Corporations Must Limit Distribution of Advice to Maintain Attorney-Client Privilege

In this post, guest blogger M. Kay Martin describes a recent California appellate court opinion illustrating what corporations must to do avoid waiving attorney client privilege.

The decision, Zurich American, holds that in order to avoid waiver, corporations should limit distribution of attorney advice, opinions and strategy to those who “need to know,” and recipients should be cautioned not to indiscriminately forward the document to others who may not fall within that description.

Case: Zurich American Ins. Co. v. Superior Court (Watts Industries, Inc.), Case No. B194793 (Cal. Ct. App. 10/11/07)

The One Sentence Summary: The attorney-client privilege applies to internal corporate communications that discuss legal advice and strategy even if the corporation’s attorneys are not directly involved in the communications, so long as the communications are shared only with persons present to further the interest of the client in the consultation or to whom disclosure is reasonably necessary to transmit the information or to accomplish the purpose for which the lawyer was consulted.

What They Were Fighting About: Watts Industries sued its insurer, Zurich American, for bad faith arising out of Zurich’s failure to defend and indemnity Watts in underlying litigation, and Zurich sought declaratory relief under the policies. Watts moved to compel production of documents from Zurich’s claims file, including documents related to loss reserves and reinsurance, that had been withheld based on attorney-client privilege and the attorney work product doctrine. The trial court ordered that the documents had to be produced, ruling that internal documents concerning reserves and reinsurance matters were not privileged, even though many of them discussed internal litigation plans and strategy, because the privilege was limited to direct communications between the client and attorney.

California Court of Appeal Holdings:
The Court of Appeal held that the trial court “used an overly restrictive standard for application of the attorney-client privilege” and directed the trial court to re-review the disputed documents applying the following principles:

First, the court must determine whether the document discusses legal advice, opinions or strategy of counsel. If so, the document is privileged.

Second, the court must then decide whether the privilege was waived by distributing the advice within the corporation. The privilege would be maintained so long as the document was shared only with those “present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted” and there is a showing that the document “was to be treated as confidential.”

Providing additional guidance, the Court of Appeal also noted that merely copying counsel on correspondence or memoranda does not confer a privilege; that relevant facts may not be withheld just because they are incorporated in a communication involving an attorney; and that the attorney-client privilege does not apply where the attorney is acting as a business agent, i.e., giving business advice or acting as a negotiator.