It is increasingly common for businesses to use outside consultants, independent contractors and other third-party nonemployees to develop and manage their business. These third parties often operate in the same manner as employees of the business and possess information the business’ attorneys would not otherwise have if it were not for the nonemployee. The issue is whether the attorney-client privilege protects these communications between a corporation’s legal counsel and a third-party nonemployee of the corporation.
The Tennessee Supreme Court recently addressed this issue in Dialysis Clinic, Inc. v. Medley, No. M2017-01352-SC-R11-CV, 2019 Tenn. LEXIS 17 (Jan. 25, 2019) and held the attorney-client privilege applies to communications between an entity’s legal counsel and a third-party nonemployee of the entity if (1) the nonparty is the functional equivalent of the entity’s employee; (2) when the communications relate to the subject matter of legal counsel’s representation of the entity; and, (3) the communications were made with the intention that they would be kept confidential.
Generally, the idea of privilege is this: communications between a client and the attorney are confidential. Privilege protects the attorney and client from being compelled to disclose confidential communications between them made for the purpose of furnishing or obtaining legal advice or assistance. It is best to check your local laws in order to determine the precise definition of “privilege” for your state.
In Tennessee, privilege is protected by the language of the following statute:
No attorney, solicitor or counselor shall be permitted, in giving testimony against a client or person who consulted the attorney, solicitor or counselor professionally, to disclose any communication made to the attorney, solicitor or counselor as such by such person during the pendency of the suit, before or afterward, to the person’s injury.
T.C.A. § 23-3-105 (2018).
Whether privilege applies to a communication differs slightly in each state. In Tennessee, it is “question, topic and case specific.” Bryan v. State, 848 S.W.2d 72, 80 (Tenn. Crim. App. 1992)(citing Johnson v. Patterson, 81 Tenn. 626, 649 (1884)). It is important to note the attorney client does not protect communications between attorneys and clients that take place in the presence of a third party or are divulged to a third party. Hazlett v. Bryant, 241 S.W.2d 121, 123 (Tenn. 1951.) In other words, the attorney-client privilege can be broken by a third party.
The facts of Dialysis Clinics, Inc. v. Kevin Medley et al. are relatively straight forward. Dialysis Clinic Inc. owned and operated dialysis centers. They owned and leased various commercial properties to third parties but had no in-house knowledge about or experience in the management of commercial rental properties. Therefore, Dialysis Clinic Inc. entered into a property management contract with XMi to manage several of their commercial properties. Under their property management agreement, XMi acted as Dialysis Clinic’s agent on an exclusive basis to manage and operate the properties. The scope of XMi’s work included negotiating lease renewals and amendments; collecting rents and dues; canceling or terminating leases upon Dialysis Clinic’s direction; and instituting, prosecuting, and defending all actions involving the leases and their properties. XMi handled all day to day operations and tenant relations and regularly communicated with Dialysis Clinic about those matters. XMi also communicated with Dialysis Clinic’s in house and outside attorney about the properties because in XMi’s role as a property manager, it had information about the properties that Dialysis Clinic did not have.
In October 2014, Dialysis Clinic filed unlawful detainer suits for three of its properties in Davidson County. The Defendant, Kevin Medley LLC, served a subpoena on XMi and requested documents related to the properties in question be turned over. These documents consisted of emails between XMi and Dialysis Clinic’s in-house and outside counsel. Dialysis Clinic argued the emails were protected by the attorney client privilege. The case made its way to the Tennessee Supreme Court, who turned to other jurisdictions for guidance on the issue.
In the 8th Circuit, the Bieter court observed that although the information an attorney needs to represent a client will in most cases be available from the client’s employees, there will also be nonemployees whose relationship to the client suggests that they will possess the very sort of information that privilege envisions. In re Bieter Co 16 F.3d 292, 937-938 (8th Cir. 1994). In Beiter, an independent contractor worked as a consultant to a partnership on a commercial development. The independent contractor worked to procure tenants and acted as the representative to the partnership with architects, other consultants and the partnership’s attorneys. His interactions were extensive and included meetings and correspondence with the attorneys. The Bieter court held that the attorney client privilege applied because the independent contractor had been involved daily with the partnership’s principals, and the court found that the independent contractor likely possessed information that no one else possessed.
The Tennessee Supreme Court also reviewed the 9th Circuit Court of Appeals decision in United States v. Graft, 610 F.3d 1148 (9th Cir. 2010). Graft was a criminal case involving an insurance company accused of fraud. The owner of the company was prohibited under a cease and desist order from being employed by an insurance company, and therefore he denied that he was a director, officer, or employee of the company but claimed instead he was an outside consultant. The Graft court found the owner was the functional equivalent of a company employee because he was the company’s agent with authority to communicate with its attorneys about legal matters. Under a separate test, the Graft court found the company’s owner in his individual capacity, as opposed to his role as a functional employee, was not represented by the company’s attorneys, and thus he had no personal attorney-client privilege over his communication with the company’s attorneys.
In Pennsylvania, a pharmaceutical consulting firm was held to be the functional equivalent of an employee of a pharmaceutical company based on the firm’s role in the development and implementation of a brand maturation plan, including administrative tasks and business strategy as well as involving the in legal and regulatory issues. In re Flonase Antitrust Litigation, 879 F. Supp. 2d 455 (E.D. Pa 2012). In Maryland, a federal district court held a landscaping company, hired to address citations issued to a landowner by the county, was the functional equivalent of an employee of the landowner. Huggins v. Price Georgy’s Cnty., No. AW-07-825, 2008 WL 11336503, at *4 (D. Md. Sept. 25, 2008).
The Tennessee Supreme Court formulated its own analysis in determining, under the totality of the circumstances, whether a third-party nonemployee is the functional equivalent of an entity’s employee whose communications with the entity’s attorneys are protected by the third-party privilege. The analysis consisted of two prongs.
First, the Court considers the following non-exclusive factors: whether the nonemployee performs a specific role on behalf of the entity; whether the nonemployee acts as a representative of the entity in interactions with other people or other entities; whether, as a result of performing its role, the nonemployee possesses information no one else has; whether the nonemployee is authorized by the entity to communicate with its attorneys on matters within the nonemployee’s scope of work to facilitate the attorney’s representation of the entity; and whether the nonemployee’s communications with the entity’s attorneys are treated as confidential. If the Court determines the nonemployee’s communications qualify for the attorney-client privilege because the nonemployee is the functional equivalent of an employee outlined above, the Court will then use the standard already in place in Tennessee to determine whether the privilege attaches to the communication.
Applying its new analysis in Dialysis Clinic, the Tennessee Supreme Court held the attorney-client privilege applied to communications between Dialysis Clinic’s legal counsel and XMi. The Court found XMi acted as a functional equivalent. Further, Court found communications between XMi and legal counsel for Dialysis Clinic related to the subject matter of counsel’s representation of Dialysis Clinic’s and were made with the intention that the communications would be kept confidential.
What does this mean for your company? More communications between in-house or outside counsel, third party contractors, brokers, consultants, public relation or marketing firms, or any other third-party nonemployee may be protected. Check to see whether your state uses a form of the “functional equivalent” analysis along with a review of what defines privilege in your state.