A new business of even a modest size is bound to have some interaction with an attorney. When disputes arise, the attorney-client privilege can become an important question in business litigation. If you’re beginning a business, it’s important to understand how attorney-client privilege works in the context of business. It’s also important to be aware of recent developments in the law in North Carolina bustiness-related attorney-client privilege as stated in the Technetics Group Daytons, Inc v. N2 Biomedical, LLC case from late 2018.
Attorney-client privilege in North Carolina
Understanding attorney-client privilege for business matters in North Carolina begins with understanding the basics of the attorney-client privilege. The attorney-client privilege prevents the attorney from disclosing things that the client tells the attorney in confidence in the course of litigation. North Carolina’s rules for attorney-client privilege are found in Rule 1.6 of the North Carolina Rules of Professional Conduct.
In addition, the United States Supreme Court has long acknowledged the public importance of the attorney-client privilege because it allows clients to fully communicate with their attorneys in a way that allows the attorney to efficiently represent the client and provide sound advice. As a matter of public policy, courts have ruled that the benefits of open communication between lawyer and client outweigh the loss of relevant information when a dispute arises.
The privilege belongs to the client and not to the attorney. The client must consent to the waiver of information. Any kind of expression by which the client conveys information to the attorney is covered by the attorney-client privilege. The privilege extends to agents of the attorney but doesn’t extend to facts or information obtained from independent sources.
Communications from third parties also aren’t privileged. Also exempt from privilege is the fact that the client consults with the lawyer, the date of the consultation and the identity of the lawyer.
North Carolina’s attorney-client privilege for business matters
In any business relationship, agents speak on behalf of the business. So it makes sense that the attorney-client privilege extends to certain employees or representatives of the business. The question becomes to whom the attorney-client privilege applies. To put it another way, who from the company is a representative of the company such that attorney-client privilege applies to communications between the individual and the business attorney?
The answer to the question depends on the facts of each case. In addition, the guidelines for determining whether an individual is a representative of the business continues to grow and change. The General Court of Justice Superior Court Division recently offered some insight in its ruling in the Technetics Group Daytona, Inc v. N2 Biomedical, LLC case.
North Carolina’s Technetics Group Daytona, Inc v. N2 Biomedical, LLC case and attorney-client privilege in business relationships
At issue in the Technetics v. N2 case was the creation of a patent through mutual agreement between the companies. Although the two companies had a cooperative working agreement, they disagreed about who had the legal rights to the patent created as a result of the work. Technetics sought to obtain documents that N2 claimed were protected by the attorney-client privilege. The documents involved communications between an independent contractor working for N2 and the attorney.
Technetics argued that because the communications involved an independent contractor rather than an employee, the communications could not be protected from disclosure by the attorney-client privilege. N2 argued that the contractor acted in the place of an employee, that the communications were necessary for effective communication between the business and the attorney and that the business and the contractor had a common legal interest that extended the privilege to the contractor’s communications. The court sided with Technetics on all of these issues.
Does attorney-client privilege extend to consultants in North Carolina?
The North Carolina court rejected these three arguments when ruling that attorney-client privilege did not extend to the independent contractor in the Technetics v. N2 case:
1. Functional equivalent argument
Until the court ruled in the Technetics case, North Carolina didn’t have a test for when a representative counts as an employee for the purposes of the attorney-client privilege. N2 argued that the contractor was essentially an employee of the corporation. While it’s true that some federal courts extend attorney-client privileges to non-employees like accountants, the court ruled that the contractor in the case didn’t meet the standard to qualify as a non-employee contractor.
The court ruled that the standard is whether the individual is the functional equivalent of a person with primary responsibility for a key corporate job. Among the questions is whether the individual is likely to have information not possessed by anyone else at the company. The court ruled that an independent contractor like the person at issue in the Technetics case didn’t meet this high standard.
2. Necessary communications argument
The next argument that the North Carolina court rejected was the Kovel doctrine. The doctrine states that a third party’s communications are privileged if they’re necessary for the attorney to provide effective services to the client. The court rejected the argument in the Technetics case saying that the third party’s involvement must be more than just convenient. Rather, the third party must have indispensable information or a specialized purpose in being present at the communications.
Essentially, the third party must be more or less an interpreter to explain technical information to the attorney or the client in order to make the attorney’s representation effective. The court ruled that the N2 independent contractor was not necessary to make the attorney-client communications effective for the business.
3. Common interest doctrine
The common-interest doctrine says that when the client and a third-party have a common legal interest or endeavor, communications may be privileged. The privilege may apply whether the business and third party have the same or different legal counsel. The purpose of the common interest doctrine is to allow parties to share information freely in order to build their respective cases.
However, the court ruled that the independent contractor in the N2 case didn’t have any legal interest at all. He couldn’t possibly have had a common legal interest with the business because he had no legal interest in the subject matter of the litigation. The court rejected N2’s assertion of the common interest doctrine and all of the proposed assertions of attorney-client privilege based on the independent contractor’s relationship with the business.
Attorney-client privilege and North Carolina corporations
In the age of contractors, micro-task workers and other limited-service relationships, it’s important to understand that attorney-client privilege has its limitations. Communications between non-employee workers and company attorneys may not receive the benefit of attorney-client privilege.
In addition, even employee communications may not be subject to privilege depending on the role and rank of the employee making the communication.
When you’re starting a business and running your business, it’s important to understand that the attorney-client privilege is not without its limitations.
Our qualified North Carolina business attorneys can help you understand best practices for handling sensitive information and protecting your business interests and all stages in the life of your business.