NC Business Court: Attorney-Client Privilege For Corporations

The NC Business Court delivered a full Opinion last week on attorney-client privilege in Technetics Group Daytona, Inc. v. N2 Biomedical, LLC, 2018 NCBC 115.  It’s on the subject of the scope of attorney-client privilege accorded to corporate clients.

That a corporation is entitled to the protection of the attorney-client privilege is “generally accepted.”  Op. ¶13.  But how far down the corporate employee ladder does the privilege extend?  As Judge Conrad observed, “it is often a challenging task to decide who speaks for a corporation and whether that person’s communications with corporate counsel are subject to the privilege.”  Op. ¶13.

The law on this point is “particularly unsettled” in North Carolina.  Op. ¶14.  The issue in the Technetics case was whether the privilege could encompass communications between the Defendant’s lawyer and an independent contractor (Storey) working for it.

Mr. Storey had been included in communications between the Defendant and its patent counsel regarding a patent application which is at issue in the lawsuit.  The Defendant refused to produce those communications based upon the attorney-client privilege.

NC Business Court Says That The Consultant Was Not The “Functional Equivalent” Of An Employee Who Could Be Covered By The Privilege

Some courts extend the protection of the privilege to non-employees, “as long as they perform roles that are functionally equivalent to employees.”  Op. Par. 16.  Judge Conrad was unwilling to follow those cases, but held that even if North Carolina were to adopt that test, the Defendant hadn’t carrying the burden of showing that Mr. Storey was the functional equivalent of an employee.

Mr. Storey was retained “on a project-by-project basis and paid by the hour.”  Op. ¶15.  He didn’t have an office and didn’t spend much time working for the Defendant.  As Judge Conrad summed it up, “Storey’s role was ‘akin to that of an ordinary third-party specialist, disclosure to whom destroys the attorney-client privilege.’”  Op. ¶19.

NC Business Court Considers The “Kovel Doctrine” And Finds That It Doesn’t Apply

Another argument in favor of the privilege offered by the Defendant was also rejected by the Business Court.  This was a federal court approach known as “the Kovel doctrine.”  This doctrine “holds that the attorney-client privilege is not destroyed by the presence of a third party if the third party “is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.” Op. ¶21 (quoting United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961)).

Judge Conrad said that although the Kovel doctrine was “widely embraced,” it had also been “carefully limited.”  Op. ¶22.  It is not enough that the participant’s consultation be “useful or convenient.”  It must instead be “nearly indispensible or serve some specialized purpose in facilitating the attorney-client communications.”  Op. ¶23 (quoting Cavallero v. United States, 284 F.3d 236, 249 (1st Cir. 2002).

In other words “the third party must function more or less as a “translator or interpreter” between the client and the lawyer.”  Op. 23.  Mr. Storey’s involvement in the claimed privileged communication did not rise to this level.

The Common Interest Doctrine Was Not Applicable

In a final run at claiming the privilege as to Mr. Storey, the Defendant argued that “the common-interest doctrine, which “extends the protection of the attorney-client privilege . . . to communications between parties sharing a common interest about a legal matter.”  Op. ¶27.

The Defendant lost out on this argument as well.  As Judge Conrad observed, an essential element of a common interest is that “the parties must ‘agree to exchange information for the purpose of facilitating legal representation of the parties.'”  Op. ¶28 (quoting Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., 247 N.C. App. 641, 648, 788 S.E.2d 170, 177 (2016).  Since Mr. Storey wasn’t represented by counsel, he wasn’t included in the Defendant’s privilege.

And if you’re thinking that the common interest doctrine really doesn’t fit here because Mr. Storey wasn’t involved in any litigation, you are right.  Judge Conrad said that “our appellate courts have not ‘extended the common interest doctrine to relationships formed primarily for purposes other than indemnification or coordination in anticipated litigation.’”  Op. ¶30 (quoting Friday Invs., supra, 247 N.C. App. at 6, 51, 788 S.E.2d at 178.

Issues Of Waiver Of Privilege

There’s more worth writing about from the Technetics Opinion.  It concerns whether the Defendant had waived the privilege by its production of a document prepared by its attorney regarding the negotiation of a “Confidential Development Agreement.”  Technetics argued that by disclosing this legal advice, the Defendant had made a subject matter waiver of all the negotiations regarding that Agreement.

You are probably familiar with the issue of the scope of a waiver coming up when there has been an inadvertent production of a privileged document.  I’ve written about that issue before.

But what if the waiver is intentional?  Then different considerations are in play.  Judge Conrad said:

It is patently unfair for a party to use the privilege as a sword and a shield in litigation, making selective disclosures for tactical gain.