The attorney-client privilege protection is premised on the confidential nature of the communications between the attorney and client. So long as that confidentiality/secrecy is maintained (viz., inappropriate third parties are not given access to it), the client can prevent the discovery of his communications with legal counsel and counsel's responses.

With the extensive governmental regulation of virtually everything that corporations do, situations often arise where government agency approval is needed for contemplated actions, but it is being withheld until certain assurances are given, which are possible only through the disclosure of privileged communications. This has happened with the Securities and Exchange Commission (SEC) when approval of stock splits or other options have been sought. If these communications are surrendered to the agency, does it waive their privilege protection? And if the protection is waived, is the waiver absolute (extending to all third parties), or is it limited to the SEC (thereby permitting the corporation to deny discovery to other agencies and private litigants)? While a waiver definitely results from the voluntary disclosure to the SEC, because of the Supreme Court's decision in Upjohn v. United States, 449 U.S. 383 (1981), there is no definitive answer to the second question, whether the parties to whom the waiver extends can be limited.

While the concept of "limited waiver" was initially recognized in Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1977),

"As Diversified disclosed these documents in a separate and nonpublic SEC investigation, we conclude that only a limited waiver of the privilege occurred. . . . To hold otherwise may have the effect of thwarting the developing procedure of corporations to employ independent outside counsel to investigate and advise them in order to protect stockholders, potential stockholders and customers."

While receiving a limited degree of acceptance in lower courts throughout the country, a number of other circuits have uniformly rejected it. See P.R. Rice, ATTORNEY-CLIENT PRIVILEGE IN THE UNITED STATES Sec. 9:87 (West Group 2d ed. 1999). The few states that have addressed this issue have split over its recognition. P.R. Rice, ATTORNEY-CLIENT PRIVILEGE: STATE LAW, Sec.9:87 (Rice Publishing 1999). Those rejecting the concept have relied on the reasoning of the court in Permian Corp. v. United States, 665 F.2d 1214 1220-21 (D.C. Cir. 1981):

"The Eighth Circuit's 'limited waiver' rule has little to do with th[e] confidential link between the client and his legal advisor. Unlike the Eighth Circuit, we cannot see how 'the developing procedure of corporations to employ independent outside counsel to investigate and advise them' would be thwarted by telling a corporation that it cannot disclose the resulting reports to the SEC if it wishes to maintain their confidentiality. Voluntary cooperation with governmental investigation may be a laudable activity, but it is hard to understand how such conduct improves the attorney-client relationship. If the client feels the need to keep his communications with his attorney confidential, he is free to do so under traditional rule by consistently asserting the privilege, even when the discovery request comes from a 'friendly' agency."

The Supreme Court's decision in Upjohn added only confusion to the resolution of this issue. In Upjohn the corporation wanted approval from the SEC for certain stock options. However, because of concern about corporate bribery of foreign government officials, this approval was being withheld until an internal investigation was conducted by an outside law firm, and that firm's report turned over to the SEC. This investigation was done, the report was submitted, and the stock actions were approved.

When the IRS subsequently began an investigation of Upjohn, it sought the discovery of the outside law firm's interviews with corporate employees during its investigation. When Upjohn objected on the ground of privilege, the IRS claimed that the communications with lower lever corporate employees were not protected by the attorney-client privilege because they were not within the corporation's control group. In resolving this limited issue, the Supreme Court completely ignored the more fundamental question of whether there was a privilege protection to be waived since the company had already voluntary disclosed the law firm's report to the SEC. While it could be argued that Upjohn impliedly condoned limited waiver by ignoring the disclosure, equally plausible interpretations could be that the IRS did not pursue the waiver question, or that the Court felt it more important to resolve the more fundamental question of who personifies the corporate client than to address the concept of limited waiver which, if rejected, would have made the personification discussion unnecessary.

Since disclosures to third parties who are not agents of either the attorney or the client are inconsistent with the fundamental requirement of confidentiality (and this generally includes outside auditors), corporations should assume that disclosures to government agencies will result in the complete loss of the privilege protection. In the next column I will explain how limited waiver, even though explicitly rejected by most courts, is indirectly being recognized through a number of practices that permit the privilege protection to survive the loss of confidentiality through disclosures to third parties.