Hepler Broom, LLC

Corporate Counsel Take Note: Attorney-Client Privilege Scores Major Victory in Illinois Supreme Court

March 23, 2013

The attorney-client privilege is one of the oldest recognized privileges protecting confidential communications between two parties.  While the privilege serves as the cornerstone of the attorney-client relationship, the privilege is waived when confidential communications are disclosed to third parties.  In fact, the “subject-matter waiver” doctrine holds that where a privileged communication concerning a particular subject is voluntarily disclosed to a third party, waiver of the attorney-client privilege extends to all other communications pertaining to the same subject matter.

The purpose of the doctrine is to prevent a party from taking a “sword and shield” approach to gain a tactical advantage in litigation.  For example, a client cannot use the privilege as a sword to strategically and selectively disclose privileged communications which further his interests, and then invoke the privilege as a shield to withhold unfavorable information pertaining to the same subject matter.

On November 29, 2012, the Illinois Supreme Court issued a landmark ruling holding that the subject matter waiver doctrine does not apply to the disclosure of privileged information made outside the context of a judicial proceeding or legal process (an extrajudicial setting).  As the first state supreme court to decide the issue, the Illinois Supreme Court decision has the potential to influence courts across the country.

The case, Center Partners, Ltd. v. Growth Head GP, LLC, involved three separate companies that own and operate retail shopping malls across the country joining together to purchase the assets of another company.  During negotiations for the purchase, the companies, each with their own legal counsel, voluntarily exchanged privileged information concerning the legal implications of the transaction and legal concerns and conclusions about the structure of a new partnership agreement.  Minority limited partners who were dissatisfied with the deal sued the purchasers for breach of contract and fiduciary duties and sought discovery of communications among the purchasers during the negotiations.

The trial court applied the subject-matter waiver doctrine and ordered the defendant companies to produce virtually all privileged materials relating to the acquisition.  The companies refused to produce the documents and submitted to contempt of court in order to effectuate an appeal. On appeal, the defendant companies argued that the court should distinguish between a waiver occurring during litigation and one occurring during the context of business negotiations.  The appellate court declined to do so, however, and upheld the decision of the trial court.  The issue was again appealed and ultimately taken up by the Illinois Supreme Court.

The Illinois Supreme Court unanimously reversed.  The court, noting that the question was a matter of first impression in Illinois, reviewed decisions from other jurisdictions and considered whether the subject-matter waiver doctrine should apply to disclosures made outside a litigation setting.  After careful consideration, the court concluded that the purpose of the doctrine, to prevent the “sword and shield” litigation tactic, was not furthered by expanding the doctrine to cover business transactions where parties disclose privileged information before litigation is even contemplated.

The court noted that holding otherwise 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.  The court did place one limitation on this rule: if a disclosure is made during a business negotiation to gain a later tactical advantage in anticipated litigation, the subject matter waiver would still apply.

While most states have not addressed the issue, the Center Partners, Ltd. v. Growth Head GP, LLC decision is a well-reasoned opinion that will likely serve as persuasive authority on extrajudicial subject-matter waiver going forward.  Illinois corporate and in-house counsel in particular should take note of the case and rest well knowing that advice given in the context of business transactions involving multiple parties will remain privileged as long it is not used to gain a tactical advantage in anticipated litigation.  A full version of the opinion is available here.