February 2013Volume 101Number 2Page 66

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LawPulse

Attorney-client privilege: no subject matter waiver in extrajudicial settings

The Illinois Supreme Court holds that the doctrine of subject matter waiver cannot be used to force disclosure of privileged communications between lawyers and clients.

In a decision that strengthens attorney-client confidentiality in non-judicial settings, the Illinois Supreme Court unanimously ruled that the doctrine of subject matter waiver cannot be used to force disclosure of otherwise privileged communications between lawyers and their clients.

In what it deemed a case of first impression, the court was asked to affirm lower court rulings that ordered defendants to produce documents and testimony related to advice and counsel those defendants had obtained from their various attorneys during out-of-court business negotiations.

In Center Partners Ltd., et al., v. Growth Head GP, LLC, et al., 2012 IL 113107, a united court reversed the lower courts by ruling that potential waivers of the attorney-client privilege could not be used to force disclosure of the confidential information when the potential waivers were not used to gain a tactical advantage in subsequent litigation.

"It is a significant opinion for lawyers and for clients," ISBA General Counsel Charles J. Northrup said of the Center Partners decision. "It reinforces the importance of the attorney-client privilege on a basic level. First, transactional attorneys are benefitted because it ensures protection for the free flow of advice and ideas and communication between client and lawyer. Second, litigators benefit because it establishes clear guidance on an important evidentiary issue."

Facts and lower-court holdings

The underlying litigation involved several defendant real estate companies that owned and operated retail shopping centers throughout the country. Center Partners Ltd. and several other corporate-entity plaintiffs sued the defendants in 2004 alleging they had breached their fiduciary and contractual duties by establishing a "synthetic partnership" that deprived the plaintiffs of rights and opportunities related to the purchase of other businesses and real estate.

According to the supreme court decision, "Plaintiffs alleged that defendants received legal advice on how to structure a 'synthetic partnership,' so as to evade the contractual terms and avoid the legal and fiduciary obligations they owed" the plaintiffs in certain business negotiations and ventures.

At the trial court level, the plaintiffs filed three motions to compel the production of privileged attorney-client communications. The first, filed in 2008, sought production of documents that the various defendants, who all had their own attorneys, shared with each other. The trial court found that the defendants had waived any assertion of privilege by sharing the information among themselves and ordered them to produce the documents.

The second motion, filed in 2009, sought to compel one defendant to testify about the rationale and other details of legal advice after he gave deposition testimony about the actual legal advice he received from his attorneys. The trial court found it was proper for that defendant to testify about the legal advice he received from an attorney without having to testify further about the reasoning and rationale behind the lawyer's advice, and the court denied the second motion.

The third motion, filed in 2010 and the subject of the supreme court appeal, sought production of more than 1,500 documents the defendants had identified during the litigation in their "privilege logs." The plaintiffs argued that the defendants breached their fiduciary duties by usurping business opportunities in violation of a partnership agreement with a plaintiff.

"Plaintiffs alleged that, during depositions, defendants' witnesses confirmed that during the business negotiations in 2001-02 each defendant's individual counsel attended negotiating sessions and discussed with nonclients legal advice regarding: (1) acquisition structure and use of a 'synthetic partnership' to avoid certain partnership obligations; and (2) liability and obligations as [a plaintiff's] general partner, including continuing obligations to acquire and develop additional properties through" that plaintiff, the supreme court wrote in its decision.

The circuit court granted the third motion after finding that under the doctrine of subject matter waiver, the defendants waived their rights to attorney-client privilege of all subject matter related to the partial testimony they provided during depositions in the 2004 lawsuit in which they discussed some - but not all - of the legal advice they received from their attorneys in 2001-02.

The defendants refused to comply with the third motion, were held in contempt, and then filed an interlocutory appeal arguing that the subject matter waiver doctrine applies only when disclosures are made in the context of litigation, not in a business transaction. In affirming the trial court, the appellate court held that it could "find no reason to distinguish between a waiver occurring during the course of litigation or during a business negotiation."

The high court: looking at the doctrine's purpose

In the unanimous opinion drafted by Justice Rita Garman, the supreme court found that Illinois has long recognized the doctrine of subject matter waiver, "with this court holding that when a client voluntarily testifies and waives the privilege, such waiver 'extends no further than the subject-matter concerning which testimony had been given by the client.'"

The purpose behind the doctrine of subject matter waiver is to prevent a litigant from partially or selectively disclosing favorable material while sequestering unfavorable material to obtain an unfair advantage.

"Courts have characterized this reasoning as the 'sword' and the 'shield' approach, in that a litigant should not be able to disclose portions of privileged communications with his attorney to gain a tactical advantage in litigation (the sword), and then claim privilege when the opposing party attempts to discover the undisclosed portion of the communication or communications relating to the same subject matter," the supreme court wrote.

The defendants argued against applying the doctrine to disclosures outside of litigation, since its purpose is to prevent a party from using the privilege as a weapon to gain tactical advantage in litigation. The plaintiffs responded by citing to some other state courts that have extended the doctrine to extrajudicial disclosures, but the supreme court could find no such decisions in any Illinois cases.

The supreme court found that any disclosures made by the defendants that could be construed as a waiver of the privilege were made either during the course of out-of-court business negotiations or during the depositions in the lawsuit. In the latter case, the potential waivers were made only after requests by the plaintiffs and orders from the court to produce. As such, the court determined that the defendants never attempted to provide partial disclosures for purposes of gaining a tactical advantage in litigation.

The court stated its rationale for refusing to extend the subject matter doctrine to include extrajudicial communications.

"First, limiting application of subject matter waiver to disclosures made in litigation better serves the purpose of the doctrine," the court wrote. "Next, the cases cited in support of limiting the doctrine…are more thorough and persuasive than those cited in opposition.

"Further…[f]airness should not be separated from the 'tactical advantage' aspect of subject matter waiver's purpose," the court continued. "Finally, we believe limiting subject matter waiver to the context of judicial disclosures to be sound policy. '[A] rule that would allow broad subject matter waivers to be implied from such communications 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.'"

Encouraging candor

The ISBA and four other attorney organizations filed amicus briefs in support of what now has become the court's unanimous holding in this case. ISBA's Northrup said the court was correct in finding that limiting the doctrine to judicial proceedings only is good public policy because it facilitates free discussions between attorneys and clients, particularly in the transactional areas where it will help facilitate freedom of negotiations during business deals.

Furthermore, Northrup said, the high court's ruling complies with its own rules of attorney conduct and professional responsibility.

"This decision makes good ethics for lawyers, particularly in light of Rule 2.1, which establishes an obligation for lawyers to be candid with their clients," Northrup said. "It's also consistent with Rule 2.3, which acknowledges that a lawyer's advice might be shared with others. I think it protects lawyers from perhaps falling down an ethical trap by limiting the advice they give to their clients out of fear that someday, maybe, that advice would be subject to disclosure."


Adam W. Lasker <alasker@ancelglink.com> is a lawyer in the Chicago office of Ancel, Glink, Diamond, Bush, DiCanni & Krafthefer.

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