A PRIMER ON ATTORNEY CLIENT PRIVILEGE: PART 2

By Charles A. Weiss

This article continues our series on attorney-client privilege. In the prior edition of our newsletter, we presented the basic rule of attorney-client privilege as generally applied in the United States, and addressed two problems seen commonly in the case of corporate clients. (See Holland & Knight's China Practice Newsletter: January-February 2021.) The first problem concerned the role of intermediaries or advisors who are involved in a substantive but informal manner in the company's communications with its lawyers. The second problem concerned the distinction between legal advice and business advice, and the issues created by lawyers who wear two hats (legal and business).

This article examines the issue of cross-border privilege, such as how a U.S. court applies attorney-client privilege when the communications at issue are between a non-U.S. lawyer and his or her client.

Lawyers involved in drafting, interpreting or litigating commercial contracts are thoroughly familiar with choiceof-law provisions, which specify what jurisdiction's law will govern. In contract cases when the governing law is specified, U.S. courts will generally adhere to the parties' choice, especially in cases involving commercial agreements, when the parties were represented by counsel and had the opportunity to negotiate and bargain for the choice of law.

By contrast, the choice of law to be applied to claims of attorney-client privilege in cross-border cases is rarely so simple. First, many disputes do not involve a contract between the litigants, such as, for example, patent or trade-secret cases, antitrust disputes and other types of business torts. Second, even when a dispute does involve a contract, the contract's choice-of-law provision will not necessarily be applicable to claims of attorneyclient privilege, which are collateral to the terms of the contract itself. Accordingly, a court hearing such cases will independently determine what law to apply to claims of attorney-client privilege. Indeed, this is true even in cases that involve solely U.S. litigants, as when a Delaware corporation with its headquarters in New Jersey that obtained advice from a New York lawyer is litigating in a Florida court against a Nevada corporation with its headquarters in Arizona that obtained advice from a California lawyer. Happily for the sanity of the litigators, and the legal budgets of the litigants, cases like this will more often than not involve what is referred to as a "false conflict," meaning that the various states' rules of privilege are either not materially different, or that the differences that do exist would not affect the outcome of the privilege issue. In the case of a false conflict, the court does not have to decide what law applies because the result would be the same under all potential choices.

A false conflict may also exist in a cross-border dispute, but oftentimes one party will perceive an advantage in raising a choice-of-law issue. For example, a U.S. company that has been advised only by U.S. lawyers, which knows that its own privilege claims will be evaluated under the very protective U.S. standard, may assert that its non-U.S. adversary's privilege claims should be governed by less-protective laws of the adversary's own jurisdiction. On the other hand, a U.S. litigant may argue for the application of U.S. privilege rules if its non-U.S. adversary's legal communications would be protected under the laws of its home jurisdiction, but would not be protected under the U.S. privilege standards.

CHOICE OF LAW TESTS: "TOUCH BASE" APPROACH VERSUS "FUNCTIONAL" APPROACH

Complicating matters, U.S. courts use to different tests, which will often result in different outcomes, to adjudicate cross-border privilege issues. Most often, court use the "touch base" approach, which asks which jurisdiction has the predominant interest in the confidentiality of the communications at issue. This will usually be the jurisdiction in which the lawyer and client entered into their relationship, or which was at the center of

the relationship when the communications occurred (these will often be the same). However, communications concerning U.S. legal proceedings will generally be found to "touch base" with the U.S. without regard to the nationality or location of the lawyer and client.

Less commonly, courts use the "functional" approach, which starts with the laws and rules of the non-U.S. jurisdiction in which the communications took place, but seeks to harmonize them with the realities of legal practice in both the non-U.S. jurisdiction and in the U.S.

As will be seen, the "touch base" approach is more likely than the "functional" approach to result in a holding that privilege does not apply.

APPLICATION OF THE "TOUCH BASE" APPROACH

At issue in Wultz v. Bank of China Ltd., 979 F. Supp. 479 (S.D.N.Y. 2013), was the plaintiffs' attempt to obtain discovery in a civil case of documents withheld by the Bank of China on the basis of attorney-client privilege. The documents at issue contained communications between the bank's in-house counsel and its business personnel. For purpose of its analysis, the court separately addressed communications that occurred before or after the date on which plaintiffs sent the bank a demand letter.

Under the "touch base" approach, China had the predominant interest in the protectability of communications that occurred prior to the date of plaintiffs' demand letter. This followed because the relationship existed in China, the communications occurred in China, and the communications did not concern U.S. legal proceedings or demands made under U.S. law. By contrast, communications that occurred after the date of plaintiffs' letter and concerned the plaintiffs' U.S. claims were held to "touch base" with the U.S. because they pertained in part to a claim made under U.S. law, even though plaintiffs' did not file suit in the U.S. until three years later.

Although the court applied Chinese law to the first group of communications and U.S. law to the second group of communications, the result was the same: privilege did not apply.

With respect to the first group of communications, which were held to touch base with China and thus would be governed by Chinese law, the court found that China did not recognize attorney-client privilege. Although the court acknowledged that Chinese law imposed on Chinese lawyers a duty of confidentiality, that duty was an ethical obligation and but not coupled with a law of evidence that made evidence of attorney-client communications inadmissible in court. In this regard, it observed that the provisions of Chinese law that authorized courts to compel testimony, Articles 67 and 72 of the Civil Procedure code, did not prohibit the courts from compelling testimony concerning attorney-client communications. It rejected the bank's argument that a Chinese court would compel such testimony, holding that the governing standard was whether a Chinese court could do so. Accordingly, because the court determined that the communications "touched base" with China and would not be protected under Chinese law, it compelled the bank to produce them.

Turning to the second category of communications, those which occurred after the bank received plaintiffs' demand letter and that concerned the plaintiffs' U.S. claim, the court applied U.S. privilege law because they "touched base" with the U.S. Here, the bank's privilege claim was rejected because its in-house counsel were not licensed as attorneys, and such licensure was required under the U.S. rules of attorney-client privilege. It rejected the bank's argument that its in-house counsel served as the "functional equivalent" of lawyers and were permitted by Chinese law to give legal advice. It observed that U.S. law justifies privilege because the authority of a lawyer "derives from her position as a member of the bar." Id. at 495. This was not the case for in-house legal advisors in China, who were not required to be members of the bar. "While the Chinese legal system may be developing, the distinctions between lawyer and in-house counsel are clear and presumably exist for a good reason. I see no compelling reason to ... create a 'functional equivalency' test for the invocation of attorney-client privilege when applying United States law." Id.

Another example of the "touch base" approach, Astra Aktiebolag v. Andrx Pharmaceuticals, Inc., 208 F.R.D. 92 (S.D.N.Y. 2002), concerned communications between a Swedish company and its outside counsel in Korea concerning Korean legal proceedings. The court began its analysis by finding that these communications "touched base" with Korea and would in the first instance be governed by Korean law. At the time, Korea did not recognize attorney-client privilege. However, it also had no mechanism under which a litigant or court could compel a Korean lawyer to testify to communications with his or her client. Thus, although the communications were not formally protected under Korean law, their confidentiality was protected as a practical matter because there was no way to compel their disclosure. Finding that application of Korean substantive law to decline a recognition of privilege would lead to an unreasonable outcome if applied in a U.S. litigation, in which the rules of procedure permit broad discovery in stark contrast to Korean procedure which did not permit such discovery, the court held that privilege should apply to prohibit discovery of the communications. Although this decision is seemingly at odds with the Wultz case, they can be distinguished by the Astra court's finding that the Korean courts could not compel disclosure, as compared to the Wultz court's finding that even if the Chinese courts would not compel disclosure, they had the legal authority to do so.

APPLICATION OF THE "FUNCTIONAL" APPROACH

As can be inferred from the court's rejection of a "functional" approach in the Wultz case, the "functional" approach is more likely to support a claim of privilege because it looks to the function and duties of the person acting in the role that would be filled in the U.S. by a lawyer, as opposed to that person's formal status or licensure under the laws of his or her non-U.S. jurisdiction.

An example of the pure application of the "functional" approach can be found in Renfield Corp. v. E. Remy Martin & Co., S.A., 98 F.R.D. 442 (D. Del. 1982). At issue in that case were communications between a French company and its in-house legal advisors. French law recognized two categories of lawyers, corresponding roughly to the more familiar categories of barrister and solicitor under English law. The "avocat" was similar to a barrister: he provided legal advice and could appear in court, but could not be an employee of a company. The "conseil juridique," similar to a solicitor, provided legal advice but could not appear in court, and if not selfemployed could be employed only by or in a firm of conseils juridiques. Thus, while a legally trained person employed by a company as a legal advisor could not fit into either category, such persons were permitted under French law to provide legal advice to their employer. Applying the "functional" approach, the court found that the company's communications with such persons would be accorded protection under attorney-client privilege even though privilege would not be recognized under French law, and a strict application of U.S. law would refuse the application of privilege because the in-house legal advisors were not licensed attorneys. Id. at 444 ("[T]he requirement is a functional one of whether the individual is competent to render legal advice and is permitted by law to do so. French 'in-house counsel' certainly meet this test; like their American counterparts, they have legal training and are employed to give legal advice to corporate officials on matters of legal significance to the corporation.").

ISSUES WITH IN-HOUSE ATTORNEYS

As can be seen from the cases discussed above, and as discussed in our previous article in this series, the difficulty of successfully asserting a claim of attorney-client privilege is greater in the case of in-house attorneys. Most often, communications between an non-U.S. company and its in-house legal advisors will "touch base" with the country in which they are located. If that country does not recognize attorney-client privilege for in-house legal advisors, it will be difficult to convince a U.S. court that it should extend U.S.-style protection. Roughly stated, the "touch base" approach will start and end with the premise that the company would not have expected such communications to be protected by its own country's legal system. This result follows from the central assumption behind American-style privilege rules, which is that clients will be inhibited

from communicating freely and candidly with their lawyers if robust privilege did not exist. By operating without this high degree of attorney-client privilege, non-U.S. legal systems have shown either that this assumption does not hold, or that the downside of privilege (inhibiting the search for the truth) is felt to outweigh its benefits.

Some jurisdictions that generally recognize attorney-client privilege do not include in-house lawyers within the scope of protection. For example, the court in the Renfield case ruled in favor of the privilege claim because the French company's in-house lawyers were acting as the functional equivalent of an American-licensed attorney, even though France did not recognize them as such. Had the court applied the "touch base" test instead of the "functional" test, the assertion of privilege would have failed regardless of whether the communications touched base with France (because French law did not recognize them as attorneys) or with the U.S. (because even though they were permitted by French law to render legal advice, they were not licensed attorneys). More recently, the federal court in Delaware has in several cases rejected claims of privilege asserted by Indian companies for communications with their in-house legal advisors, because India provides that attorneys may not be employees of their clients, such that the licensure of attorneys who go inhouse is effectively suspended during the period in which they remain employees of the company.

The Wultz case also illustrates what can seem like a "heads I win, tails you lose" rule for communications with in-house lawyers. Recall first that privilege was held not to apply for communications that "touched base" with China because attorney-client privilege was not recognized by Chinese law. But even for communications that "touched base" with the U.S. because they concerned U.S. proceedings, the privilege claim failed because the in-house counsel were not licensed as attorneys as required for a valid assertion of privilege under U.S. law.

ISSUES WITH PATENT AGENTS AND PATENT ATTORNEYS

Given the highly international nature of patent procurement and enforcement, cross-border privilege issues often arise in patent infringement litigation. Here, the usual challenges of determining the application of privilege can be increased by issues of nomenclature and licensure.

In the U.S., "patent attorneys" or "patent lawyers" are fully qualified and licensed attorneys-at-law, permitted to appear in court and provide their clients with the full range of legal services. In addition to being licensed by one or more states as attorneys, they are separately licensed by the national government to represent clients before the U.S. Patent and Trademark Office in patent matters, such as the submission and prosecution of patent applications. Less common are "patent agents," who are not legally trained, are not licensed as attorneys and hold only the license to represent clients before the U.S. Patent and Trademark Office in patent matters. Unlike a patent attorney, a patent agent is not authorized to advise clients on questions of infringement or validity of patents held by others, or in connection with license agreements, because such matters are considered to be the practice of law. Because their limited scope of practice makes it harder to represent clients on their own, most patent agents are employed by law firms or companies, and work to a greater or lesser degree in collaboration with patent attorneys.

By contrast, most persons outside the U.S. with the title "patent attorney" are not attorneys at law. For example, a German patentanwalt will be referred to in English as a "patent attorney" but has a scope of practice that is broader than that of a U.S. patent agent but not as broad as that of a German rechtsanwalt (attorney at law) or a U.S. patent attorney.

Because the viability of a privilege claim under the "touch base" approach may turn on whether the jurisdiction in which the communication took place would be recognized as privileged under the laws of that jurisdiction, it can be necessary to determine the nature of license held by non-U.S. persons with the title of "patent attorney," because their entitlement to privilege may not be the same as that of an attorney at law.

REDUCING RISKS

Most of the strategies to enhance the likelihood of successfully asserting attorney-client privilege in U.S. litigation with respect to non-U.S. communications will come at an economic cost. To be cost efficient, one should start by considering the potential importance of winning a privilege dispute in the event of U.S. litigation. For example, even U.S. companies that are sensitive to privilege issues may use non-attorney personnel for tasks that are legal in nature but not particularly sensitive, such as keeping track of and reporting on the terms of contracts. Many times, it is entirely reasonable to conclude that the added cost of engaging a lawyer to handle certain issues just to enhance a privilege claim in the event of an unforeseeable dispute is unwarranted if the task can be adequately handled by a well-trained employee who is not a lawyer. However, for matters that are sensitive, potentially contentious, of high economic value or risk, or implicate laws or regulations that carry a stiff penalty for noncompliance, the additional cost of taking steps to enhance the viability of a subsequent privilege claim may be money well spent.

One should start with an assumption that a U.S. court will apply the "touch base" test to non-U.S. communications. Thus, because communications may be found to "touch base" with either the non-U.S. jurisdiction or with the U.S., it is prudent to work toward satisfying both the local standards and the U.S. standards.

It is beyond the scope of this article to suggest ways to comply with non-U.S. standards for attorney-client privilege, beyond the reminder that some jurisdictions do not recognize privilege for communications with inhouse legal advisors. If this is the case in the reader's jurisdiction, it may be necessary to engage outside counsel to augment the role of in-house counsel.

To satisfy the U.S. privilege standards if a court finds that the communications touch base with the U.S., we repeat from the first article in this series the general rule that governs attorney-client privilege under U.S. law. Specifically, privilege applies to communications 1) between a lawyer and client, 2) in confidence, and 3) for the purpose of requesting or receiving legal advice. It will be the rare case that communications with outside counsel who are licensed as attorneys-at-law in the jurisdiction in which they practice will not satisfy the U.S. standard for privilege to attach. Accordingly, the most reliable way to ensure that privilege attaches to legal communications in those instances where the availability of privilege is deemed valuable is to engage outside counsel.

Our next article will address the common-interest and joint-defense doctrines, which provide in certain circumstances that a client's disclosure of privileged communications to a third party is not a waiver of privilege. As will be seen from that article, care must be taken before relying on these doctrines, because their scope is not always as broad as often believed.