Privilege Grab

Escue v. Sequent, Inc., 2012 U.S. Dist. LEXIS 9949 (S.D. Ohio, Jan 25, 2012).

Topic:  Former Director's Rights to Corporate Attorney-Client Privilege.

Plaintiff Michael Escue brought suit to rescind a merger agreement that merged two professional employee organizations: Better Business Solutions of Alabama, in which Escue had been the 100% shareholder, and defendant Sequent. In the merger, Escue traded the shares in his company, BBSA, for shares in Sequent. As the basis for rescission, Escue alleged that Sequent had concealed that it had engaged in unlawful transactions and was the subject of an ongoing criminal investigation and thus misrepresented the value of the company.

During discovery, a dispute arose between the parties regarding the attorney-client privilege. Escue argued that Sequent could not withhold documents on the basis of privilege because he was within the privilege as a former Sequent owner and director. The court disagreed, emphasizing two key principles of corporate privilege law: (1) the corporation, not its officers, holds the privilege and (2) a corporation's officers when making decisions for the company act as fiduciaries who are bound to pursue the best interests of the company, rather than their own personal interests. Accordingly, the court held, a former officer or director, once no longer acting on behalf of the corporation, has no control over a corporation's attorney-client privilege and cannot exercise or waive the privilege on behalf of the company.

The court also considered Escue's argument that the privilege had been waived during merger negotiations. It rejected his assertion that a "duty to disclose" during the merger discussions required Sequent to waive its privilege, but the court agreed that waiver occurred for information communicated during a phone conversation in which Escue's private attorneys had participated. The court also found that Escue had not met the requirements needed to invoke the crime-fraud exception to attorney-client privilege. The court held that any claimed wrongdoing must actually have been made with the intent to further an unlawful act and that those circumstances had not been demonstrated.

BuLITS Points

  • Corporate privilege has its traditions. Three traditional principles of corporate privilege controlled here. First, the attorney-client privilege belongs to the corporation. Second, a corporation's decisions and communications are made by its chosen representatives, either its board or senior officers. Third, although board members or senior officers make decisions that are binding on the corporation, they do so in their corporate, not individual capacities. In this case, that meant the corporation could assert the attorney-client privilege even though the owner and director who sought the information formerly had access to it.
  • Merger doesn't mean waiver. The act of seeking a merger does not require a waiver of the attorney-client privilege. The "duty to disclose" in merger talks does not carry with it a duty to waive privilege for the documents or conversations that serve as a source for that information.
  • Make sure you know exactly who has joined a privileged conference call. A client may waive the privilege by conduct "that implies a waiver of the privilege or a consent to disclosure." In this case, the corporation's outside counsel believed he was speaking to a board member of his client and disclosed the details of a criminal investigation. He learned while on the call that third-party counsel was on the line, but continued to discuss privileged information. Even though the waiver wasn't intentional (and the outside attorney didn't have the authority to waive the corporation's privilege), the court found the privilege waived as to the phone call because counsel "should have known" that continuing the conversation would waive the privilege and because the corporation failed to act promptly to limit the consequences of the disclosure.

And Remember

If you're faced with a crime-fraud exception issue, the fact that privileged communications may be related to a crime is not enough to invoke the crime-fraud exception to the attorney-client privilege. Instead, to be subject to disclosure, the communications must actually have been made with an intent to further an unlawful act.

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