Privilege in Discovery Fights for Dual-Purpose Advice

The Circuit Splits and Arbitrator Best Practices

The U.S. Supreme Court recently heard argument in In Re Grand Jury (case No. 21-1397) to address a three-way split among the 9th, D.C., and 7th Circuit Courts of Appeal regarding attorney-client, and possibly attorney work-product, privileges. Privilege issues may arise when clients receive both business and legal (“dual-purpose”) advice from counsel.

After oral argument, the Court declined to decide the issue, dismissing the writ of certiorari as improvidently granted (a “DIG”). The Court’s analytical retreat left the Circuit split in place, which can cause confusion when arbitrators rule on discovery of dual-purpose material.  

In Re Grand Jury presented the question whether a district court properly denied a law firm’s claim of attorney-client privilege for communications, related to preparing a client’s tax returns, for which “obtaining legal advice” might not be the primary purpose.

The case focused on the attorney-client confidential communication ethics analysis for clients who receive advice on legal and non-legal issues in a single matter or communication. This arises in the finance, tax, business, administrative, and in-house contexts, and likely in discovery fights in FINRA arbitrations.

The law firm in this case prepared tax forms for clients and provided advice on international tax issues. As part of a criminal investigation of the client, a federal grand jury subpoenaed law firm documents. The law firm refused to produce some documents, asserting attorney-client privilege, and the government moved to compel production. The federal district court ordered disclosure of some documents and, with redactions, portions of other documents.

The court permitted the law firm to withhold in full all documents that involved non-tax legal advice because the primary purpose of those documents was providing legal advice and not solely tax return preparation.

For documents for which the court determined that a portion of a tax-preparation communication contained tax-related legal advice, the court instructed the law firm to redact the legal advice portion of the document before providing it.

The court ordered production of some documents based on the crime-fraud exception to privilege.[1] But the court ordered disclosure of the portions of communications where the primary or predominate purpose was about the procedural aspects of the preparation of the client’s tax return or where a certified public accountant provided advice as an accountant.

The law firm refused to comply and withheld all documents. The court rejected application of the “because of” test that protects dual-purpose communications provided “because of” the need to give or receive legal advice. The court held the law firm in civil contempt; it appealed to the 9th Circuit.

The law firm argued that the district court erred by failing to apply the “primary purpose” test developed in Kellogg, Brown & Root (“Kellogg, Brown”). The Kellogg, Brown test, crafted by then-D.C. Circuit Court Judge, now-U.S. Supreme Court Justice Brett Kavanagh, states that, in the context of an internal corporate investigation, attorney-client privilege applies if obtaining or providing legal advice is a “primary purpose” or “significant purpose” of the communication.[2]

Under Kellogg, Brown, privilege applies to documents with a dual business and legal purpose, if legal advice is counsel’s primary purpose when making the communication.

The 9th Circuit largely affirmed the district court’s order of production, holding that attorney-client privilege does not shield communications with the primary purpose of providing business advice, even if the communication also offers legal advice. A communication can address both compliance considerations (a non-legal purpose) and advice on what to do if the government challenges the action (possibly a legal purpose).

The Court held that communications seeking legal advice about what to state on a tax return, or other tax-connected legal advice, may be privileged when the primary purpose of the communication is legal advice, however. Counsel’s communications that concern advice about what must be claimed on a return, advantages of various strategies, risk analysis, or similar topics are protected by attorney-client privilege.

The Court characterized unsettled accounting questions as requiring legal, not accounting, advice.

Regarding Petitioner’s Kellogg, Brown “primary purpose” argument, the 9th Circuit reasoned that Kellogg, Brown did not apply with equal force in tax advice and tax advocacy situations and declined to apply it, noting that communications can have more than one purpose. The 9th Circuit found that because it is not clear if Kellogg, Brown applies, the district court properly found that the predominate purpose of the disputed communications was not legal advice.

The 7th Circuit follows a traditional analytical path, holding that dual purpose communication is never privileged, even if legal advice is the most significant purpose, when the other purpose is assisting with preparing a tax return, which is not legal advice. This approach holds that, generally, a party cannot disclose a portion of a privileged communication yet preserve privilege as to the remainder.[3]

This has set up a three-way split of authority among the Circuits on how to handle discovery fights in the context of dual-purpose attorney advising. The conflict can arise in arbitrations, business litigation, tax controversies, and almost any other setting. The Circuits set out three very different approaches:

Primary Purpose Test - Narrow Application

When counsel’s communications have both business and legal goals, the “primary purpose” test analyzes whether the predominant purpose is legal advice or to further business interests. Kellogg, Brown asks only if legal advice was a primary reason for the communication. It does not require weighing the relative significance of competing business and legal purposes. The district court applied this test in In Re Grand Jury.

The privilege can generally be raised in proceedings where an adversary or third party seeks to legally compel disclosure of communications, including in discovery and during testimony. The law firm argued that, considering the tax system’s reliance on self-assessment and voluntary reporting, a robust attorney-client privilege is vital. The law firm asserted that Kellogg, Brown renders privilege uncertain, which chills clients’ candor toward their counsel.

Primary Purpose Test - Broad Application

In a later decision, the D.C. Circuit preferred the more predictable analysis of whether obtaining or providing legal advice is a primary purpose of the communication, meaning one of the significant purposes of the communication. Courts should not presume that a communication may have only one primary purpose and should not find any primary purpose when a communication has multiple purposes. The broad application of the primary purpose test does not draw a firm distinction between a communication’s legal and business purposes.

Briefs focused on in-house lawyers, who often mingle business and legal advising, asserting that the 9th Circuit’s approach hobbles these discussions. The Department of Justice argued for Kellogg, Brown, where privilege would apply when legal advice is a primary purpose of the communication.

Significant Purpose

In a later decision by then-Judge Kavanagh, the D.C. Circuit applied a broader “significant purpose” test. In that case, the federal government subpoenaed documents (which the general counsel had directed company employees to assemble) as well as settlement communications between the general counsel and top executives.

The Court determined that the employee document assembly was intended to help the company comply with antitrust laws - a legal purpose. Communications with company executives were to secure an advantageous settlement of litigation - a business purpose. Applying Kellogg, Brown, the Court held that this dual-purpose communication was privileged.

Applying the Three Dual-Purpose Communication Analysis in Privilege Fights in Arbitration

Securities Litigators / Tax and Business Advising / Transactional Attorneys

Counsel who represent businesses, shareholders, C-suite executives, Board members, investors, and stockholders often provide mixed business and legal advice. Counsel are likely providing legal advice when they draw on their legal training and apply legal principles to address their clients’ needs.

Attorney-client privilege may not protect all of counsel’s documents in dual purpose advice situations. But the privilege might protect the portions of the documents that contain legal advice.

In-House Counsel

When in-house counsel’s mixed legal and business communications with clients might be requested, corporate clients sometimes try to anticipatorily shield discoverable information by looping in-house lawyers into business communications that are not legal discussions.

FINRA arbitrators should consider requiring in-house counsel, as the party seeking to shield the communication, to make a showing, by clear and convincing evidence, that counsel was acting in a legal advising capacity in regard to the particular communications withheld on grounds of privilege. This legal purpose must be demonstrated notwithstanding the documents’ labels or other self-serving, self-help arguments.

Smaller Firm /  General Practice Attorneys

Smaller firm and general practice attorneys often represent single clients on multiple issues. Clients routinely ask about multiple items outside of the language in the retainer agreement.   

ABA Model Rule 5.7 outlines the ethical obligations of lawyers engaged in “law-related services”.  It states that:

(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services . . . if the law-related services are provided: 1. by the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or 2. in other circumstances by an entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the services knows that the services are not legal services and that the protections of the client-lawyer relationship do not exist. (b)The term “law-related services” denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services. Privilege may apply, even if the services are provided through an entity distinct from the law firm, unless counsel can establish that it took reasonable measures to communicate the nature of the relationship between the user and counsel.  The definition of law-related services is so elastic that many business-related services that counsel provide could be considered law-related.

ABA Model Rule 5.7(A).

The client holds the attorney-client privilege, so the reasonable understanding of the law firm client who is receiving legal advice-adjacent services controls the privilege analysis. The inquiry would be whether the law firm client understood that in this legal advice-adjacent communication, the client is not a client of the law firm, but rather a user of counsel’s legal services-adjacent offerings, so attorney-client privilege does not apply to, or protect disclosure of, these particular communications with counsel.

This could be a fraught inquiry, as most clients, and some counsel, will have only a hazy understanding of either the facts or the issues, or both.

Government Counsel

Government counsel advise elected and appointed officials, agencies, boards, legislatures, taxpayers, and branches of the military, with opportunities for dual purpose representation. Because government lawyers play a somewhat different role than most private sector lawyers, analyses of their ethical obligations can shift, depending on the purpose for the inquiry. The identity of the “client” may be different for different purposes, for example, conflicts of interest vs. applying the attorney–client privilege.

ABA Model Rule 1.11 creates duties of confidentiality and loyalty for the former government lawyer’s former client, the government entities. Government lawyers’ duty of confidentiality is the same as private sector counsel. Lawyers who were public officers or employees of the government may not reveal information about former clients in most circumstances. ABA Model Rule 1.9(c).

Outside Attorneys Conducting Internal Investigations

Attorneys sometimes provide legal services-adjacent investigation services to organizations. The outside attorneys then advise clients on compliance issues (banking, securities, other areas) as well as legal exposure. Counsel’s analysis and work product obtained during an internal investigation is likely protected by the attorney-client privilege and work product doctrines if the reason for the investigation is to provide legal advice. 

NOTE:

If the client discloses the investigatory report or material related to the internal investigation to the government, either as part of a cooperation agreement or by statutory requirement, or to an entity that is not necessary to the representation, the disclosure may waive privilege.

Best Practices:

Three Steps to Mastering Dual-Purpose Representation Privilege Fights in Arbitration

The U.S. Supreme Court may take the position that federal district court judges can individually determine privilege, and not provide a bright-line analysis. This leaves many arbitrators and administrative neutrals without firm guidance. Unless defined rules are available for the particular forum, the following framework provides a basic approach for arbitrators or administrative neutrals faced with dual-purpose privilege conflicts:   

 1. Party Seeking to Defeat Makes a Prima Facie Showing to Establish the Presumption of Privilege

The party claiming privilege must make a prima facie case that the dual-purpose communication is likely shielded by the attorney–client or attorney work–product privilege.[4] This requires the minimum quantum of evidence necessary to support a rational inference that the assertion of privilege is true.[5] Counsel’s analyses on privilege should track the appropriate jurisdiction’s (generally, the jurisdiction where the advice was provided) professional responsibility rules on privilege.[6] The withheld materials are then presumed privileged and protected from disclosure. The burden of going forward then shifts to the party seeking disclosure to explain the need for the evidence.   

NOTE:

Generally, claims of privilege must be raised timely, at the earliest occurrence of the issue. Because privilege generally shields material in specific adversarial instances, blanket reservations of privilege at the outset of a representation or other process are not effective. Failure to timely raise a claim of privilege may waive the right to assert the privilege later in the same or any subsequent proceeding.

2. The Party Seeking Disclosure Rebuts the Presumption of Privilege by Clear and Convincing Evidence

To rebut the presumption of privilege, the party seeking disclosure of what is now presumed to be privileged material must show, by clear and convincing evidence, that it needs the dual-purpose communication to effectively put on its case. It must show how denial violates a constitutional right, such as the right to confrontation, due process, or privilege against self-incrimination, or another important right. The clear and convincing standard requires evidence that leaves the arbitrator or administrative neutral with a firm conviction that it is highly probable that the factual contentions of the assertion are true.

3. The Party Defending Against Discovery Advocates Responsively

The party refusing to provide the material may refute the claims of the party seeking disclosure by showing that other, non-privileged material can be effectively used to prove the facts, or that there is no need to prove those facts at all (pre-trial motions have eliminated the issue, the parties have entered into a stipulation covering the issue, affected parties have settled or been dismissed, or other developments).

NOTE: A Snapshot of In-Camera Review

If the disputed dual-purpose material contains privileged material, arbitrators and administrative neutrals can consider whether the documents can effectively be redacted or summarized and can order the parties to meet and confer at any time.  

NOTE: When’s the End of the Privilege as we Know it?

Attorney–client privilege, held by the client, usually continues after the death of the client. The client cannot posthumously waive privilege, absent very particular circumstances, demonstrated by clear and convincing evidence. 

Attorney work-product privilege, held by counsel, continues even if counsel dies or retires. If counsel retires, counsel’s firm holds the privilege. If counsel dies, the executor of counsel’s estate holds the privilege.

If the client is a corporation, and a surviving entity, such as a trustee-in-bankruptcy, is in place, privilege survives the “death” of the corporation. Absent a surviving entity, courts have held that the privilege is extinguished.[7] 

Work Cited:

[1] The crime-fraud exception to attorney-client privilege applies to legal advice that is used to further an illegal or fraudulent activity, generally applied prospectively. See U.S. v. Zolin, 491 U.S. 554, 562-63 (1989). Seeking an attorney’s advice on how to deal with a crime or fraud already committed is privileged, unless the client is contemplating covering up a completed crime. To claim that the crime-fraud exception applies, the proponent must make a prima facie case, meaning a mere allegation of criminal activity is not enough. The contested documents themselves cannot be used to bootstrap a finding of criminal activity, but neutrals inspect the contested documents in camera to make the determination.

[2] In re Kellogg, Brown & Root, Inc., 756 F.3d 754, 759-760 (D.C. Cir. 2014), cert. den., 574 U.S. 1122 (2015).

[3] Some courts allow parties to agree that disclosure of certain matters is not a blanket privilege waiver, which may allow cooperation with investigating agencies as well as opposing parties, without privilege push-back. Almost all circuit courts have rejected this selective waiver doctrine. See, e.g. Permian Corp v United States, 665 F.2d 1214 (D.C. Cir. 1981).

[4] See In re Lindsey, 158 F.3d 1263 (D.C. Cir. 1998)

[5] See In re E.I. DuPont de Nemours & Co., 136 S.W.3d 218, 223 (Tex. 2004).

[6] Most jurisdictions’ professional responsibility rules generally track the ABA Model Rules of Professional Conduct. The Comment to Rule 1.6, Confidentiality of Information, states in pertinent part, “The attorney-client privilege and work product doctrine apply in judicial and other proceedings in which a lawyer may be called as a witness or otherwise required to produce evidence concerning a client.” https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional_conduct_table_of_contents/.

In federal cases concerning federal questions, federal law governs privilege. Fed. R. Evid. 501. In federal cases grounded in diversity jurisdiction, state law governs attorney-client privilege. Fed. R. Evid. 501; In re Ford Motor Co., 110 F.3d 954, 965 (3d Cir. 1997).

[7] See, e.g. Sec. & Exch. Comm'n v. Carrillo Huettel LLP, 13 Civ. 1735 (GBD) (S.D.N.Y. 2017).