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This article reviews recent developments that attorneys practicing in the labor, employment, and employee benefits areas must address to effectively advise and represent their clients and to facilitate their clients' ability to claim that certain attorney-client communications are protected by the attorney-client privilege and work-product doctrine.1 While these protections are the client's to claim, the attorney advising the client is best able to assist the client in documenting privilege and exemption claims and to advise the client when communications may be at risk of nonprotection based on (i) application of the fiduciary exception to the attorney-client privilege or work-product doctrine; and (ii) other ways the client's privileges and exemptions may be at risk. This article reviews recent developments in attorney-client privilege and the work-product doctrine in the context of the labor, employment, and employee benefits practice areas. As discussed below, these practice areas frequently overlap factually. As a result, the failure to consider the impact of factual nuances in each practice area may create risks when an attorney seeks to protect the client's privilege or to rely on the attorney work-product exemption. Moreover, attorneys must carefully consider the ethical implications of their actions when performing tasks and communicating with clients so as to protect and preserve a client's claim of attorney-client privilege or work-product exemption. A checklist for preserving attorney-client privilege can be found here.
To be sure, the party or person claiming the privilege or work-product exemption bears the burden of proving that the privilege applies. Accordingly, the claiming party should document when the privilege or exemption is applicable to documents, statements, communications, or other work products that are part of litigation, investigations, audits, or other disputes. Preparing such documentation at the time the document or communication is prepared:
Merely placing a claim of privilege or work-product protection on every communication or document may raise questions as to the authenticity of the claim and place it in jeopardy when reviewed.
Furthermore, the rules of the various jurisdictions require an attorney to maintain client confidences and to protect and secure the attorney's legal advice. The Model Rules of Professional Conduct (Model Rules) require attorneys to keep legal advice secure, and this requires preservation of the privilege. For example, Model Rule 1.6 requires an attorney not to reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted under one of seven other enumerated exceptions2. And while the American Bar Association has published the Model Rules, each state modified those rules when it adopted its own rules of professional responsibility.
In addition to the individual state modifications, courts have interpreted the Model Rules in a variety of ways in different jurisdictions and in a host of factual situations. Accordingly, an attorney must carefully review the applicable rules in the jurisdiction in which the attorney practices as well as in the jurisdiction in which the client operates and may be subject to lawsuit. Moreover, employers operating in multiple jurisdictions may be sued in multiple jurisdictions, not only under a plethora of labor and employment laws but also under the Employee Retirement Income Security Act. Consequently, in the labor, employment, and ERISA context, lawyers should be cognizant that, while they may be advising their client in one jurisdiction, the rules that may ultimately apply to whether their communications are privileged or protected as work product may be determined under a separate jurisdiction's interpretations of the attorney-client privilege, work-product doctrine, the fiduciary exception to the attorney-client privilege, or other privileges and exemptions.
This paper now turns to a few background examples of the overlapping privilege and work-product ethical issues in the employment and employee benefits setting.
As discussed in “The Fiduciary Exception” section below, the advice the administrator receives may not be protected by the attorney-client privilege because, when the employer acts as an ERISA plan fiduciary, the legal advice the employer seeks may be discoverable by a plan participant or beneficiary because the employer—as plan administrator—is acting in a fiduciary capacity under ERISA and must act in the best interest of plan participants. Thus, what may have been thought to be advice to the employer, in a retrospective review by a court, may be viewed as advice to a fiduciary that must be disclosed to all plan participants and beneficiaries should a dispute arise.
If the employer settles the claim outside the plan, the employer is not acting as a fiduciary of the plan, but as the employer. While this may help to preserve the attorney-client privilege by removing the communications from the fiduciary exception to the privilege, it nevertheless raises additional issues. For example, direct settlement outside of the plan with a represented union member may constitute negotiating directly with a represented individual, potentially in violation of the collective bargaining agreement. This could also result in the settlement being viewed as additional compensation paid to the represented employee beyond the terms of the collective bargaining agreement and, in some cases, in violation of the agreement or a requirement to maintain the status quo under the agreement.
As each of the preceding examples demonstrates, given the interrelationship of the labor, employment, and employee benefits practice areas and how the changing roles of the same employer may result in different legal obligations, attorneys need to be particularly mindful of the impact of the advice they render.
Identifying who is the client can be critical in other situations, such as in internal investigations. In a recent stock-options backdating investigation, attorneys for the company explained to employees that they represented the entity in the investigation and not individual employees, who were free to seek their own counsel.10 An employee later was unable to claim attorney-client privilege in a subsequent criminal prosecution based on his statements made during the investigation because the attorneys had clearly stated that they represented the company and not any of the individuals. Thus, it is important that your client and any party who might believe he or she is part of the client is plainly identified and documented. Identifying who is the client is also important so the employees know if they need to seek their own representation.
Identifying who is the client and the role in which the client is acting also becomes important to preserving privilege by preventing waiver through disclosure to nonclients. For example, in Steelworkers v. IVACO Inc.,11 a union's in-house counsel provided the union members his memorandum prepared for the union on the union's potential causes of action against the employer for terminating its retiree medical plan. The union's in-house counsel failed to recognize that his client was the union, not the individual union members. Accordingly, his disclosure of the memorandum to the union members was disclosure to nonclients, and privilege no longer applied to the memorandum after it was disclosed to persons who were not his client. Thus, failure to identify the client and to limit disclosure of the advice to the client resulted in the loss of privilege.
Consequently, if the party in question is acting in the capacity of a fiduciary and the communication would otherwise meet the requirements for attorney-client privilege, the next step is to determine whether the fiduciary exception would apply. Courts have interpreted and applied the exception in a variety of ways since the U.S. Court of Appeals for the Second Circuit decided the primary decision involving ERISA plans and privilege, namely, In re Long Island Lighting Co.13 Whether the fiduciary exception applies varies by the types of documents the court reviews and the point at which the dispute arises in the claims adjudication process, in appeals, or in a litigation context.
As a threshold matter, the fiduciary exception applies when the client is acting as a fiduciary. The client may be acting as a fiduciary when an ERISA plan administrator makes decisions on claims and, in some jurisdictions, on appeals. For instance, a client may be acting as a fiduciary when it is part of an ERISA plan committee making decisions on plan claims, plan investments, a self-directed retirement plan's designated investment alternatives, or communications to plan participants. The client could be part of the employer's human resources department or any other department or division of the employer involved in communications to participants. This may include an employee relations department when making communications regarding employee benefit plans subject to ERISA or responding to inquiries regarding transactions, window programs, and other events impacting benefit plans. Moreover, a client may engage in a fiduciary action outside the ERISA plan context, such as when a company board acts in a fiduciary capacity with respect to the company's shareholders.14 Thus, the role in which the client is acting is key to determining whether privilege or work-product protections apply.
However, not all advice to a fiduciary is subject to the fiduciary exception and discoverable. Fiduciaries may receive advice that is protected by privilege in certain circumstances—these limits to the fiduciary exception were developed to define those situations in which a fiduciary may seek legal advice and rely on the attorney-client privilege to protect that advice from disclosure and are discussed later in this article. Some courts, however, have not applied the limitations to the fiduciary exception when the employer could not establish that the documents in question were fully unrelated to plan administration and had not been used in connection with a defendant's role as plan administrator.15 All the elements for claiming the privilege and avoiding the application of the fiduciary exception are fairly similar in most jurisdictions concerning fundamental requirements, but there are some variations.
In turn, if the plan is not an ERISA employee benefit plan, a fiduciary duty may not apply. Executive compensation plans are frequently not plans subject to ERISA and, therefore, do not carry with them the fiduciary duties under ERISA. This was recognized in a recent case in the U.S. Court of Appeals for the Seventh Circuit in which an executive asserted that the fiduciary exception should require disclosure of all legal advice provided to the company; the court, however, concluded that the fiduciary exception did not apply because top-hat plan administrators were not subject to the fiduciary requirements of ERISA.19 Absent any fiduciary duties related to a non-ERISA severance plan, the advice was not for the benefit of the beneficiaries of the non-ERISA plan.20
In contrast, in Stephan v. Unum Life Ins. Co., 24 the Ninth Circuit recently held that the fiduciary exception applies until the final denial upon the appeal of the claim is issued. The Ninth Circuit's decision will impact in-house counsel who frequently provide advice to plan administrators or fiduciaries during the claim and appeal process, and before the final adverse benefit determination is issued. Some other recent interpretations on when interests diverge are explored below because, while the Ninth Circuit has adopted a “final denial” standard for determining when interests diverge sufficiently to stop application of the fiduciary exception to the attorney-client privilege, not all circuit courts have established such a bright-line rule. It is unclear how this final denial-upon-appeal standard will work with health care reform's mandated external review process for some medical plan claims. Will the external review be the final denial upon appeal or will the final appeal prior to the external review be the final denial upon appeal?
In Theis v. Life Insurance Co. of North America,25 an email sent after the claim was denied but before the appeal was filed is subject to the fiduciary exception, even though the plaintiff had consulted an attorney in the appeal process. Similarly, in Holmes v. Bethlehem Steel Corp. Pension Plan,26 a memorandum prepared by an attorney in the claims administration process regarding whether interest should be credited on a delayed payment of a pension benefit was not privileged. The court applied the fiduciary exception and concluded that the memorandum was also not protected as work product because it was not prepared in anticipation of litigation.
In Clarke v. Unum Life Insurance Co. of Am.,27 a participant was receiving long-term disability benefits when the insurer stopped the benefit payments. The participant appealed the cessation of benefits and brought a declaratory action that she was entitled to the benefit, during which she sought discovery of the insurer's administrative record on the claim. The documents in question were communications between the insurer and its counsel before the filing of the lawsuit seeking the declaratory judgment. Nevertheless, the court found that the privilege log established these documents were privileged and that the plaintiff failed to demonstrate that the fiduciary exception applied to them. In contrast, in Moss v. Unum Life Insurance Co. of Am.,28 the court concluded that communications after the claim was denied and that were related to the litigation were not subject to the fiduciary exception because they were prepared in anticipation of litigation.
Similarly, the court in Belluardo v. Cox Enterprises Inc. Pension Plan concluded that, once litigation was filed against a plan administrator, the communications between counsel and the plan administrator were protected as privileged.31 Several courts, however, have not applied this “litigation” limitation on the fiduciary exception when the employer could not establish that documents were wholly unrelated to plan administration and had not been used in connection with defendant's role as plan administrator.32
One strategy for trying to prevent disclosure of privileged communications is to isolate communications related to plan administrator or settlor functions from those related to fiduciary functions by using separate legal counsel for each. This will likely avoid overlapping or intermingled legal advice for the different settlor, plan administration, and litigation functions so as to preserve the protection of privileged communications.
Accordingly, when representing an employer regarding changes to a plan via a plan amendment or a plan amendment necessitated by a change in the collective bargaining agreement (for example, when the collective bargaining agreement changes the way in which vacation is accrued that may impact the plan's calculation of service based on changes in the application of Department of Labor rules on service crediting), and also representing the employer on other issues related to the plan, an attorney should keep the advice related to the plan segregated from any advice regarding communications to the employees on plan benefits or changes. If the communication relates to plan amendments, an attorney should make clear that the communication relates solely to plan amendments—a settlor function—and does not relate to any fiduciary act and, therefore, is not discoverable under the fiduciary exception to the attorney-client privilege.35
Nevertheless, the “segregation” of attorney advice is not foolproof and does not avoid judicial review of each attorney-client communication. For example, a company segregated its advice for different functions to separate counsel, and it appeared to be fairly well-segregated. Nevertheless, when the company was sued on its defined benefit plan benefit calculation and the company sought from litigation counsel an interpretation of the plan's provisions and the calculation methodology used under those provisions, the court ordered the disclosure of the communication even though it was a communication with litigation counsel. The court concluded that the advice was subject to the fiduciary exception because the advice related to plan interpretation, construction, and benefit calculations, which are all plan administration functions.36
In contrast, courts in the U.S. Court of Appeals for the Sixth Circuit have not considered whether an insurer can or cannot be a fiduciary with respect to a plan, and, as a result, the fiduciary status of the insurer is not frequently analyzed. But the fiduciary exception is applied in the insured plan cases. For example, in Moss v. Unum Life Ins. Co., 41 the fiduciary exception was found not to apply to communications after a claim was denied, but was still in the appeal process, because the court found that there was no reason to apply the fiduciary exception to all fiduciaries in the same way. The fiduciary exception did not apply to documents created before the final benefit denial determination because the documents were prepared in contemplation of litigation; hence, they were privileged and not subject to the fiduciary exception. The Moss court explained in dicta that it did not adopt the reasoning of Wachtel and that no statutory basis existed for applying the fiduciary exception to all fiduciaries except insurers.
Generally, communications generated before the claim is denied are subject to the fiduciary exception; however, the district court in Buzzanga v. Life Ins. Co. of N. America concluded that documents generated after a claim was denied and in response to an appeal filed by the participant's attorney were protected by the attorney-client privilege.42 Yet, in a later case in the same district court just 14 months later, the court found that advice provided at the same time in the ERISA claim and appeal procedure time line was not privileged.43The difference appears to be that in Buzzanga the employee waited one year to file her appeal; thus, the court determined that the initial benefit denial had become a final determination. In Carr, however, the employee filed his appeal more rapidly (i.e., on a timely basis), and advice provided in emails by the in-house counsel relating to the appeals process, which were generated after the initial claim denial, were not privilege protected, but rather were subject to the fiduciary exception, because Carr's interests were not sufficiently divergent from the plan administrator's. However, emails counsel later sent regarding the drafting of the final denial letter were privileged and not subject to the fiduciary exception because the parties' interests were then sufficiently adverse.44 The decisions in Carr and Buzzanga occurred at the same time in the appeal process, after the initial denial, but were treated entirely differently. This difference in treatment demonstrates how factually sensitive these determinations are for each communication, especially when the federal circuit court has not established a bright-line precedent for the circuit.
Other courts reviewing insurer decisions have not always reviewed the role of the insurer and attempted to determine whether it was acting as an insurer or whether it was a fiduciary to the ERISA plan. This difference in analysis has led to different case law results. The following cases review the application of the fiduciary exception in other insured plans when a benefit plan's benefits are provided through a fully-insured insurance policy.
In Hooper v. Unum Life Ins. Co.,45 the court looked at claims of privilege and the fiduciary exception in the context of plans whose benefits are provided via fully insured policies. In four communications between the insurance company and its in-house lawyers, the district court determined that the communications were made before the final decision to deny benefits was made and, as a result, were not protected. All four documents were discoverable because they were part of the claims administration process and concerned Unum's activities in deciding claims under the insurance policy in its fiduciary capacity. The case did not consider whether the insurance company is a fiduciary with respect to an ERISA plan, but solely analyzed whether the claim had been decided.46
In Buzzanga, discussed previously, the court decided that three communications generated before the claim was denied were not protected by the work-product doctrine because they fell within the fiduciary exception to the attorney-client privilege and were made while the company was acting on behalf of plan beneficiaries as a plan administrator. The fourth document, generated in response to an appeal by the participant's attorney, was protected by attorney-client privilege because the prospect of litigation at that time was sufficient to invoke the privilege, in part because counsel had been retained.47 While this court permitted the privilege claim to stand, the court's rationale to support nondisclosure is not clear, namely whether the fiduciary exception did not apply or whether a limitation to the exception applied.
In Moore v. Metropolitan Life Ins. Co., the putative beneficiary filed a lawsuit alleging she was entitled to life insurance proceeds after her common law husband died and she sought production of certain documents related to the administrative review of her claim. One of the documents she sought was prepared before the plaintiff had retained counsel. Consequently, the court determined that no inference existed and that the parties' interests had diverged before the time she retained counsel; accordingly, the document was subject to the fiduciary exception and must be disclosed.
Further, three documents were prepared after the lawsuit commenced but while the insurance company was still administratively considering the plaintiff's claim for benefits. Because making a benefits claim determination is a fiduciary act, the fiduciary exception applied. Moreover, the three documents did not reveal the authors' concern about the fiduciary's civil or criminal liability in any personal capacity, and the advice was sought on a matter of plan administration. Therefore, the documents were required to be produced even though they were prepared after litigation had commenced.48 The court did not discuss whether the insurer was a fiduciary to the plan when making claim determinations under the insurance policy funding the plan's benefits.
In Harvey v. Standard Insurance Co.,49 the Northern District of Alabama applied a different analysis to find that an in-house attorney's documents prepared in reviewing a claim after it had been denied is part of the insurance company's administrative review of the participant's claim, thus the documents were not protected by the work-product doctrine. The court also reasoned that, even if these documents constituted work product, they were subject to the fiduciary exception because these were communications related solely to ERISA plan administration. The court again did not consider whether the insurance company was acting as an ERISA fiduciary.50 Similarly, emails and memos from the in-house attorney created long before the disability claimant filed the action were discoverable under the fiduciary exception because they were related to plan administration. By contrast, the email communications regarding overpayments created after the lawsuit was filed were protected by the attorney-client privilege and were not required to be produced.51
The Cotillion court also reviewed a variety of memoranda and other communications regarding actuarial calculations performed with respect to the plan. Regarding some of these memoranda, the Cotillion court found:
Protecting Work Product Using the Work-Product Doctrine
For a document or communication to be protected as attorney work product, it must be:
Once a document or communication is protected by the work-product doctrine, it may either be “fact work product” or “opinion work product.” Opinion work product covers those documents or communications reflecting thoughts or opinions of the attorney involved in the litigation. Nevertheless, documents and information disclosed to a testifying expert in connection with his testimony are discoverable by the opposing party, whether or not the expert relies on the documents or information in preparing his report.59
Several recent court decisions illustrate the work-product doctrine's protection. Work-product protection for some documents was considered in Cotillion as well as in Everett v. U.S. Air Group. In Cotillion, the court carefully reviewed the purpose for which each document was prepared and rejected work-product protection for communications related to plan administration, communications to plan auditors, and communications regarding the pension plan funding/actuarial valuations because these were not prepared in anticipation of litigation, but rather in the ordinary course of the plan's business.60 In Everett, the court held that, when an attorney cannot demonstrate that the communications constitute work product and were prepared in anticipation of the plan beneficiary's litigation, the documents are likely discoverable because the party claiming the work-product exemption failed to prove that the protection applies.61
Several exceptions exist to the application of the attorney work-product doctrine's protection.
Generally, involuntary disclosures, such as those pursuant to a search warrant or subpoena, will not waive attorney-client privilege or the protection of the work-product doctrine.66 In some circuits, when no threat of contempt, subpoena, or document request exists, a responding party's testimony or production of documents is not involuntary; therefore, the responding party would lose the protection of the attorney-client privilege and work-product doctrine if the documents are produced.67 Accordingly, if a party voluntarily shares the documents, such disclosure will destroy the privilege and work-product protection.68 In general, a party may not waive the privilege or work-product doctrine selectively. Yet, some courts have concluded that a single inadvertent disclosure is not sufficient to waive the privilege.69 Disclosure to attorneys representing another federal agency with conflicting interests involved in the litigation is not a disclosure that waives work-product protection because the attorneys are all part of the same party—the federal government.70
Under Rule 502 of the Federal Rules of Evidence, the disclosure in a federal proceeding of a document or communication otherwise protected by the attorney-client privilege or work-product doctrine also waives the protection to undisclosed protected material “only if: (1) the waiver is intentional; (2) the disclosed and undisclosed information or communications concern the same subject matter; and (3) they ought in fairness to be considered together.”71 As a result of the increased use of electronic search technologies, the Federal Rules of Evidence includes a nonwaiver of the attorney-client privilege and electronically-stored information (ESI)/document rule when, under certain circumstances, the party claiming the privilege seeks the prompt return of privileged ESI/documents inadvertently disclosed.72
Additional Practical Considerations
In addition to being conscious of attorney-client privilege and work-product protection requirements, attorneys involved in litigation must be mindful of the ethical limitations regarding deposing or contacting opposing parties, how to handle persons formerly employed by the opposing party, and identifying to which parties these restrictions apply when the opposing party is an entity with a changing work force.
When an entity is a party, the Model Rule 4.2 prohibition on ex parte contact extends to employees:
Further, in most circumstances, outside counsel cannot be deposed in an ERISA litigation regarding their advice to the client in defending the litigation.77 In Wildbur v. Arco Chem. Co., for example, the court concluded that outside counsel could not be deposed because no mutuality of interests existed between counsel and the plan beneficiary and because the communications involved defense of the litigation, not plan administration. Accordingly, the fiduciary exception did not apply.78
Likewise, in Beesley v. International Paper Co., a tax code Section 401(k) plan participant's attorney was not permitted to depose the plan's former director of investments and plan administrator regarding the plan's decision to form a new administrative committee and select a new administrator. The court determined that the depositions were precluded because the plan's decisions were related to a plan amendment, a settlor function, and as a result, the fiduciary exception did not apply.79
Accordingly, attorneys must address the role of the parties to be deposed in an ERISA litigation case concerning any benefit plan and, in turn, the nature of that role as settlor versus fiduciary.
Greta E. Cowart (firstname.lastname@example.org) is a shareholder with Winstead PC in Dallas. She has provided advice and counseling with respect to ERISA, employee benefits, and executive compensation issues for 28 years. Dean J. Schaner (email@example.com) is a partner with Haynes & Boone in Houston. He has exclusively practiced employment and labor litigation for more than 24 years. Scott C. Thompson (firstname.lastname@example.org) is an associate in Haynes & Boone's employee benefits and executive compensation practice group in Dallas.
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This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
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