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MCLE
MCLE Self Study
Edited by Barbara Kate Repa
Practice and procedure Protecting Privileged Communications By Jack S. Yeh and Ileana M. Hernandez
For many years California case law has provided little guidance on the extent to which parties can share sensitive information in a transactional or nonlitigation environment. As a result, transactional attorneys often have been uncertain about how to advise clients regarding sharing such information with a prospective business partner. Litigators defending a client's decision about exchanging information with a theoretically adverse party were also left without legal guidance. And clients were often left with an unenviable Hobson's choice: Either exchange sensitive legal information to facilitate a deal at the risk of being forced to disclose it to a third party in later litigation or forgo sharing such information and risk killing the deal to ameliorate any possibility that future litigants may gain access to it.
Recently, however, California courts have provided some guidance in this area of law, clarifying how waiver principles that apply to privileges operate in business environments and in later-filed lawsuits. THE LAW OF PRIVILEGES Privileges in California are created and governed by statute. As one state court recognized: "Courts may not add to the statutory privileges except as required by state or federal constitutional law, nor may courts imply unwritten exceptions to existing statutory privileges." (Roberts v. City of Palmdale, 5 Cal. 4th 363 at 373 (1993).)
Unlike California law, however, the Federal Rules of Evidence provide that common law principles govern rules of privilege. Thus, federal courts have the flexibility to develop rules of privilege case by case. (Trammel v. United States, 445 U.S. 40 (1980).) For example, the Ninth Circuit has recognized a joint defense privilege-protecting communications between allied parties in or in anticipation of litigation-as an extension of the attorney-client privilege since at least 1964. (United States v. Henke, 222 F. 3d 633 at 637 (2000).)
In California the attorney-client privilege consists of communications between client and counsel that are presumed to have been made in confidence and are broadly protected against discovery. Confidential communication includes "a legal opinion formed and the advice given by the lawyer in the course of that [attorney-client] relationship." (2002 Ranch v. Superior Court, 113 Cal. App. 4th 1377 (2004).) And the privilege applies not only to communications made in anticipation of litigation but also to legal advice when no litigation is threatened. It is the client who holds the privilege in accordance with the Evidence Code. (Cal. Evid. Code § 954.)
Finally, the attorney work product doctrine is intended to preserve attorneys' rights in preparing their cases and prevent them from taking advantage of the industry and creativity of opposing counsel. (Cal. Code of Civ. Proc. § 2018.) Specifically, it creates for the attorney "a qualified privilege against discovery of general work product and an absolute privilege against disclosure of writings containing the attorney's impressions, conclusions, opinions or legal theories." (State Comp. Ins. Fund v. Superior Court, 91 Cal. App. 4th 1080 at 1091 (2001).) And the privilege also applies more broadly to "writings prepared by an attorney while acting in a nonlitigation capacity." (County of Los Angeles v. Superior Court, 82 Cal. App. 4th 819 at 833 (2000).) The attorney is the exclusive holder of the work product protection. (State Comp. Ins. Fund, 91 Cal. App. 4th 1080 at 1091.) THE WAIVER DOCTRINE Ordinarily, disclosure of a confidential communication by the attorney or client to a third party waives the attorney-client privilege-with one exception. (Insurance Co. of N. Am. v. Superior Court, 108 Cal. App. 3d 758 at 765-66 (1980).) Evidence Code section 912(d) expressly provides that disclosing a privileged communication in confidence does not waive the privilege when it is "reasonably necessary" to accomplish the purpose for which the lawyer was consulted. Similarly, Evidence Code section 952 expressly provides that a confidential communication may be disclosed to third parties "who are present to further the interest of the client" or those "to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted."
Conversely, there is no statutory provision governing waiver of the attorney work product protection. However, California courts have recognized that the waiver doctrine also applies to the work product rule. (Wells Fargo Bank v. Superior Court, 22 Cal. 4th 201 at 214 (2000).) The protection may be waived "by the attorney's disclosure or consent to disclosure to a person, other than the client, who has no interest in maintaining the confidentiality ... of a significant part of the work product." (OXY Res. California v. Superior Court, 115 Cal. App. 4th 874 at 891 (2004).) FRIEND OR FOE? A handful of California cases have recognized that codefendants and their counsel "are entitled to communicate in confidence with one another on matters of common interest." (Cooke v. Superior Court, 83 Cal. App. 3d 582 (1978); Insurance Co. of N. Am. v. Superior Court, 108 Cal. App. 3d 758 (1980); Raytheon Co. v. Superior Court, 208 Cal. App. 3d 683 (1989).)
However, none of those cases addressed whether the privilege also relates to nonlitigation-related communications. It is in this context that the court of appeal's decision in STI Outdoor v. Superior Court (91 Cal. App. 4th 334 (2001)) provided a welcome clarification that exchanging privileged communications during business negotiations does not necessarily compromise the scope or integrity of the attorney-client privilege.
STI Outdoor involved the Los Angeles County Metropolitan Transportation Authority's (MTA) solicitation of proposals for the installation of automated public toilets as a service for its riders. After the project was awarded, the losing bidder invoked the California Public Records Act in an effort to compel the MTA's disclosure of legal opinions exchanged with the winning bidder during negotiations. The trial court ordered disclosure of the opinions, notwithstanding the winning bidder's and the MTA's assertion of the attorney-client privilege.
The appellate court, however, specifically rejected the argument that the attorney-client privilege is waived in such business settings: "We are not persuaded that the attorney-client privilege is limited to litigation-related communications. Evidence Code sections 912 and 952 do not use the terms 'litigation' or 'legal communications' in their description of privileged disclosures, but specifically refer to 'the accomplishment of the purpose' for which the lawyer was consulted. Attorneys are consulted for a myriad of reasons besides litigation." (91 Cal. App. 4th at 341.)
In addition, the STI Outdoor court rejected the notion that parties are necessarily adverse-and thus have no common interest-because they are on opposite sides of a business transaction.
The STI Outdoor court recognized that while the details of a business deal are negotiated for each party's own separate interest, the framing and overall deal itself is pursued for the mutual and common benefit of both parties-a practical reality of the everyday business world. Thus, a party who requests legal advice from its attorneys in a business transaction does not necessarily waive the attorney-client privilege by disclosing the opinion to a transactional counterpart if the disclosure is reasonably necessary to accomplish the purpose for which the attorney originally was retained. PROVING NONWAIVER It can be difficult to establish that an exchange of confidential information with a transactional "foe" is protected in later litigation, but a California court recently helped define the parameters. Applying the principles set out in STI Outdoor, the California Court of Appeal, First Appellate District, explained in OXY Res. California v. Superior Court the circumstances under which parties negotiating a business transaction later can rely on mutual promises during the negotiations to retain the communications' confidentiality and protect them from third-party litigants.
The OXY case involved a complex business transaction in which OXY Resources California and EOG Resources exchanged interests in properties that produced oil and gas, including some property subject to a preferential purchase right held by Calpine Natural Gas. Before finalizing their negotiations, OXY and EOG entered into a joint defense agreement anticipating that Calpine would later try to obtain some of the confidential information they had exchanged. As predicted, Calpine later sued both OXY and EOG and moved to compel production of documents reflecting OXY and EOG's communications both before and after the two companies finalized the transaction.
The trial court concluded, based on the STI Outdoor holding, that the pre-acquisition documents were privileged because they were reasonably necessary to further the interest of both parties in finalizing the negotiations. However, it reasoned that OXY failed to demonstrate that the exchange of post-acquisition documents was necessary to finalize the negotiations, so no joint defense privilege protected the post-acquisition documents.
The California court of appeal found that the trial court relied on inadequate evidence-general declarations and a privilege log-to conclude that the preacquisition documents were privileged and reasoned that a joint defense agreement cannot serve as the sole basis for withholding documents from disclosure. (115 Cal. App. 4th 874 at 894.) The party holding the privilege must meet its burden to establish a claim of privilege for documents withheld on the basis of a joint defense agreement, even if the holder of the privilege does not have the documents. Interestingly, the OXY court instructed the trial court to first determine whether each document withheld was independently protected by either the attorney-client privilege or the attorney work product doctrine, and then review the documents in camera to determine whether the disclosure was necessary.
The OXY ruling makes clear that a party relying on the nonwaiver doctrine must do more than just establish that a confidential communication took place between parties who purportedly share a common interest. The invoking party must establish that the communicated information would otherwise be protected from disclosure by a claim of privilege, there was a reasonable expectation that the communications would be maintained in confidence, and it was reasonably necessary to disclose the information to accomplish the purpose for which the lawyer was consulted. BEWARE OF THE GOVERNMENT The lessons learned from the STI Outdoor and OXY decisions come with one caveat: Beware of the government.
Within two weeks of the OXY ruling, the same court of appeal held in McKesson HBIC, Inc. v. Superior Court that a company waives the attorney-client and attorney work product protection for documents it shares with the government during a government investigation. (115 Cal. App. 4th 1229 (2004).) In McKesson, the court ruled that it was not necessary for the company to share the results of its internal investigation of the U.S. Attorney's office and the Securities and Exchange Commission with shareholders in a later lawsuit based on improperly recorded revenues.
The court expressly held that the protections of the attorney work product doctrine had been waived because the government had "no interest independent of the agreements to keep the information confidential" and the two parties were not aligned in any litigation and did not have the same goal. (115 Cal. App. 4th at 1239-40.)
McKesson should be viewed as a narrow exception to the nonwaiver doctrine articulated in STI Outdoor and OXY. The decision creates a significant disincentive for companies to share privileged documents with the government, particularly when a company is not the target of an investigation. Despite its policy implications, however, practitioners should consider this factor when contemplating whether to share sensitive legal information with the government. LESSONS LEARNED Though California's nonwaiver doctrine continues to evolve in the courts, the STI Outdoor and OXY cases provide a framework within which to consider how clients can share sensitive legal information with other parties.
Protecting privileged information. A party considering disclosing privileged information to a transactional opponent should take care in creating a sufficient record to preserve the party's ability to protect the information. Lawyers in this context should:

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Consider requiring parties to sign a confidentiality, nondisclosure, or joint defense agreement that specifically keeps privileged information confidential in perpetuity.
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Use caution in disclosing privileged information after the transaction has closed, since timing has been considered a key issue.
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Disclose only information that is reasonably necessary to accomplish the purpose for which you were retained to help prevent a trial court from finding that the disclosure waives the privilege.
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Limit access to the privileged information to a few key players in the negotiation-and document steps taken to control dissemination.
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Stamp or mark documents exchanged with labels identifying them as confidential, attorney-client privileged, or joint-defense privileged.
Asserting the privilege in litigation. To prevent waiver of the privilege, those who hold it-including parties to litigation as well as nonparties who receive subpoenas-must assert the privilege in litigation. It is immaterial who physically possesses the privileged documents. Instead, counsel should focus on determining that the documents are privileged and that there has not been a prior waiver-and then ensure that the person holding the privilege is prepared to demonstrate that:

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the communicated information would otherwise be protected from disclosure by a claim of privilege
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the participants to the exchange of information had a reasonable expectation that the information disclosed would remain confidential, and
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disclosing the information was reasonably necessary to accomplish the purpose for which the lawyer was retained.
Establishing a prima facie claim. To establish a claim of privilege in later litigation, the party asserting it should consider submitting a privilege log that provides at least a general sense of the communication's content, although not the specifics. A party should also provide detailed declarations explaining how the disclosure of the information between the two parties was reasonably necessary to accomplish the purpose for which a lawyer was consulted.
Requesting an in camera hearing. Finally, a party who relies on the nonwaiver doctrine to prevent disclosing privileged information to a third party should also consider the propriety of requesting an in camera review of documents for which it claims the privilege has not been waived.
Generally, although a court cannot conduct an in camera review of the content of a communication to determine the existence of a privilege, such a review can be conducted to determine an exception to or waiver of the privilege.

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