SharpThinking

No. 52   Perspectives on Developments in the Law from The  Sharp Law Firm, P.C.    September 2011

Sharing Information in Business Transactions May Result in Waiver of Attorney-Client Privilege

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

            Persons who share privileged information with others as part of a business transaction may find that they have waived the privilege as to all communications on the subject matter of the shared information, a panel of the Illinois Appellate Court ruled late last month.

            Moreover, Center Partners, Ltd. v. Growth Head GP, LLC, 2011 IL App (1st) 110381 (Aug. 30, 2011), holds that business transaction lawyers have no “work product” privilege which may be asserted to cover any such shared information.

            Assuming the decision is not subsequently reversed and that its logic is accepted by other appellate panels, the ruling is likely to have severe chilling effects on information-sharing during transactions and on business lawyers generally.

            Plaintiffs and defendants in Center Partners were in the business of owning and operating shopping malls.  In 2001-02, three groups of the defendants negotiated to jointly purchase the assets of a Dutch company.  Among the assets to be purchased was an entity known as Head Acquisition, L.P. (“Head”), which was the general partner of a limited partnership known as Urban Shopping Centers, L.P. (“Urban”).           As part of the transaction, the three groups of defendants acquiring the Dutch company’s assets shared information and strategy concerning the acquisition and how the target’s assets would be split up as part of the acquisition.  Plaintiffs were minority limited partners in Urban who claimed that the acquisition of Head constituted breaches of contract and of fiduciary duties owed to them.  They filed suit on those theories and as part of the discovery process sought the privileged information which had been shared between the three groups of defendants during the transaction.                                                                                                                                                             

            Defendants resisted the discovery requests on the grounds of the attorney-client privilege, and their attorneys resisted it on the further ground of the work-product exemption.  However, the Appellate Court rebuffed both of those objections.

            With respect to the attorney-client privilege, the court held that the privilege was waived when the defendants shared their privileged information with each other.  Although a credible argument apparently could be made that the acquiring companies were commonly-aligned allies, the appellate panel instead treated the information recipients as “third parties” to the privilege and ruled that the disclosures not only waived the privilege as to the specific communications shared, but as to all information on the same subject.

            Although the subject-matter waiver doctrine is well established in privilege law,[1] the objecting defendants sought to distinguish cases applying that doctrine on the grounds that they involved disclosures in the litigation context rather than as part of a business negotiation.  The court rejected the proffered distinction.  Moreover, the court emphasized previous case law to the effect that any assertion of the privilege had to be construed “very narrowly”. 

            Next the defendants sought to rely upon their attorneys’ assertion of objections under the work-product doctrine.  However, making explicit a premise which always has been implicit in the origin of that doctrine, the appellate panel held that the objection was without merit because “the documents were not generated in preparation for trial or litigation.”  

            Several observations may be offered with respect to Center Partners.

            First, the court ignored the “common interest” doctrine which we and a number of other writers have thought would justify protection of such information-sharing, analogous to the “joint defense” application of the privilege in litigation.[2] 

            Second, Center Partners by its terms says nothing about waiver by information-sharing with the opposite side of a transaction during the “due diligence” process.[3]  However, given that information-sharing among joint buyers was found to be waiver, disclosure of information from a seller to a buyer necessarily would seem to be waiver in this court’s opinion.

            Third, notably absent from the appellate panel’s analysis is any discussion of the fiduciary exception to attorney-client privilege.  Under that exception, when the client asserting the privilege is a fiduciary of the person seeking it, courts often find that the privilege is not effective.  The fact pattern in Center Partners is extremely complex, and perhaps that doctrine would not have applied to all of the discovery requests at issue, but some analysis of the doctrine would have been helpful.

            Fourth, Center Partners is likely to send shock waves through the offices of business transaction lawyers, as they learn that their work product is not entitled to the same protection which extends to their litigation partners.  However, the panel is well-founded in its result on this point.

            Lastly, the Center Partners panel expressly said that the waiver which it found did not go to “all privileged communication and information as related to a particular business transaction” but only to “the subject matter of the privilege that is already waived.”  That distinction likely will provide gist for many future arguments as to what the decision really means.       

[1]  For more information on the subject-matter waiver doctrine, and alternatives thereto, the interested reader may wish to consult Hundley, Waiver of Evidentiary Privilege by Inadvertent Disclosure – State Law, 51 A.L.R.5th §§ 9-11 (1997 with current supp.), and Hundley, Waiver of Evidentiary Privilege by Inadvertent Disclosure – Federal Law, 159 A.L.R. Fed. 153 §§ 7-10 (2000 with current supp.). Cf. Hundley, “Inadvertent Waiver” of Evidentiary Privileges: Can Reformulating The Issue Lead to More Sensible Decisions?, 19 S.I.U.L.J. 263 (1995).

[2] See, e.g., Hundley, White Knights, Pre-Nuptial Confidences, and the Morning After: The Effect of Transaction-Related Disclosures on the Attorney-Client and Related Privileges, 5 DePaul Bus. L.J. 59, 82-85 (1992-93).

[3]  See generally the White Knights article cited in n. 2. 

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