conclusion

While Erie was a prisoner's rights case, the reliance aspect applies with equal force in the corporate world. Like so many corporate disputes, the Erie case involved legal review, development, and adaptation of policies ' activities undertaken by every company. Like many companies, the defendants in Erie changed their policy after obtaining legal advice. The Hearn approach arguably exposed such legal advice to disclosure whenever there was a challenge to conduct undertaken pursuant to a policy because the advice was relevant to the policy. Under Erie, defending the legality of the challenged conduct, by itself, should not be enough to constitute an “at-issue” waiver of privilege unless there also is reliance upon the legal advice about the policy in defending a case. Affirmatively asserting a person's good faith, state of mind, or reliance upon the advice of counsel as a claim or defense in the case may trigger the waiver of the privilege over such legal advice; that decision will continue to be made on a case-by-case basis.

Michael Dockterman is a partner in the Litigation Department of Wildman, Harrold, Allen & Dixon LLP (Chicago). He an be reached at [email protected] or 312-201-2652. Beth L. Fancsali is a partner in the same department and office. She can be reached at [email protected] or 312- 201-2470.