The attorney-client privilege protects the privacy of communications between an attorney and his client. Most courts agree that the attorney-client privilege between a lawyer and a client that is a corporation extends to more than just the owners of the corporation. The privilege is generally also applied to higher-up individuals, such as top level managers and Chief Financial Officers. However, a U.S. District Court went even further and extended the privilege to a former board member of a corporation in a recent case out of Norfolk, Virginia.
The question before the court was whether the attorney client privilege covered email communications from an attorney to his corporate client, Digital Vending Services International, Inc. (“DVSI”), after those email communications were forwarded by DVSI’s principals to a former board member of DVSI, General Clarence McKnight (“McKnight”).
In the Fourth Circuit, “the attorney-client privilege applies not only to the upward flow of information from a client or client’s representative to counsel, but also can apply to the downward flow of legal advice from counsel to client in limited circumstances,” Op. at 8, if the communications “‘reveal confidential client communications’” Op. at 8 (quoting U.S. v. (Under Seal), 748 F.2d 871, 874 (1984), or “‘reveal the motive of the client in seeking representation, litigation strategy or the specific nature of the services provided.’” Op. at 8 (quoting Chaudhry v. Gallerizzo, 174 F.3d 394, 402 (1999)). The issue before the court was whether the attorney-client privilege was waived when DVSI forwarded the emails to McKnight.
The court ruled that the attorney-client privilege applied because McKnight had a “need to know” the information communicated.
According to Plaintiff, McKnight was formerly on DVSI’s Board of Directors, but resigned before the lawsuit commenced in order to join CLIN’s Board of Directors and thus avoid a conflict of interest. CLIN Inc. is a corporation and one of the members of DVSI. CLIN Inc. was also DVSI’s corporate predecessor.
Plaintiff claimed that “McKnight was a sort of ‘ex-officio’ member of the Board [of DVSI] and a person whose institutional knowledge was valuable to the Board of Directors and whose advice was sought often.” Op. at 7. Plaintiff asserted that McKnight remained an advisor in an unofficial capacity, but was not a currently employee or board member. McKnight testified at his deposition, however, that he was “‘not privy to all the . . . management of the directors and so forth”’ and referred to himself as a “‘figurehead.’” Op. at 7 (quoting McKnight Deposition testimony).
The court stated that “[i]n its research, [it] found no cases on point to answer the question of whether attorney-client privilege was waived when communications from an attorney, rendering legal advice, were conveyed to the client and the client then conveyed that information to both current members of the Board of Directors and to a former member of the company’s Board of Directors.” Op. at 7.
Relying on Eighth Circuit cases, the court stated that the attorney-client privilege is not waived in the corporate context when confidential communications from counsel are “restricted to those who need to know.” Op. at 14.
Thus, the question before the court was whether McKnight had a “need to know” the information in the attorneys’ communications with DVSI. To determine whether a “need to know” existed, the court used the Eighth Circuit’s “functional equivalent” test which has been used in the Fourth Circuit, although not formally adopted. The test asks whether McKnight was the “functional equivalent” of a member of the board of directors. The question then is whether that person’s “‘involvement in the subject of the litigation makes him precisely the sort of person with whom a lawyer would wish to confer confidentially in order to understand [the client’s] reasons for seeking representation.’” Op. at 14 (quoting In re Bieter Co., 16 F.3d 929, 940 (8th Cir. 1994)).
The court recognized that Boards of Directors need to know an attorney’s advice to the corporation since it must make strategic decisions for the corporation. The court found that McKnight was a trusted advisor with an on-going role with DVSI’s Board of Directors and had been involved with DVSI since the start of the corporation. He remained involved in DVSI after he left to sit on CLIN Inc.’s Board. He was part of the strategy conference calls with the corporation and attorneys regarding the litigation at hand. All of these factors made him an individual with a “need to know” the attorney-client privilege information. Since he was included in the Board’s discussions as if he was still a member of DVSI’s Board, and he was the functional equivalent of a Board member, his deposition testimony that he was not privy to the management of the directors and the fact that he wasn’t paid by DVSI were insufficient facts to support waiver of the attorney-client privilege. Therefore, the privilege was extended to include communications with McKnight.
It is important to note that the court closely considered the factual circumstance of McKnight’s involvement. Determining who is qualified as someone who has a “need to know” will depend on the specific facts of a case. While this case expands the range of individuals that a corporation can involve in making litigation decisions, corporations should tread cautiously because the consequences of otherwise privileged communications getting disclosed to a litigation adversary can be severe.