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Watch Out When Waiving Privilege

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October 2, 2013
By: Edward M. McNally
Delaware Business Court Insider

A recent master's opinion in the Delaware Court of Chancery may expand the scope of a waiver of the attorney-client privilege. While not without precedent, the ruling may come as a surprise to some. It warrants caution by all who consider waiving a privileged communication.

Mennen v. Wilmington Trust, Del. Ch. C.A. 8432-ML (September 18, 2013), involved an unusual situation. The defendant, Wilmington Trust, was accused of mismanaging the investments of a large trust. One of Wilmington Trust's defenses was that it was required to follow the investment decisions of an individual co-trustee and the co-trustee was responsible for the allegedly poor investment decisions. That issue turned on the meaning of the so-called "powers and responsibilities" clause of the trust instrument that dealt with the respective roles of Wilmington Trust and the individual co-trustee. Wilmington Trust argued that the trust gave it immunity when it acted on the advice of counsel that the meaning of the powers and responsibilities clause required Wilmington Trust to do what the co-trustee directed. Hence, advice of counsel was central to Wilmington Trust's defense.

Initially, the advice of counsel was from Wilmington Trust's in-house attorneys. But when the trust's main investment went bankrupt, Wilmington Trust also turned to outside counsel for advice. When it raised the advice-of-counsel defense, Wilmington Trust acknowledged that it waived the attorney-client privilege as to its in-house counsel. However, it claimed that waiver did not extend to the later advice Wilmington Trust received from its outside counsel.

Calling the Wilmington Trust argument a "temporal" limitation on its waiver of the attorney-client privilege, the master in chancery, Abigail M. LeGrow, rejected any such limitation. Instead, LeGrow held that the waiver extended to all communications on the same subject matter of the meaning of the powers and responsibilities clause. Accordingly, LeGrow recommended that the Court of Chancery find that Wilmington Trust waived attorney-client privilege for all the powers and responsibilities documents created before the litigation was filed, except those portions of the documents in which counsel directly evaluated Wilmington Trust's potential liability or its litigation strategy.

Now, why is that ruling important given the odd factual circumstances in which it arose? The reason the Mennen decision is important is that the advice-of-counsel defense has real value, but may be easily overlooked or lost. For example, directors of a Delaware corporation may rely on the advice of their counsel as a defense to claims seeking damages for breaches of their duty of care. An insurer of those directors would want that defense raised in any litigation against their insured directors and officers. Yet under the Mennen rationale, that defense may not be raised out of fear that the revelations about counsel's advice may actually be damaging to the defense.

How is that possible? Every complicated corporate transaction will involve an opinion by a transactional lawyer that the deal complies with the legal requirements of the corporate law and the company's governing documents (such as its charter, bylaws or a stockholder agreement). Otherwise, that lawyer would not help to do the deal. Call that the "first firm's opinion." When, as happens so often now, the transaction is attacked by litigation accusing the directors of violating their duties, a different, litigation lawyer will be retained and inevitably asked for his or her opinion about the merits of the case. Call that the "second opinion." Just as the transactional attorney has an incentive to give the first opinion to get the deal done and to be paid, the litigation lawyer will want to be cautious about the outcome when he or she gives the second opinion. But if the advice-of-counsel defense is raised, that second opinion may need to be disclosed with all of its qualifications or admissions and then waived in front of the court or, even worse, in front of the jury. This is a reason not to raise the advice-of-counsel defense.

First, is the mandatory disclosure of the second opinion a good policy? After all, second opinions are thought to be desirable in medicine and other fields where risk is addressed in making decisions. Requiring disclosure of those opinions inhibits asking for them and that is a bad result. Moreover, in many cases, the second opinion is not really relevant to testing the advice-of-counsel defense. What counts is whether the directors acted reasonably and in good faith when they approved the transaction relying on the first opinion. That a second opinion exists months or years later sheds no real light on the directors' actions before receiving that opinion. Hence, the second opinion need not be disclosed because it is usually not relevant.

If, however, this policy argument against mandatory disclosure of second opinions is not accepted, then what to do about the possible Mennen rule needs to be addressed. To begin with, Mennen does not always require that every second opinion be disclosed. Generally, attorney opinions about the risk of pending litigation are protected by the work-product privilege that Mennen recognizes may apply in any specific case. It is important to remember that Mennen involved pre-litigation advice of Wilmington Trust's second set of attorneys and, as LeGrow carefully explained, the second opinions at issue did not involve "litigation strategy or counsel's evaluation of Wilmington Trust's defenses and potential exposure in litigation."

Thus, the real lessons of Mennen are to remember that the attorney-client privilege is easily lost and needs to be protected when the advice of counsel may be desirable as a defense. If you think that you need a second opinion, then you also probably are facing potential litigation. If so, then be sure that opinion addresses what your company really needs — an evaluation of its defenses and exposures in litigation — not abstract advice about its legal rights.

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