Out-of-Court Disclosure of Privileged Material Does Not Bring About Subject Matter Waiver

By Joan C. Rogers  

Disclosing privileged documents in the course of business negotiations or other extrajudicial settings does not waive the attorney-client privilege for all communications between counsel and client on the same subject matter, the Illinois Supreme Court declared Nov. 29 (Center Partners Ltd. v. Growth Head GP LLC, Ill., No. 113107, 11/29/12, rev'g 27 Law. Man. Prof. Conduct 604).

In a matter of first impression, the court held that the subject matter waiver doctrine is limited to disclosures made in connection with litigation. Applying the doctrine to disclosures made outside that context would not serve its purpose nor would it be sound policy, Justice Rita B. Garman said.

Fallout From Deal.

Three separate groups of companies that own and operate retail shopping malls jointly purchased the assets of another company. As part of the acquisition, the purchasers obtained a majority interest in an Illinois limited partnership. Minority limited partners who were dissatisfied with the deal sued the purchasers and sought discovery of communications among the purchasers during the negotiations.

The trial court ordered the defendants to produce attorney-client communications that had been shared among one another during the negotiations. Later, the court also directed them to turn over all other attorney-client communications concerning the purchase negotiations, even communications that had not been disclosed among the buyers. The defendants declined to comply and submitted to a contempt finding to pave the way for an appeal.

The plaintiffs convinced the intermediate appellate court that when the defendant companies disclosed privileged communications among themselves regarding the purchase, those disclosures resulted in a subject matter waiver of all privileged communications regarding the purchase. Emphasizing that Illinois courts have long adhered to the subject matter waiver doctrine in the context of litigation, the appellate court said it could find no reason to distinguish between a waiver occurring during litigation and one occurring during business negotiations.

The supreme court reversed, holding that “subject matter waiver does not apply to disclosures made in an extrajudicial context when those disclosures are not thereafter used by the client to gain a tactical advantage in litigation.”

Review of Case Law.

Finding no Illinois state court decisions on point, the court reviewed decisions from other jurisdictions and compared their reasoning on whether the subject matter waiver doctrine applies to disclosures made outside a litigation setting.

The court devoted the most attention to In re von Bulow, 828 F.2d 94 (2d Cir. 1987), which held that disclosures of information in a book about the trials of Claus von Bulow for attempted murder, written by his attorney Alan Dershowitz, did not waive the privilege for all of their attorney-client communications on the same subject, and In re Keeper of Records (Grand Jury Subpoena Addressed to XYZ Corp.), 348 F.3d 16, 19 Law. Man. Prof. Conduct 602 (1st Cir. 2003), which held that corporate counsel's participation in a conference call about the recall of a medical device did not waive the attorney-client privilege for other communications on the same topic.

Both of those opinions contain thorough and detailed reasoning as to why the subject matter waiver doctrine should not be extended to purely extrajudicial disclosure, the court said.

“[S]ubject matter waiver does not apply to disclosures made in an extrajudicial context when those disclosures are not thereafter used by the client to gain a tactical advantage in litigation.”
Illinois Supreme Court

Garman also reviewed federal district court decisions that have gone the other way, along with cases cited as support for the statement in the Restatement (Third) of the Law Governing Lawyers §79, Reporter's Note cmt. f (2000), that “With respect to out-of-court partial disclosures, the substantial majority of decisions announces a broad and almost automatic subject-matter-waiver rule.”

Those cases, the court found, do not set out reasons or justification for extending the subject matter waiver doctrine to extrajudicial disclosures. Therefore, it found, those decisions are not as persuasive as the more complete analyses found in In re Keeper of Records and von Bulow.

In a footnote, the court distinguished two pro-waiver cases as involving disclosures made to a federal office or agency. Fed. R. Evid. 502(a) provides a special rule on subject matter waiver when disclosures are made in a federal proceeding or to a federal office or agency, it noted.

Purpose and Policy.

Drawing on In re Keeper of Records, the court found that “limiting application of subject matter waiver to disclosures made in litigation better serves the purpose of the doctrine.” That purpose, Garman said, is to prevent a party from strategically disclosing partial attorney-client communications to use as a sword, and then invoking the privilege as a shield to other communications so as to gain a tactical advantage.

The subject matter waiver doctrine ensures, the court explained, that the full context of the partial disclosure is discoverable so that courts may fulfill their truth-seeking function and extend fairness to the opposing party. Expanding the doctrine to cover extrajudicial disclosures that are not made for tactical purposes in litigation would not serve those functions and would necessarily broaden the scope of the doctrine's purposes, Garman said.

The court disagreed with the analysis in In re OM Group Sec. Litig., 226 F.R.D. 579 (N.D. Ohio 2005), which Garman said relied solely on fairness considerations in finding subject matter waiver from partial extrajudicial disclosures. “Fairness” should not be separated from the question of whether the privilege holder gained a tactical advantage in litigation, she said.

Moreover, the court found that limiting subject matter waiver to the context of judicial disclosures is sound from a policy standpoint. Quoting In re Keeper of Records, the court said that extending subject matter waiver to extrajudicial disclosures “would provide perverse incentives: parties would leave attorneys out of commercial negotiations for fear that their inclusion would later force wholesale disclosure of confidential information.”

This consequence would “strike at the heart of the attorney-client relationship and could deprive clients of counsel at times when such counsel is most needed,” the court said. While noting that the court's holding was not limited to advice given in business transactions, Garman said that business transactions would be uniquely burdened by extending subject matter waiver beyond the litigation context.

It does not matter, the court added, if disclosure made during a business negotiation is done to gain a tactical advantage during the business negotiation. Unless a law or Illinois ethics rule was broken, disclosures during a business negotiation are between the negotiating entities and are not in the court's province, Garman said.

The court also stated that “if a disclosure is made during a business negotiation to gain a later tactical advantage in anticipated litigation, subject matter waiver would still apply if such a disclosure is later used by the disclosing party at any point during the litigation to gain a tactical advantage.”

But if the disclosure is not reused during litigation, the court said, subject matter waiver would not apply, regardless of whether the disclosing party had some hidden intent to gain an advantage in litigation. To apply subject matter waiver in that manner, it said, would require a speculative determination about the disclosing party's intent and would not serve the purpose of the subject matter waiver doctrine.

No Waiver Here.

The court decided that in this instance the defendants' disclosures occurred only during the negotiations for the purchase and were not made in connection with this litigation.

The plaintiffs claimed that in deposition testimony given by two officers and an executive, the defendants disclosed the legal advice they received during the negotiations in order to advance their defense in the litigation. But after examining the deposition testimony, the court found that the executives did not waive the privilege so as to allow application of the subject matter waiver doctrine.

In reaching that conclusion, the court emphasized that the plaintiffs elicited the testimony in question and that the defendants provided it under the assumption that the trial court had deemed the privilege waived for documents and communications containing legal advice that were shared among the companies. In one of the depositions, defense counsel repeatedly objected and prevented disclosure of the actual content and basis of the legal advice, the court also noted.

Gino L. DiVito of Tabet DiVito & Rothstein, Chicago, argued for the defendants. Kevin M. Forde, Forde Law Offices, Chicago, argued for the plaintiffs.

Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-92hslf.

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